RM & I Detailed PDF

RISK MANAGEMENT AND INSURANCE 14MBAFM408
RISK MANAGEMENT AND INSURANCE

Subject Code: 14MBA FM408 IA Marks: 50
No. of Lecture Hours / Week: 04 Exam Hours: 03
Total Number of Lecture Hours: 56 Exam Marks: 100
Practical Component: 01 Hour / Week
Module 1: (8 Hours)
Introduction to Risk Management: Risk-Risk and Uncertainty-Types of Risk-Burden of Risk-
Sources of Risk-Methods of handling Risk-Degree of Risk-Management of Risk
Risk Management-Risk Management Process-Identification Loss exposures-Analyzing Loss
exposures-Objectives of Risk Management-Select the Appropriate Risk Management Technique-
Implement and Monitor the Risk Management Program-Risk Management by Individuals and
Corporations-Risk Management objectives-Need for a Rationale for Risk Management in
Organizations- Understanding the cost of Risk-Individual Risk Management and the Cost of
Risk-Risk Management and Societal Welfare.
Module 2: (6 Hours)
Risk Identification-Business Risk Exposures-Individual Exposures-Exposures of Physical
Assets -Exposures of Financial Assets -Exposures of Human Assets -Exposures to Legal
Liability - Exposure to Work-Related Injury-Basic concepts form probability and Statistics.
Module 3: (8 Hours)
Risk Measurement-Evaluating the Frequency and Severity of Losses-Risk Control-Risk
Financing Techniques-Risk Management Decision Methods-Pooling Arrangements and
Diversification of Risk.
Advanced Issues in Risk Management: The Changing Scope of Risk Management-Insurance
Market Dynamics-Loss Forecasting-Financial Analysis in Risk Management --Decision Making-
Other Risk Management Tools
Module 4: (8 Hours)
Introduction to Insurance
Dept. of MBA/SJBIT Page 1

Risk and Insurance- Definition and Basic Characteristics of Insurance-Requirements of an

Insurable Risk-Adverse Selection and Insurance-Insurance vs. Gambling Insurance vs. Hedging-
Types of Insurance-Essentials of Insurance Contracts.
Indian Insurance Industry -Historical Framework of Insurance, Insurance sector Reforms in
India-Liberalization of Insurance Markets-Major players of Insurance.
Regulation of Insurance- Insurance Act 1938- eligibility-Registration and Capital requirement-
Investment of assets-Approved investments-Licensing of insurance agents- IRDA-Duties and
powers of IRDA-IRDA Act 1999-IRDA regulations for general insurance-reinsurance, life
insurance, micro insurance, licensing of insurance agents, registration of insurance companies
and protection of policyholders interest.
Module 5: (8 Hours)
Life Insurance
Basics of Life Insurance-Growth of Actuarial Science-Features of Life Insurance-Life
Insurance Contract-Life Insurance Documents-Insurance Premium Calculations. Life Insurance
Classification-Classification on the Basis Duration-Premium Payment- Participation in Profit-
Number of Persons Assured-Payment of Policy Amount-Money Back Policies-Unit Linked
Plans.
Annuities-Need of Annuity Contracts, Annuity V/s Life Insurance, Classification of Annuities.
Module 6: (10 Hours)

General Insurance-Laws Related to General Insurance-General Insurance Contract-General
Insurance Corporation(GIC)-Performance Private and Public General insurance companies.
Health Insurance-Individual Medical Expense Insurance Long Term Care Coverage
Disability Income Insurance Medi-claim Policy Group Medi-claim Policy Personal
Accident Policy Child Welfare Policy-Employee Group Insurance Features of Group Health
Insurance Group Availability Plan. Fire Insurance-Essentials of Fire Insurance Contracts,
Types of Fire Insurance Policies, Fire Insurance Coverage.
Marine Insurance-Types of Marine Insurance Marine Insurance principles Important Clauses
in Marine Insurance Marine Insurance Policies Marine Risks-Clauses in Marine Policy. Motor
Vehicles Insurance-Need for Motor Insurance, Types of Motor Insurance, Factors to be
considered for Premium Fixing.

Module 7: (8 Hours)
Management of Insurance Companies
Functions and Organization of Insurers- Types of Insurance Organization, Organizational
Structure of Insurance Companies-Functions of Insurers.
Underwriting-Principles of Underwriting, Underwriting in Life Insurance, Underwriting in
nonlife Insurance.
Claims Management-Claim Settlement in General Insurance-Claim Settlement in Life
Insurance.
Insurance Pricing-Insurance Cost and Fair Premiums, Expected Claim Costs, Investment
Income and the timing of claims Payments, Administrative Costs, Profit Loading, Capital Shocks
and Underwriting Cycles, Price Regulation.
Insurance Marketing: Marketing of Insurance Products, Critical Success factors for Insurance
Players, Marketing Strategies in India.

Contents
Module No. Particulars Page No.
1 Introduction to Risk Management 5 31
2 Risk identification 32 51
3 Risk Measurement 52 62
Introduction to Insurance 63 110

4
Life Insurance 111 128

5
6 General Insurance 129 168
Management of Insurance Companies 169 - 187

7

Module 1: (8 Hours)
Introduction to Risk Management: Risk-Risk and Uncertainty-Types of Risk-Burden of Risk-
Sources of Risk-Methods of handling Risk-Degree of Risk-Management of Risk
Risk Management-Risk Management Process-Identification Loss exposures-Analyzing Loss
exposures-Objectives of Risk Management-Select the Appropriate Risk Management Technique-
Implement and Monitor the Risk Management Program-Risk Management by Individuals and
Corporations-Risk Management objectives-Need for a Rationale for Risk Management in
Organizations- Understanding the cost of Risk-Individual Risk Management and the Cost of Risk-
Risk Management and Societal Welfare.
Risk
Risk is virtually anything that threatens or limits the ability of a community or nonprofit
organisation to achieve its mission.
It can be unexpected and unpredictable events such as destruction of a building, the wiping of all
your computer files, loss of funds through theft or an injury to a member or visitor who trips on a
slippery floor and decides to sue. Any of these or a million other things can happen, and if they
do they have the potential to damage your organisation, cost you money, or in a worst case
scenario, cause your organisation to close.
Risk management
Risk management is a process of thinking systematically about all possible risks, problems or
disasters before they happen and setting up procedures that will avoid the risk, or minimise its
impact, or cope with its impact. It is basically setting up a process where you can identify the risk
and set up a strategy to control or deal with it.
It is also about making a realistic evaluation of the true level of risk. The chance of a tidal wave
taking out your annual beach picnic is fairly slim. The chance of your group's bus being involved
in a road accident is a bit more pressing.
Uncertainty
Situation where the current state of knowledge is such that the order or nature of things is
unknown, the consequences, extent, or magnitude of circumstances, conditions, or events is

unpredictable
Types of Risk:
There are two different types of risk: systematic risk and unsystematic risk.
Systematic risk is volatility caused by factors in the economic system that affect all investments
resulting in either losses or gains. For example, the risk of higher oil prices is a systematic risk
factor. Higher oil prices affect transportation costs, which in turn, affects the price of almost
everything else in the economy. Higher oil prices result in losses for car rental firms, trucking
firms, shipping firms, and airlines. They cause higher prices for food (all of which is transported
from where it is grown to where it is sold to consumers), and raw materials for manufacturers
which leads to higher prices for finished goods. Since consumers must pay higher prices for
fuel, they have less money to spend on other consumer items which produces losses for firms
supplying these products. Since higher oil prices raise the prices of everything else, and since
consumption drives about 66% of the U.S. GDP, higher oil prices causes the entire economy to
slow down.
Systematic risk goes by three other names: undiversifiable risk, portfolio risk and market risk.
The other type of risk associated with investing is called unsystematic risk.
Unsystematic ris has two other names: firm-specific risk and diversifiable risk.
Unsystematic risk is the variability of returns (risk) caused by factors associated with a
particular firm. Examples include the risk of bad or fraudulent management, the risk of a plant
fire, a labor strike, or a lawsuit. These risk factors are not likely to be present in all the firms in a
portfolio at the same time. Some firms will have them and some wont. An investor holding a
well-diversified portfolio (investments in firms in different industries and locations) will not be
concerned with unsystematic risk. For example, consider the quality of management. Some of
the firms in a portfolio will have good managers and some will have poor managers. The net
effect on the return of the portfolio will be nil. In effect, investors can diversify away the risk
posed by bad managers. The same is true for the other factors causing unsystematic risk.
Economic
Natural
Human
Economic
These risks occur from changes in overall business conditions.

This can include:

amount or type of competitor(s)
changing consumer lifestyle
population changes
government regulations
inflation
recession
Natural Risks
Natural risks are result from natural disasters or disruptions
floods
tornadoes
hurricanes
fires
droughts
lightning
earthquakes
even sudden abnormal weather conditions
Human Risks
These are caused by human mistakes and errors, as well as the unpredictability of customers,
employees, or the work environment
This could include:
Theft
injury on the job
bad checks
employee error
Negligence
Incompetence
etc.
Burden & Sources of Risk
Marketplace,
Employee-related risks and

Financing risks.
Methods to Handle Business Risks

For each risk you have identified, there will be one or more strategies or courses of action
available to you. The main strategies that you will be working with are as follows:
a. Avoidance
b. Risk Control
c. Risk Transfer
d. Loss Reduction
e. Segregation of Exposures (Spread of Risk)
f. Duplication of Resources
g. Self-Retention
(a) Avoidance
This is the most effective risk management strategy in that, by avoiding an activity or risk, any
chance of a loss is eliminated. While it is the most effective strategy, it is also not always the
most practical choice, as every part of a school operation has some level of risk, and avoiding all
risk would mean a school (or society) could not function.
The key with Avoidance is to use it for situations where:
the activity is inherently dangerous and/or a serious injury is likely to occur (See High
Risk category);
the foreseeable risks are beyond your control;
the activity is not necessary to fulfill educational goals;
the risks are not acceptable to your organization, or
you do not wish to devote the necessary resources to manage it properly.
If the risks have been properly identified and ranked as described in Step 1, then an
informed decision can be made as to whether a risk should be avoided.
(b) Risk Control
This is the process of actually managing the risk taking proactive steps to reduce the identified
risks where possible and putting steps, rules or procedures in place to minimize the residual risk
to reduce the chance of a loss or the severity of such a loss. Classic examples of risk control are

things like using protective gear for sports activities, setting rules, and of course, supervising to
ensure rules are enforced.
Risk Control is the most widely used strategy, as, when combined with the other strategies, it
enables activities or operations to take place with best safety practices or policies/procedures in
effect that address the various elements of risk inherent in the activity or process.
In effect, Risk Control enables calculated, informed risk taking to occur where the benefits of
proceeding with an activity outweigh the much-reduced risks that are present.
(c) Risk Transfer
This is the proactive process of transferring unwanted risk away from your organization to
another person or organization. Risk can be transferred to another party as follows:
by law (e.g. Occupiers Liability, Joint and Several Liability, Employers Vicarious
Liability):
through a written agreement or contract between two parties (known as Contractual
Transfer), or through a conventional insurance policy.
There are several situations where this strategy is effective:
Purchasing an insurance policy to substitute a known risk (the premium you will pay) for
an uncertain risk (will I have a million dollar loss?);
Purchasing an insurance policy to protect against liability imposed by civil law for
Occupiers Liability, Joint and Several Liability and Employers Vicarious Liability;
Someone else is using your premises/property for an activity they are in control of (See
Certificates of Insurance)
In outside person or independent contractor is performing work on your behalf. (See
Certificates of Insurance)
(d) Loss Reduction
This is a post-loss strategy that is essentially a response plan that addresses what will be done
if a loss does occur. An effective Loss Reduction strategy can effectively reduce the impact of a
loss and can make the difference between an inconvenience and a catastrophe.
Fire Drills and Emergency Response Plans are examples of Loss Reduction strategies.

(e) Segregation of Exposures

In essence, this strategy follows the adage dont put all your eggs in one basket. By spreading
your exposure to loss across different locations or by isolating certain risks, the chance of a total
loss is significantly reduced.
Some typical examples of segregation of exposures in a school environment include, but are not
limited to:
Not allowing combustible materials to be stored in boiler/furnace/electrical rooms;
Using steel fire-proof cabinets for storing flammable liquids;
Sports and Field Trips - Using female supervisors for female students and male supervisors
for male students;
Cash management procedures that require separate duties for employees or volunteers
regarding cash receipts and cash disbursements and audit functions;
Computer systems that can operate from different sites (hot sites);
Computer back-up medium stored off-site.
(f) Duplication of Resources
This strategy involves maintaining back-up facilities or having a contingency plan in place in
case an unexpected situation interrupts the normal flow of operations. While this strategy can
involve maintaining an expensive infrastructure, it is an important strategy to consider for certain
critical operations for your school board.
Some applications of this strategy include, but are not limited to:
Ensuring an adequate number of supervisors are present for school excursions or activities to
provide back-up in case of distraction, illness, injury or other emergency;
Computer facilities back-up computer data and access to alternate computer equipment that
can be used to run the boards computer systems (see also Segregation of Exposures).
Alternate suppliers of goods and services to protect against supply chain interruption (e.g.
fuel oil, maintenance contractors, etc.)
Maintaining access to alternate teaching facilities either by contractual agreement or by
utilizing existing schools that are not in use. For example, if a fire destroyed a high school,
where would the students be sent?

(g) Self-Retention
This strategy is applied to manage risks that are either uninsurable due to high risk factors, or for
small, infrequent losses that can be better managed internally than by claiming through an
insurance policy (e.g. deductible level on a property insurance policy).
Most school boards do not have many uninsurable high risks that are essential to their business
operations (see Avoidance), so the Self-Retention strategy is most commonly applied to
supplement conventional insurance policy contracts by carrying a deductible. In return for
taking a share of the small losses by way of a deductible, school boards are able to achieve
reduced premiums on their main property insurance coverage, saving the insurance policy for
catastrophic losses, while funding the small losses internally.
Degree of risk
Extent or level of uncertainty in a given situation the likelihood of the actual result being
different from the estimated result. See also law of large numbers, odds, and probability.
Management of risk
Risk management is the identification, assessment, and prioritization of risks (defined in ISO
31000 as the effect of uncertainty on objectives) followed by coordinated and economical
application of resources to minimize, monitor, and control the probability and/or impact of
unfortunate events
The Risk Management Process

Risk Management is defined in the standard (AS/NZS 4360:2004) as "the systematic application
of management policies, procedures and practices to the tasks of establishing the context,
identifying, analysing, assessing, treating, monitoring and communicating".
It is an iterative process that, with each cycle, can contribute progressively to organisational
improvement by providing management with a greater insight into risks and their impact.
Risk management can be applied to all levels of an organisation, in both the strategic and
operational contexts, to specific projects, decisions and recognised risk areas.
Risk is defined as 'the chance of something happening that will have an impact on objectives'. It
is, therefore, important to understand what the objectives of the University, Faculty, work unit or
your position, are, prior to attempting to analyse the risks.

A simple process
Risk analysis is best done in a group with each member of the group having a good
understanding of the tasks and objectives of the area being analysed.
1. Identify the Risks: as a group, list the things that might inhibit your ability to meet your
objectives. You can even look at the things that would actually enhance your ability to meet
those objectives eg.
a fund-raising
commercial
opportunity. These
are the risks that
you face eg. loss of
a key team member;
prolonged IT
network outage;
delayed provision of
important
information by
another work
unit/individual;
failure to seize a
commercial
opportunity etc.
2. Identify the
Causes: try to
identify what might
cause these things to
occur eg. the key
team member might
be disillusioned
with his/her
position, might be

head hunted to go elsewhere; the person upon whom you are relying for information might be
very busy, going on leave or notoriously slow in supplying such data; the supervisor required to
approve the commercial undertaking might be risk averse and need extra convincing before
taking the risk etc etc.
3. Identify the Controls: identify all the things (Controls) that you have in place that are aimed
at reducing the Likelihood of your risks from happening in the first place and, if they do happen,
what you have in place to reduce their impact (Consequence) eg. providing a friendly work
environment for your team; multi-skill across the team to reduce the reliance on one person;
stress the need for the required information to be supplied in a timely manner; send a reminder
before the deadline; provide additional information to the supervisor before he/she asks for it etc.
4. Establish your Likelihood and Consequence Descriptors, remembering that these depend
upon the context of your analysis ie. if your analysis relates to your work unit, any financial loss
or loss of a key staff member, for example, will have a greater impact on that work unit than it
will have on the University as a whole so those descriptors used for the whole-of-University
(strategic) context will generally not be appropriate for the Faculty, other work unit or the
individual eg. a loss of $300000 might be considered Insignificant to the University, but it could
very well be Catastrophic to your work unit.
You will need to establish these parameters in consultation with the Head of the work unit.
5. Establish your Risk Rating Descriptors: ie. what is meant by a Low, Moderate, High or
Extreme Risk needs to be decided upon ahead of time. Because these are more generic in
terminology though, you might find that the University's Strategic Risk Rating Descriptors are
applicable.
Identify and Analyze Loss Exposures

This is the process of determining the potential sources of loss, or hazards, that your school
board is exposed to which may result in loss or injury. This is a critical component, as it will
assist you in determining where to divert your resources.
Risk Identification:
There are several ways to identify sources of loss, but the most common approaches are:
a. Analyze past claims experience and determine categories or types of losses that you have
had (Contact OSBIE Risk Management).

b. Analyze past incident report data to determine where minor injuries that did not result in
claims were occurring. Based on the law of large numbers, large clusters of incidents from a
specific source can be predictors of where claims will eventually occur. (Contact OSBIE Risk
Management).
c. Conduct a survey of each department or operating division to determine where potential
losses can occur. Such surveys can be done professionally, or can be completed in-house using
the sample template (Figure 1). Within a department, each activity can also be assessed using
this form. Once completed, each risk factor can be ranked Low, Medium or High and
appropriate strategies can be documented to address each one (see Risk Management Steps 2 and
3).
d. Site inspections can also be used to provide a visual perspective of where your exposures
are e.g. proximity to nuclear facilities, manufacturing plants, transportation arteries, natural
hazards, isolated/remote location, high crime area, etc. Again, these inspections can be
conducted professionally or could be done in-house.
The types of risk identified by any
of the above methods generally
fall into the following categories,
and can be charted as illustrated in
Figure 1:
Financial Risks Also known as
Net Income Risks (because they
impact the bottom line of an
organization), these are the risks
that are not paid for by insurance,
whether by choice or by exclusion
e.g. Fines, penalties, clean-up
orders, losses below your
insurance deductible, punitive
damages, losses excluded by
insurance policy, increases in

premiums due to claims experience, etc.

Liability Risks These are the risks you face of being held legally responsible as the result of an
employees negligent act causing injury or damage to someone else. That includes all the
activities your board approves, organizes, directs, controls and supervises, as well as what is
imposed on you by law, such as Occupiers Liability, Employers Vicarious Liability, Joint and
Several Liability, etc.
Property Risks These are the risks you face of losing your buildings or property resulting
from natural events (tornado, flood, etc.), technological events (fire, chemical, explosion,
electrical, etc.) or man-made events (arson, vandalism, terrorism, etc.)
Analyzing/Assessing Risk:
It must be recognized that all risk elements are not equal in terms of frequency (how often a loss
will occur) and severity (how serious the loss is). Since scarce resources cannot be devoted to
address all risks equally, it is necessary to rank or prioritize your risks into categories that can be
dealt with based on the degree of threat that is posed to the school board.
Risk can be ranked many ways, but a simple and effective method is to use Low/Medium/High
rankings, as follows (See Figure 2):
Figure 2
Low There is an identifiable risk of a loss occurring, but it is either unlikely to occur or would
not cause serious injury/damage. Some characteristics of low risk factors include, but are not
limited to: sedentary classroom activities, low-impact exercises, walking, computer studies,
reading activities, etc.

A particular event or situation may also be considered a low risk if the likelihood of an
occurrence is rare or atypical for the school environment or location. Events such as hurricanes,
earthquakes, nuclear war, radioactive fall-out, students experiencing fatal heart attacks, etc. are
considered examples low risk as they rarely occur and, unless situations or conditions suddenly
change, would not warrant an allocation of resources to manage such risks.
Medium There is a known risk associated with the activity that may cause a loss to occur, but
you can takes steps to remove or reduce the risk. Some characteristics of medium risk factors
include, but are not limited to: physical contact sports, commercial transportation, water
transportation, downhill sports (ski, toboggan, tubing, etc.), water activities (swimming, sailing,
canoeing, etc.), physical education programs, etc.
There is also a sub-class in this category called High medium, which applies to activities
where relatively few losses occur, but because of the nature of the hazards, result in catastrophic
types of losses occurring. Activities and operations under this sub-category need to be carefully
considered, and if selected, managed with more caution than the medium risks, and includes
things like wilderness excursions, rock climbing, high ropes, canopy walks, technical studies
programs, etc.
High The nature of the activity or the presence of obvious hazards results in a High probability
of a loss occurring with catastrophic results (high severity); it is foreseeable that a loss will
occur, and/or you have no control over the risks that are present. Some characteristics of high
risk factors include, but are not limited to: fall heights exceeding 8 feet; severe weather
conditions, high speeds, uncontrolled/free falls or jumps, strong water currents or tidal effects,
inexperienced or unqualified supervisors and/or participants, students driving vehicles, etc.
Objectives of Risk Management

The Institute is exposed to various risks, which are either insured or uninsured, depending on the
specific objectives being performed while fulfilling the Institutes Mission. Our goal is to
identify the risks and determine if they may be avoided, reduced, spread, transferred or
prevented. Having recognized the need, and taken the responsibility to preserve the Institute's
resources, the following guidelines assist in managing the insurance and risks the Institute may
encounter:

1. Achieve and maintain a reduced cost of risk (both insurance and self-insurance) without
placing the Institute in a position of risk exposure that could have a significant impact on
its financial security and its Mission.
2. Evaluate and assess all risks of loss and need for insurance related to the specific
performance objective.
3. Modify or eliminate identifiable conditions and practices which may cause loss whenever
possible.
4. Purchased insurance coverage using the following guidelines:
a. While a competitive atmosphere is desired, continuity of relationship with
insurance sources is advantageous and will be maintained unless there is a
significant reason for making a change.
b. Selection is based on quality of protection, services provided, and cost.
Select Appropriate Risk Management Technique/Strategies

Once the risks have been identified and ranked as previously outlined, then the selection and
application of strategies can be completed. Usually, various combinations of strategies will work
together to address the identified risks, and it is not unusual to shift to other strategies as new
risks become apparent (see Monitoring), or more information accumulates on the risk profile of
an activity.
The following table provides a guide to the general application of the various risk management
strategies based on the assessed risk level Figure 3 provides an illustration of a risk map with
typical examples of risk by category and the applicable strategies:
High Risk Avoidance Risk Transfer (Contractual)

Self-Retention
Medium risk Avoidance (if unacceptable risks)

and Risk Control
High-Medium Risk LossReduction
Risk Transfer (Contractual, Insurance policy)
Duplication of Resources
Segregation of Exposures

Low Risk Self Retention

Loss Reduction
Risk Management Techniques: Noninsurance Methods

Risk Avoidance
A conscious decision not to expose oneself or ones firm to a particular risk
Can be said to decrease ones chance of loss to zero
A doctor may decide to leave the practice of medicine rather than contend with the risk of
malpractice liability losses
Risk avoidance is common
Particularly among those with a strong aversion to risk
However, avoidance is not always feasible
Or may not even be desirable if it is possible
When risk is avoided, the potential benefits, as well as costs, are given up
Loss Control
When particular risks cannot be avoided
Actions may often be taken to reduce the losses associated with them
Known as loss control
The firm or individual is still engaging in operations that give rise to particular risks
Involves making conscious decisions regarding the manner in which those activities will
be conducted
Focus of Loss Control
Some loss control measures are designed primarily to reduce loss frequency
Called frequency reduction
Some firms spend considerable funds in an effort to reduce the frequency of injuries to its
workers
Useful to consider the classic domino theory originally stated by H. W. Heinrich
Domino Theory
Employee accidents can be viewed in light of the following steps
Heredity and social environment, which cause persons to act a particular way

Personal fault, which is the failure of individuals to respond appropriately in a given

situation
An unsafe act or the existence of a physical hazard
Accident
Injury
Each step can be thought of as a domino that falls, which in turn causes the next domino
to fall
If any of the dominos prior to the final one are removed
The injury will not occur
Often argued that the emphasis of loss control should be on the third domino
Figure 5-1: Heinrichs Domino Theory
Types of Loss Control

Severity reduction
For example, an auto manufacturer having airbags installed in the company fleet of
automobiles
The air bags will not prevent accidents from occurring, but they will reduce the
probable injuries that employees will suffer if an accident does happen
Separation
Involves the reduction of the maximum probable loss associated with some kinds of
risks
Duplication
Spare parts or supplies are maintained to replace immediately damaged equipment
and/or inventories
Timing of Loss Control
Pre-loss activities
Implemented before any losses occur

Concurrent loss control

Activities that take place concurrently with losses
Post-loss activities
Always have a severity-reduction focus
One example is trying to salvage damaged property rather than discard it
Decisions Regarding Loss Control
A major issue for risk managers
The decision about how much money to spend on the various forms of loss control
In some cases it may be possible to significantly reduce the exposure to some
types of risk
But if the cost of doing so is very high relative to the firms financial situation
The loss control investment may not be money well spent
The general rule is that to justify the expenditure
The expected gains from an investment in loss control should be at least equal to
the expected costs
Potential Benefits of Loss Control

Many of the benefits are either readily quantifiable or can be reasonably estimated
These may include the reduction or elimination of expenses associated with the ff:
Repair or replacement of damaged property
Income losses due to destruction of property
Extra costs to maintain operations following a loss
Adverse liability judgments
Medical costs to treat injuries
Income losses due to death or disabilities
Another potential quantifiable benefit of loss control
A reduction in the cost of other risk management techniques used in conjunction with
the loss control
An example is the decrease in insurance premiums that often accompanies a loss
control investment
There may be loss control benefits for which a dollar value cannot be easily estimated

Examples include
The reduction in subjective risk that may accompany lower expected loss
frequency and severity
Improved public and employee relations associated with fewer and less severe
losses
Potential Costs of Loss Control
It is usually easier to estimate the potential costs
Two obvious cost components are installation and maintenance expenses
For example, a sprinkler system will have an initial cost to install and also will have
ongoing expenses necessary to maintain it in proper working order
The challenge of cost estimation is often identifying all of the ongoing expenses
Also, some of the ongoing cost may merely be increases in other expenses
Risk Retention
Involves the assumption of risk
If a loss occurs, an individual or firm will pay for it out of whatever funds are available at
the time
Planned Versus Unplanned Retention

Planned retention
Involves a conscious and deliberate assumption of recognized risk
Sometimes occurs because it is the most convenient risk treatment technique
Or because there are simply no alternatives available short of ceasing operations
Unplanned retention
When a firm or individual does not recognize that a risk exists and unwittingly
believes that no loss could occur
Sometimes occurs even when the existence of a risk is acknowledged
If the maximum possible loss associated with a recognized risk is significantly
underestimated
Funded Versus Unfunded Retention
Many risk retention strategies involve the intention to pay for losses as they occur
Without making any funding arrangements in advance of a loss

Known as unfunded retention

Funded retention
Preloss arrangements are made to ensure that money is readily available to pay for
losses that occur
Funded Retention
Credit
May provide some limited opportunities to fund losses that result from retained risks
Usually not a viable source of funds for the payment of large losses
Unless the risk manager has already established a line of credit prior to the loss
The very fact that the loss has occurred may make it impossible to obtain
credit when needed
Reserve funds
Sometimes established to pay for losses arising out of risks a firm has decided to
retain
When the maximum possible loss is quite large
A reserve fund may not be appropriate
Self-insurance
If the firm has a group of exposure units large enough to reduce risk and thereby
predict losses
The establishment of a fund to pay for those losses is a special form of planned,
funded retention
Will not involve a transfer of risk
Necessary elements of self-insurance
Existence of a group of exposure units that is sufficiently large to enable accurate
loss prediction
Prefunding of expected losses through a fund specifically designed for that
purpose
Captive insurers
Combines the techniques of risk retention and risk transfer
Decisions Regarding Retention: Financial Resources
A large business can often use risk retention to a greater extent than can a small firm

In part because of the large firms greater financial resources

Thus, losses due to many risks may merely be absorbed as losses occur, without much
advance planning
Examples may include pilferage of office supplies, breakage of windows,
burglary of vending machines
The following elements from a firms financial statements should be considered when
choosing possible retention levels
Total assets, total revenues, asset liquidity, cash flows, working capital, ratio of
revenues to net worth, retained earnings, ratio of total debt to net worth
Ability to predict losses
Although a firm may be able to retain the maximum probable loss associated with a
particular risk
Problems may result if there is considerable variability in the range of possible
losses
Implement and Monitor the Risk Management Program
Feasibility of the retention program
If the decision to retain losses involves advance funding
Administrative issues may need to be considered
If the risk is likely to result in several losses over time
There will be administrative expenses associated with investigating and paying
for those losses
Administrative issues are of particular concern when a firm decides to set up a self-
insurance or captive insurer arrangement
Risk Transfer
Involves payment by one party (the transferor) to another (the transferee, or risk bearer)
Transferee agrees to assume a risk that the transferor desires to escape
Hold-Harmless Agreements
Provisions inserted into many different kinds of contracts
Can transfer responsibility for some types of losses to a party different than the one that
would otherwise bear it
Also known as indemnity agreements

Intent of these contractual clauses

To specify the party that will be responsible for paying for various losses
Usually, no dollar limit is stated
Forms of hold-harmless agreements
Limited form
Clarifies that all parties are responsible for liabilities arising from their own
actions
Intermediate form
Transferee agrees to pay for any losses in which both the transferee and transferor
are jointly liable
Broad form
Requires the transferee to be responsible for all losses arising out of a particular
situation
Regardless of fault
Enforcement of hold harmless agreements
Are not always legally enforceable
If the transferor is in a superior position to the transferee with respect to either
bargaining power or knowledge of the factual situation
Attempt to transfer risk through a hold-harmless agreement may not be upheld by
the courts
Particularly true of broad-form hold-harmless agreements
Incorporation
The most that an incorporated firm can ever lose is the total amount of its assets
Personal assets of the owners cannot be attached to help pay for business losses
As can be the case with sole proprietorships and partnerships
Diversification, Hedging, and Insurance
Diversification
Results in the transfer of risk across business units
Combining businesses or geographic locations in one firm can even result in a
reduction in total risk

Through the portfolio effect of pooling individual risks that have different
correlations
Hedging
Involves the transfer of a speculative risk
A business transaction in which the risk of price fluctuations is transferred to a third
party
Which can be either a speculator or another hedger
Insurance
The most widely used form of risk transfer
The Value of Risk Management
Some elements of risk management can be viewed as positive net present value projects
If the expected gains from an investment in loss control exceed the expected costs
associated with that investment
The project should increase the value of the firm
However, shareholders in a publicly traded corporation can eliminate firm-specific risk
By holding a diversified portfolio of different company stocks
Therefore, the shareholder would appear to care little about the management of
nonsystematic or firm-specific risk
This would appear to make many risk management activities negative net present
value projects
However, many corporations engage in a number of activities directed at
managing firm-specific risk
Why is this economically justified?
Mayers and Smith suggest reasons for the transfer of risk by the corporation
Insurance contracts and other forms of risk transfer can allocate risk to those of the
firms claim holders who have a comparative advantage in risk bearing
Risk transfer can provide benefits by lowering the expected costs of bankruptcy
Risk transfer increases the likelihood that the firm will meet its obligations to its
debtholders and assures that funds will be available for future investment in valuable
projects

The comparative advantage of insurers in providing services related to risks can be an

advantage of risk transfer through insurance
When the tax system is progressive
The additional tax from increases and earnings is greater than the reduction in
taxes associated with decreases in earnings
A broader view of risk underpins the movement toward enterprise risk management
Reflects the realization that appropriate risk management must consider the fact that the
corporation faces a portfolio of risks
Diversification within the portfolio of risks facing the corporation can alter the firms risk
profile
Ignoring these diversification effects by managing the firms many risks independently
Can lead to an inefficient use of the corporations resources
Integrated Risk Management
The enterprise view of risk management
Encompasses building a structure and a systematic process for managing all the
corporations risks
Considers financial, commodity, credit, legal, environmental, reputation, and other
intangible exposures that could adversely impact the value of the corporation
The formation by some firms of the new position of chief risk officer (CRO)
Reflects a realization of the importance of identifying all risks that could negatively
impact the firm
Suggested responsibilities of the CRO include
Implementation of a consistent risk management framework across the
organizations business areas
Implementation and management of an integrated risk management program
With particular emphasis on operational risk
Communication of risk and the integrated risk management program to
stakeholders
Mitigation and financing of risks

Risk Management for Individuals and corporations:

Over the last couple of decades, institutional risk management has become an integral process at
almost every large organization. Corporate risk managers concern themselves not only with
financial risks, but with strategic and operational risks as well, evaluating possible future
outcomes and their effect on their organizations.
The International Standards Organization has even attempted to standardize the process of
organizational risk management, defining it as "the effect of uncertainty on objectives." It defines
risk management as "the identification, assessment and prioritization of risks followed by
coordinated and economical application of resources to minimize, monitor and control the
probability and/or impact of unfortunate events."
While these definitions look good on slide presentations at corporate risk management
departments, they are probably a bit too abstract for the real world practice of managing assets
for people. Still, they offer a framework to systematically evaluate and manage client risk. By
explicitly defining what could happen, focusing in on the uncertainties and estimating costs, it's
possible for investors to minimize and control their impact.
Most individuals, too, and their advisors are already managing risk in their investment process,
even if they don't know it. Specifically, they try to curb the risk of suffering shortfalls when it
comes time to cover future liabilities. The insurance they buy protects them against certain rare
but costly events. But saving and investing is a type of insurance as well-essentially it's self-
insuring against all other future liabilities, trying to prevent catastrophes in the future that you
can't predict and whose magnitude is uncertain.
The goal of diversification is to manage liquidity and uncertainty in the asset class returns of a
client's portfolio to cover future expenditures.
There are two ways we can tweak a portfolio to meet liabilities. First, after identifying and
segregating uncertain future liabilities, we can match them to assets that are highly correlated
with them. Second, we can imagine different scenarios that help us manage those risks better by
ensuring sufficient liquidity.
The interesting thing about this approach is that, besides helping us prepare for catastrophe, it
also gives us a higher overall portfolio return-because the risk profile is now better defined.
People can buy insurance in preparation for a number of horrible circumstances. They can insure
against death, disability, health problems and medical emergencies, property loss and legal

trouble. They can also partially insure things such as educational outlays (through prepaid tuition
plans) and retirement income (through annuities). Of course, there are also catastrophic risks
such as war, natural disasters and the government confiscation of property that can't be insured
against-things that would hurt almost every asset class if they came to pass. But since there is no
feasible way to manage these events short of building a survivalist compound stocked with food,
weapons and gold bars, we will ignore them.
What we manage instead is the uncertainty in future asset values by putting them next to
comparable future liabilities. We take investment risk and then divide it into further components
of inflation risk, market risk, interest rate risk, credit risk, liquidity risk, etc. The historical effects
of these risks on the returns of various asset classes are quantified as annual standard deviations,
which are then used to compare the "riskiness" of expected returns.
Defining Risk With Investment Goals
Clients can manage their investment risk typically by building a diversified portfolio with an
allocation and assets that seek the highest return for the client's risk appetite. Usually, the risk
profile is defined as how tolerant the client is for losing money when he will need it to meet a
few large defined expenditures: retirement, education costs, a house, etc. After an investor takes
these liabilities into account, he invests the rest of the portfolio for preservation of capital on the
one hand and growth on the other, with income sought somewhere in the middle. Defining other
future liabilities and the risk associated with them allows an investor to lower his risk of a future
asset shortfall.
Rather than thinking in growth or income terms on the investment side, the investor must
separate out expense streams and allocate a portion of the portfolio to more closely track these
expenses over time. The largest non-discretionary expenses incurred by most households are for
housing, taxes, energy and food. To manage the risk that these expenses will increase, investors
can pick assets that more closely track them than a diversified investment portfolio would. In
addition, if an investor anticipates other future liabilities and estimates when they might occur,
he can create an investment allocation that better minimizes the risk of potential shortfalls. He
could, on the other hand, well come up short if he simply estimates expected asset class returns,
correlations and annual standard deviations.
There is one other advantage of this approach: Investors who don't use it might otherwise be
sacrificing return by keeping the overall risk level of their portfolios too low. They aren't taking

the proper time horizon into account and they could be mistakenly misallocating assets in excess
of their future non-discretionary needs. They are more likely to assail their overall risk if they
tackle the individual components of risk separately, allocating portions of their portfolio to
retirement income, education savings, living expenses and estate planning. Not only will they be
managing their risk better, but they will also be better able to use what assets remain,
maximizing their long-term non-essential discretionary spending for things such as philanthropy,
bequests, collecting or lifestyle. If a client separates these assets from particular savings goals, he
will be more likely to invest them in more illiquid long-term investments with a higher expected
return.
Managing Risk
To use this risk framework, an investor must first insure risks of uncertain but improbable events
such as premature death and disability, catastrophic medical costs or property loss. Next, he
should segregate out and invest specifically for future liabilities with unknown costs: for
example, retirement income, education costs and living expenses. Since the risk associated with
these unknown costs is primarily related to inflation (not necessarily CPI inflation), the
diversified portfolio for each will have to contain asset classes with a higher expected return than
inflation. Additionally, the shorter the time horizon, the more heavily weighted the portfolio
should be to assets that directly track the inflation of the costs specific to the liability.
Take household expenses. It is now possible to use commodity ETFs that track the same futures
used by corporate risk managers to hedge against future household price increases. Similarly, if
an individual doesn't own real estate but he might have future housing needs, he can find liquid
real estate investments that will reduce his exposure to future housing inflation without giving
him the liquidity risk of holding actual real estate.
For principal protection against inflation as measured by CPI, an investor may turn to Treasury
Inflation-Protected Securities, but he might also consider ETFs or assets with a lower tracking
error than TIPS-for example, gold for general dollar risk or international currencies and bonds
for specific non-dollar exposures.
Rationale and Application:

The overall purpose of the management of risk process is to help a decision-maker understand a
situation, along with the likely outcomes.

This process is in two parts:

assess the risk
plan and control the activities to reduce the risk
The cost of risk is misunderstood. Far too many businesses calculate the total cost of risk as
the money they pay away in insurance premiums. Nothing could be further from the truth...
Companies face more risk today than ever before. Management has to consider the threat posed
by fire, theft, regulatory compliance and the environment as well as employee risks such as
staff turnover and the loss of key individuals, among others.
A sound risk management strategy entails identifying relevant risks to your business, mitigating
these risks by implementing controls to reduce the risk probability and introducing efficient
financing methods to cover the risk severity in the event the loss occurs.
Severity and Probability

The severity of a risk, usually expressed in financial terms, is the impact the event would have on
the business whereas probability refers to the likelihood of the event occurring at all. While the
rating of risks is subjective and unique to each business, all companies face a serious risk when
high or medium probability intersects with high or medium severity. You should take actions to
mitigate such risks as a matter of urgency.
The key objective of risk mitigation is to create a residual risk environment that your company is
comfortable with. You can reduce the severity of losing a key individual by introducing
succession planning, while the probability of this risk can be addressed by implementing an
incentive-based staff retention plan.
Understanding the cost of risk
Insurance the transfer of risk to a third party is an efficient method of financing the severity
of a risk. Many people consider the insurance premium to be the total cost of risk but there are
costs of risk that are not transferred to the third party. In other words the critical components of
costs of risk include the price paid for insurance and the cost of any uninsured losses.
A companys decision to insure or retain risk is guided by the cost of insurance relative to the
perceived benefit of the protection purchased, the capacity and appetite of the insurance market

to accept the relevant risk, the ability and capacity of the company to retain risk, and the
relevance the company assigns to the particular risk.
Striking a balance
The cost of insurance is a function of supply and demand so we can assume this is an efficient
method of financing risk. But the optimal solution is not readily evident when determining the
cost of risk retained.
Your risk management strategy must consider the most efficient method to finance risk retention.
A first option is to do nothing and proceed on the basis there will be sufficient income and cash
to cover uninsured loss events.
A second option is to secure a line of credit from the bank as a contingent liquidity facility. You
have to pay a fee for this facility, which could also hamper your ability to secure credit for other
purposes.
And third, you can choose to build up a reserve by setting aside cash. The obvious problem is
that the company may not have sufficient time to build up a reserve before the loss occurs The
reserve is not tax efficient either, as it is set aside from after-tax money!
Retained risk solutions
The insurance industry has structures to assist risk managers in covering risk retention.
Policies exist to participate in the risk by the insured and reward sound risk management by the
payment of profit commissions back to the insured. Policy premiums are calculated as a function
of the amount of protection required.
The premium is typically tax deducible and you are covered for the full amount at policy
inception, notwithstanding that premiums calculated to finance this amount may be paid over
several years.
Individual Risk Management
Individual risk management explained in the above paraghraph
Social risk management (SRM) is a conceptual framework developed by the World Bank,
specifically its Social Protection and Labor Sector under the leadership of Robert Holzmann,
since the end 1990s. The objective of SRM is to extend the traditional framework of social
protection to include prevention, mitigation, and coping strategies to protect
basic livelihoods and promote risk taking. SRM focuses specifically on the poor, who are the
most vulnerable to risk and more likely to suffer in the face of economic shocks. Through its

strategies SRM aims to reduce the vulnerability of the poor and encourage them to participate in
riskier but higher-return activities in order to transition out of chronic poverty.
Module 2: (6 Hours)
Risk Identification-Business Risk Exposures-Individual Exposures-Exposures of Physical Assets -
Exposures of Financial Assets -Exposures of Human Assets -Exposures to Legal Liability - Exposure
to Work-Related Injury-Basic concepts form probability and Statistics.
Introduction
This Business Risk Exposure (BRE) Tool forms part of a broader Strategic Asset Management
program developed by WERF, in association with the Water Research Foundation, United
Kingdom Water Industry Research (UKWIR), and the Global Water Research Coalition
(GWRC). The web based Tool has been developed to assist asset managers in decision making
based on performing a systematic assessment of the level of business risk exposure a Utility
faces from potential failures of its water and/or wastewater assets.
Business Risk Exposure
Business Risk Exposure (BRE) is a method of calculating (scoring) the nature and level of
exposure that an organization is likely to confront through a potential failure of a specified asset
or group of assets. Business Risk Exposure is derived by assessing both likelihood of failure
(what is the likelihood or probability that a predicted failure may actually occur?) and the
consequence of failure attributable to an asset should it fail (what are the implications or cost to
the utility and the community if an asset fails?).
Expressed mathematically, BRE is the product of the Consequence and Likelihood of a possible
failure, adjusted for risk mitigation measures currently in place and those that could be put in
place. Risk mitigation measures are those practices applied to an asset on a case by case basis to
either reduce either the likelihood of failure or the consequence of failure.
Figure 1 is a schematic representation of the key variables of business risk exposure.

Figure 1: Schematic of Business Risk Exposure Framework

Likelihood of Failure - from a risk standpoint is the expected possibility of failure occurring
based on history or known performance of the particular asset.
Consequence of Failure is the outcome of an asset failure expressed either qualitatively or
quantitatively, being a loss, injury, or disadvantage from a social, economic and environmental
or regulatory standpoint.
Analysis and Evaluation of Risk Exposure - Business Related Risk Exposures
Commercial general liability, commonly thought of as the "slip and fall" coverage, insures a
business against accidents and injury that might happen on or away from its premises, as well as
certain exposures relating to the carrying out of its business operations.
It protects the business owner from payments for bodily injury or property damage to a third
party, for medical expenses accruing to the underlying incident, for the cost of defending
lawsuits including investigations and settlements, and for any bonds or judgments required
during an appeal procedure.
Home-Business Liability
With so many people now working out of their homes, it's worth noting that the liability
coverage on your homeowner's policy may not apply if a customer or messenger is injured on
your property. And since a standard homeowner's policy comes with only a limited amount of
coverage for business equipment, usually up to $2500, those who work at home should consider

supplementing their insurance.
Business risk exposures to consider:

1) General Liability
2) Errors and Omissions
3) Director & Officer protection
4) Business Overhead expenses
5) Employee Group Benefit plans
Some might argue that employee group benefit plans are not necessarily a risk exposure. But
picture this: Suppose its common practice in your industry for a business to offer health/dental
insurance as well as 401k participation to its employees. If a firm within that industry has taken
the position that they are not going to provide these benefits to employees, the firm has now
exposed themselves to the recruitment risk of competitor firms bidding for their top employees
with more attractive compensation & benefits packages.
Coverage of these business risks will be discussed in more detail in the chapter that follows.
Individual Exposures, Exposures of Financial Assets -Exposures of Human Assets

Types of RisksRisk Exposures
Most risk professionals define risk in terms of an expected deviation of an occurrence from what
they expectalso known as anticipated variability. In common English language, many people
continue to use the word risk as a noun to describe the enterprise, property, person, or activity
that will be exposed to losses. In contrast, most insurance industry contracts and education and
training materials use the term exposure to describe the enterprise, property, person, or activity
facing a potential loss. So a house built on the coast near Galveston, Texas, is called an
exposure unit for the potentiality of loss due to a hurricane. Throughout this text, we will use
the terms exposure and risk to note those units that are exposed to losses.
Pure versus Speculative Risk Exposures
Some people say that Eskimos have a dozen or so words to name or describe snow. Likewise,
professional people who study risk use several words to designate what others intuitively and
popularly know as risk. Professionals note several different ideas for risk, depending on the

particular aspect of the consequences of uncertainty that they wish to consider. Using different
terminology to describe different aspects of risk allows risk professionals to reduce any
confusion that might arise as they discuss risks.
As we noted in Table 1.2 "Examples of Pure versus Speculative Risk Exposures", risk
professionals often differentiate between pure risk that features some chance of loss and no
chance of gain (e.g., fire risk, flood risk, etc.) and those they refer to as speculative
risk. Speculative risks feature a chance to either gain or lose (including investment risk,
reputational risk, strategic risk, etc.). This distinction fits well into Figure 1.3 "Roles (Objectives)
Underlying the Definition of Risk". The right-hand side focuses on speculative risk. The left-
hand side represents pure risk. Risk professionals find this distinction useful to differentiate
between types of risk.
Some risks can be transferred to a third partylike an insurance company. These third parties
can provide a useful risk management solution. Some situations, on the other hand, require risk
transfers that use capital markets, known as hedging or securitizations. Hedging refers to
activities that are taken to reduce or eliminate risks. Securitization is the packaging and
transferring of insurance risks to the capital markets through the issuance of a financial security.
We explain such risk retention. In essence it is self-insuring against adverse contingencies out of
its own cash flows. For example, firms might prefer to capture up-side return potential at the
same time that they mitigate while mitigating the downside loss potential.
In the business environment, when evaluating the expected financial returns from the
introduction of a new product (which represents speculative risk), other issues concerning
product liability must be considered. Product liability refers to the possibility that a manufacturer
may be liable for harm caused by use of its product, even if the manufacturer was reasonable in
producing it.
Table 1.2 "Examples of Pure versus Speculative Risk Exposures" provides examples of the pure
versus speculative risks dichotomy as a way to cross classify risks. The examples provided
in Table 1.2 "Examples of Pure versus Speculative Risk Exposures" are not always a perfect fit
into the pure versus speculative risk dichotomy since each exposure might be regarded in
alternative ways. Operational risks, for example, can be regarded as operations that can cause
only loss or operations that can provide also gain. However, if it is more specifically defined, the
risks can be more clearly categorized.

The simultaneous consideration of pure and speculative risks within the objectives continuum
of Figure 1.3 "Roles (Objectives) Underlying the Definition of Risk"is an approach to managing
risk, which is known as enterprise risk management (ERM). ERM is one of todays key risk
management approaches. It considers all risks simultaneously and manages risk in a holistic or
enterprise-wide (and risk-wide) context. ERM was listed by the Harvard Business Review as one
of the key breakthrough areas in their 2004 evaluation of strategic management approaches by
top management. In todays environment, identifying, evaluating, and mitigating all risks
confronted by the entity is a key focus. Firms that are evaluated by credit rating organizations
such as Moodys or Standard & Poors are required to show their activities in the areas of
enterprise risk management. As you will see in later chapters, the risk manager in businesses is
no longer buried in the tranches of the enterprise. Risk managers are part of the executive team
and are essential to achieving the main objectives of the enterprise. A picture of the enterprise
risk map of life insurers is shown later in Figure 1.5 "A Photo of Galveston Island after
Hurricane Ike".
Table 1.2 Examples of Pure versus Speculative Risk Exposures
Speculative RiskPossible
Pure RiskLoss or No Loss Only Gains or Losses
Physical damage risk to property (at the enterprise level) such Market risks: interest risk,
as caused by fire, flood, weather damage foreign exchange risk, stock
market risk
Liability risk exposure (such as products liability, premise Reputational risk

liability, employment practice liability)
Innovational or technical obsolescence risk Brand risk
Operational risk: mistakes in process or procedure that cause Credit risk (at the individual
losses enterprise level)
Mortality and morbidity risk at the individual level Product success risk
Intellectual property violation risks Public relation risk
Environmental risks: water, air, hazardous-chemical, and other Population changes

Speculative RiskPossible
Pure RiskLoss or No Loss Only Gains or Losses
pollution; depletion of resources; irreversible destruction of

food chains
Natural disaster damage: floods, earthquakes, windstorms Market for the product risk
Man-made destructive risks: nuclear risks, wars, Regulatory change risk

unemployment, population changes, political risks
Mortality and morbidity risk at the societal and global level (as Political risk
in pandemics, social security program exposure, nationalize
health care systems, etc.)
Accounting risk
Longevity risk at the societal

level
Genetic testing and genetic

engineering risk
Investment risk
Research and development risk
Within the class of pure risk exposures, it is common to further explore risks by use of the
dichotomy of personal property versus liability exposure risk.
Personal Loss ExposuresPersonal Pure Risk
Because the financial consequences of all risk exposures are ultimately borne by people (as
individuals, stakeholders in corporations, or as taxpayers), it could be said that all exposures are
personal. Some risks, however, have a more direct impact on peoples individual lives. Exposure
to premature death, sickness, disability, unemployment, and dependent old age are examples of
personal loss exposures when considered at the individual/personal level. An organization may
also experience loss from these events when such events affect employees. For example, social
support programs and employer-sponsored health or pension plan costs can be affected by

natural or man-made changes. The categorization is often a matter of perspective. These events
may be catastrophic or accidental.
Property Loss ExposuresProperty Pure Risk
Property owners face the possibility of both direct and indirect (consequential) losses. If a car is
damaged in a collision, the direct loss is the cost of repairs. If a firm experiences a fire in the
warehouse, the direct cost is the cost of rebuilding and replacing inventory. Consequential or
indirect losses are nonphysical losses such as loss of business. For example, a firm losing its
clients because of street closure would be a consequential loss. Such losses include the time and
effort required to arrange for repairs, the loss of use of the car or warehouse while repairs are
being made, and the additional cost of replacement facilities or lost productivity. Property loss
exposures are associated with both real property such as buildings and personal property such as
automobiles and the contents of a building. A property is exposed to losses because of accidents
or catastrophes such as floods or hurricanes.
Liability Loss ExposuresLiability Pure Risk
The legal system is designed to mitigate risks and is not intended to create new risks. However, it
has the power of transferring the risk from your shoulders to mine. Under most legal systems, a
party can be held responsible for the financial consequences of causing damage to others. One is
exposed to the possibility ofliability loss (loss caused by a third party who is considered at fault)
by having to defend against a lawsuit when he or she has in some way hurt other people. The
responsible party may become legally obligated to pay for injury to persons or damage to
property. Liability risk may occur because of catastrophic loss exposure or because of accidental
loss exposure. Product liability is an illustrative example: a firm is responsible for compensating
persons injured by supplying a defective product, which causes damage to an individual or
another firm.
Catastrophic Loss Exposure and Fundamental or Systemic Pure Risk
Catastrophic risk is a concentration of strong, positively correlated risk exposures, such as many
homes in the same location. A loss that is catastrophic and includes a large number of exposures
in a single location is considered a nonaccidental risk. All homes in the path will be damaged or
destroyed when a flood occurs. As such the flood impacts a large number of exposures, and as
such, all these exposures are subject to what is called a fundamental risk. Generally these types
of risks are too pervasive to be undertaken by insurers and affect the whole economy as opposed

to accidental risk for an individual. Too many people or properties may be hurt or damaged in
one location at once (and the insurer needs to worry about its own solvency). Hurricanes in
Florida and the southern and eastern shores of the United States, floods in the Midwestern states,
earthquakes in the western states, and terrorism attacks are the types of loss exposures that are
associated with fundamental risk. Fundamental risks are generally systemic and non-
diversifiable.
Figure 1.5 A Photo of Galveston Island after Hurricane Ike
Accidental Loss Exposure and Particular Pure Risk

Many pure risks arise due to accidental causes of loss, not due to man-made or intentional ones
(such as making a bad investment). As opposed to fundamental losses, noncatastrophic
accidental losses, such as those caused by fires, are considered particular risks. Often, when the
potential losses are reasonably bounded, a risk-transfer mechanism, such as insurance, can be
used to handle the financial consequences.
In summary, exposures are units that are exposed to possible losses. They can be people,
businesses, properties, and nations that are at risk of experiencing losses. The term exposures
is used to include all units subject to some potential loss.
Another possible categorization of exposures is as follows:
Risks of nature
Risks related to human nature (theft, burglary, embezzlement, fraud)
Man-made risks
Risks associated with data and knowledge
Risks associated with the legal system (liability)it does not create the risks but it may
shift them to your arena
Risks related to large systems: governments, armies, large business organizations,
political groups
Intellectual property
Pure and speculative risks are not the only way one might dichotomize risks. Another breakdown
is between catastrophic risks, such as flood and hurricanes, as opposed to accidental losses such
as those caused by accidents such as fires. Another differentiation is by systemic or
nondiversifiable risks, as opposed to idiosyncratic or diversifiable risks; this is explained below.

Diversifiable and Nondiversifiable Risks

As noted above, another important dichotomy risk professionals use is between diversifiable and
nondiversifiable risk. Diversifiable risks are those that can have their adverse consequences
mitigated simply by having a well-diversified portfolio of risk exposures. For example, having
some factories located in nonearthquake areas or hotels placed in numerous locations in the
United States diversifies the risk. If one property is damaged, the others are not subject to the
same geographical phenomenon causing the risks. A large number of relatively homogeneous
independent exposure units pooled together in a portfolio can make the average, or per exposure,
unit loss much more predictable, and since these exposure units are independent of each other,
the per-unit consequences of the risk can then be significantly reduced, sometimes to the point of
being ignorable. These will be further explored in a later chapter about the tools to mitigate risks.
Diversification is the core of the modern portfolio theory in finance and in insurance. Risks,
which are idiosyncratic (with particular characteristics that are not shared by all) in nature, are
often viewed as being amenable to having their financial consequences reduced or eliminated by
holding a well-diversified portfolio.
Systemic risks that are shared by all, on the other hand, such as global warming, or movements
of the entire economy such as that precipitated by the credit crisis of fall 2008, are considered
nondiversifiable. Every asset or exposure in the portfolio is affected. The negative effect does not
go away by having more elements in the portfolio. This will be discussed in detail below and in
later chapters. The field of risk management deals with both diversifiable and nondiversifiable
risks. As the events of September 2008 have shown, contrary to some interpretations of financial
theory, the idiosyncratic risks of some banks could not always be diversified away. These risks
have shown they have the ability to come back to bite (and poison) the entire enterprise and
others associated with them.
Table 1.3 "Examples of Risk Exposures by the Diversifiable and Nondiversifiable Categories"
provides examples of risk exposures by the categories of diversifiable and nondiversifiable risk
exposures. Many of them are self-explanatory, but the most important distinction is whether the
risk is unique or idiosyncratic to a firm or not. For example, the reputation of a firm is unique to
the firm. Destroying ones reputation is not a systemic risk in the economy or the market-place.
On the other hand, market risk, such as devaluation of the dollar is systemic risk for all firms in
the export or import businesses. In Table 1.3 "Examples of Risk Exposures by the Diversifiable

and Non-diversifiable Categories" we provide examples of risks by these categories. The

examples are not complete and the student is invited to add as many examples as desired.
Table 1.3 Examples of Risk Exposures by the Diversifiable and Nondiversifiable Categories
Diversifiable RiskIdiosyncratic
Risk Non-diversifiable RisksSystemic Risk
Reputational risk Market risk
Brand risk Regulatory risk
Credit risk (at the individual Environmental risk

enterprise level)
Product risk Political risk
Legal risk Inflation and recession risk
Physical damage risk (at the Accounting risk

enterprise level) such as fire, flood,
weather damage
Liability risk (products liability, Longevity risk at the societal level

premise liability, employment
practice liability)
Innovational or technical Mortality and morbidity risk at the societal and global
obsolesce risk level (pandemics, social security program exposure,
nationalize health care systems, etc.)
Operational risk
Strategic risk
Longevity risk at the individual

level
Mortality and morbidity risk at the

individual level

Enterprise Risks
As discussed above, the opportunities in the risks and the fear of losses encompass the holistic
risk or the enterprise risk of an entity. The following is an example of the enterprise risks of life
insurers in a map in Figure 1.6 "Life
Insurers Enterprise Risks". Since
enterprise risk management is a key
current concept today, the enterprise
risk map of life insurers is offered
here as an example. Operational risks
include public relations risks,
environmental risks, and several
others not detailed in the map
in Figure 1.4 "Risk Balls". Because
operational risks are so important,
they usually include a long list of
risks from employment risks to the
operations of hardware and software
for information systems.
Figure 1.6 Life Insurers Enterprise
Risks
Risks in the Limelight

Our great successes in innovation are also at the heart of the greatest risks of our lives. An
ongoing concern is the electronic risk (e-risk) generated by the extensive use of computers, e-
commerce, and the Internet. These risks are extensive and the exposures are becoming more
defined. The box "The Risks of E-exposures" below illustrates the newness and not-so-newness
in our risks.
The Risks of E-exposures
Electronic risk, or e-risk, comes in many forms. Like any property, computers are vulnerable to
theft and employee damage (accidental or malicious). Certain components are susceptible to
harm from magnetic or electrical disturbance or extremes of temperature and humidity. More

important than replaceable hardware or software is the data they store; theft of proprietary
information costs companies billions of dollars. Most data theft is perpetrated by employees, but
netspionageelectronic espionage by rival companiesis on the rise.
Companies that use the Internet commerciallywho create and post content or sell services or
merchandisemust follow the laws and regulations that traditional businesses do and are
exposed to the same risks. An online newsletter or e-zine can be sued for libel, defamation,
invasion of privacy, or misappropriation (e.g., reproducing a photograph without permission)
under the same laws that apply to a print newspaper. Web site owners and companies conducting
business over the Internet have three major exposures to protect: intellectual property
(copyrights, patents, trade secrets); security (against viruses and hackers); and business
continuity (in case of system crashes).
All of these losses are covered by insurance, right? Wrong. Some coverage is provided through
commercial property and liability policies, but traditional insurance policies were not designed to
include e-risks. In fact, standard policies specifically exclude digital risks (or provide minimal
coverage). Commercial property policies cover physical damage to tangible assetsand
computer data, software, programs, and networks are generally not counted as tangible property.
(U.S. courts are still debating the issue.)
This coverage gap can be bridged either by buying a rider or supplemental coverage to the
traditional policies or by purchasing special e-risk or e-commerce coverage. E-risk property
policies cover damages to the insureds computer system or Web site, including lost income
because of a computer crash. An increasing number of insurers are offering e-commerce liability
policies that offer protection in case the insured is sued for spreading a computer virus,
infringing on property or intellectual rights, invading privacy, and so forth.
Cybercrime is just one of the e-risk-related challenges facing todays risk managers. They are
preparing for it as the world evolves faster around cyberspace, evidenced by record-breaking
online sales during the 2005 Christmas season.
Sources: Harry Croydon, Making Sense of Cyber-Exposures, National Underwriter, Property
& Casualty/Risk & Benefits Management Edition, 17 June 2002; Joanne Wojcik, Insurers Cut
E-Risks from Policies, Business Insurance, 10 September 2001; Various media resources at the
end of 2005 such asWall Street Journal and local newspapers.

Today, there is no media that is not discussing the risks that brought us to the calamity we are
enduring during our current financial crisis. Thus, as opposed to the megacatastrophes of 2001
and 2005, our concentration is on the failure of risk management in the area of speculative risks
or the opportunity in risks and not as much on the pure risk. A case at point is the little media
coverage of the devastation of Galveston Island from Hurricane Ike during the financial crisis of
September 2008. The following box describes the risks of the first decade of the new
millennium.
Risks in the New Millennium
While man-made and natural disasters are the stamps of this decade, another type of man-made
disaster marks this period. Innovative financial products without appropriate underwriting and
risk management coupled with greed and lack of corporate controls brought us to the credit crisis
of 2007 and 2008 and the deepest recession in a generation. The capital market has become an
important player in the area of risk management with creative new financial instruments, such as
Catastrophe Bonds and securitized instruments. However, the creativity and innovation also
introduced new risky instruments, such as credit default swaps and mortgage-backed securities.
Lack of careful underwriting of mortgages coupled with lack of understanding of the new
creative insurance default swaps instruments and the resulting instability of the two largest
remaining bond insurers are at the heart of the current credit crisis.
As such, within only one decade we see the escalation in new risk exposures at an accelerated
rate. This decade can be named the decade of extreme risks with inadequate risk management.
The late 1990s saw extreme risks with the stock market bubble without concrete financial theory.
This was followed by the worst terrorist attack in a magnitude not experienced before on U.S.
soil. The corporate corruption at extreme levels in corporations such as Enron just deepened the
sense of extreme risks. The natural disasters of Katrina, Rita, and Wilma added to the extreme
risks and were exacerbated by extraordinary mismanagement. Today, the extreme risks of
mismanaged innovations in the financial markets combined with greed are stretching the field of
risk management to new levels of governmental and private controls.
However, did the myopic concentration on terrorism risk derail the holistic view of risk
management and preparedness? The aftermath of Katrina is a testimonial to the lack of risk
management. The increase of awareness and usage of enterprise risk management (ERM) post
September 11 failed to encompass the already well-known risks of high-category hurricanes on

the sustainability of New Orleans levies. The newly created holistic Homeland Security agency,
which houses FEMA, not only did not initiate steps to avoid the disaster, it also did not take the
appropriate steps to reduce the suffering of those afflicted once the risk materialized. This
outcome also points to the importance of having a committed stakeholder who is vested in the
outcome and cares to lower and mitigate the risk. Since the insurance industry did not own the
risk of flood, there was a gap in the risk management. The focus on terrorism risk could be
regarded as a contributing factor to the neglect of the natural disasters risk in New Orleans. The
ground was fertile for mishandling the extreme hurricane catastrophes. Therefore, from such a
viewpoint, it can be argued that September 11 derailed our comprehensive national risk
management and contributed indirectly to the worsening of the effects of Hurricane Katrina.
Furthermore, in an era of financial technology and creation of innovative modeling for predicting
the most infrequent catastrophes, the innovation and growth in human capacity is at the root of
the current credit crisis. While the innovation allows firms such as Risk Management Solutions
(RMS) and AIR Worldwide to provide models that predict potential man-made and natural
catastrophes, financial technology also advanced the creation of financial instruments, such as
credit default derivatives and mortgage-backed securities. The creation of the products provided
black boxes understood by few and without appropriate risk management. Engineers,
mathematicians, and quantitatively talented people moved from the low-paying jobs in their
respective fields into Wall Street. They used their skills to create models and new products but
lacked the business acumen and the required safety net understanding to ensure product
sustenance. Management of large financial institutions globally enjoyed the new creativity and
endorsed the adoption of the new products without clear understanding of their potential impact
or just because of greed. This lack of risk management is at the heart of the credit crisis of 2008.
No wonder the credit rating organizations are now adding ERM scores to their ratings of
companies.
The following quote is a key to todays risk management discipline: Risk management has been
a significant part of the insurance industry, but in recent times it has developed a wider
currency as an emerging management philosophy across the globe. The challenge facing the
risk management practitioner of the twenty-first century is not just breaking free of the mantra
that risk management is all about insurance, and if we have insurance, then we have managed our
risks, but rather being accepted as a provider of advice and service to the risk makers and the risk

takers at all levels within the enterprise. It is the risk makers and the risk takers who must be the
owners of risk and accountable for its effective management.
Exposures to Legal Liability, Exposure to Work-Related Injury, Basic concepts form

probability and Statistics
To be able to survive and sustain, organizations need to ensure continuity of their operations and
preservation of their assets. They are exposed to various risks and therefore in order to sustain
themselves to achieve corporate goal the organization must have a Risk Management Policy. As
a result of social changes, rapid technological advancements and the prevailing political,
economic and legal environment, the organizations are faced with a new threat to their existence
the one emanating from legal liability under tort, statutory law and contract. The liability
exposure alongwith other areas of loss exposure therefore should form Part of the overall risk
management policy of any organization.
Before we discuss insurance part of it, lets examine risk management per se from the point of
view of an organization which typically consists of
i) Risk Analysis
ii) Risk Control
iii) Risk Financing
iv) Monitoring and review
Risk Analysis basically involves identification and evaluation of risk. We first identify the areas
of risk exposure e.g. assets, earning capacity, human resource, legal liabilities, etc. and then
correlate them with possible sources of loss/ damage/ injury. What is the probability of
happening of such a loss and its likely severity is then evaluated. Broadly speaking there may be
high frequency and low severity and Low Frequency and high severity losses. The next step
in the process is Risk Control measures which is aimed at avoiding, eliminating or reducing the
chances of loss producing events. This also involves measures for diminishing the severity of
loss that has occurred.
These can be achieved by technical improvement, procedural changes, TQM approach and loss
prevention measures. Since these involve substantial amount of money, a cost-benefit analysis is
carried out before the actual measures are initiated, though any progressive management would

regard all loss prevention activities as not to be dispersed with. Inspite of the best efforts in
preventing accidents / losses, they do take place and the organizations must have to find ways to
finance them. The possible options are insurance /ART, finance by loan, creation of contingency
fund, losses to be charged to operating costs, etc. We are living in a dynamic world and any
policy / strategy needs to be continuously reviewed and monitored to effect change if so
warranted.
Lets now examine the legal liability and its implication on an organization. Lets also examine
the evolution of liability legislation and the prevailing judicial attitude. This is necessary because
the liability insurance has to necessarily move along the path determined by both the liability
legislation and the court decision / judgment. Legal liability may be defined as specific
responsibilities and obligations which can be enforced at law. We are here basically concerned
with civil liability which may arise under (i) Law of Tort (ii) Statutory Law (iii) Law of Contract.
It should be noted that for any civil wrong suits can be filed for damages / injury. It should also
be noted that there is no escape from liability under statutory and contract law provision.
Originally everybody abided by the principle you pay for your own losses. However with the
passage of time the notion of fault got incorporated in civil law, which meant that if you are
responsible for the damages / injures you have to pay the monetary compensation. But this
required the establishment of fault in the court law - a difficult task indeed. Therefore, in order
to help the victims and to safeguard his interest, the onus of proof was shifted to the defendant
who has to prove his innocence rather than the victim proving the negligence on the part of tort-
feasor. The principle that for every wrong there must be redress in the form of damage has
now changed to for every injury there must be redress in the form of damage. With this
change has come the concept of strict or absolute liability which means that mere existence /
operation of an activity constitute the cause triggering liability - the only requirement being a
causal link between the activity and the loss event. With growing awareness about the
environment, preservation of flora & fauna, the assets belonging to society as a whole (eco-
system) are being brought in the liability net, the guiding principle being the polluter pays.
Retroactive application of these laws has their own implication.
In order to ensure that the victims get the compensation (where the liable party is not in a
position to pay) the concept of group common fate has been introduced. Several parties are held
jointly responsible in accordance with their ability to pay creating deep pocket approach. This

means that persons / parties who have nothing to do with the original event may be fastened with
liability. The net of liable parties is thus widening. Of late there has been trend to award punitive
damage as a deterrent to the perpetrators, apart from soaring compensation payments. Sometimes
the punitive damages exceed the actual damage awarded.
In the light of the above, it should now become very clear that other than Act of God peril, there
is hardly any legally permitted exoneration pleas and hence the extent of liability exposure can
very well be imagined / understood. It will not be out of place here to mention a few relevant
court cases, which are indicative of the shape of things to come in future. In the case of SriRam
Foods & Fertilizer where oleum gas escaped from one of the units resulting in injuries to many,
the Supreme Court held that the liability to compensate is absolute and that Chairman / MD/
Officers heading the plant are personally liable to pay the compensation. In Uphaar Cinema
tragedy the court has held MCD, Delhi Police and DESU (All public agencies) jointly
responsible for the payment of compensation. A leading software Indian Co. has to settle for an
out of court settlement in a sexual harassment case against one of its employees in USA. The
liability exposure arising out of cases like Bhopal Gas Tragedy can be well imagined. At this
stage it will not be out of place to have a look at statutory laws governing civil liability. Apart
from tort they are
WC Act 1923 (as amended)
Factories Act 1948
Consumer Protection Act 1986
The Environment Protection Act 1986
National Environment Tribunal Act 1995
Public Liability Insurance Act 1991
Law of Contract
Those falling within the purview of WC Act 1923 & PLI Act, 1991, have to necessarily take
Insurance cover as provided in the Act. As for the liability under other statutes and the liability
under tort the companies have to plan for them in their Risk Management Programme.
Lets now examine the position from the point of view of Insurers. Lets first start with the
pricing part of it. It is an accepted principle of insurance pricing that there should be proper
matching between the rate of premium and degree of exposure in terms of probability of loss.

Liability claims being long-tail, open-ended, and intangible, pose problem in working out the
premium rate. It is difficult to objectively measure the probability because of lack of adequate
data- base and also because the liability fixed is very subjective based upon the prevailing
judicial attitude. The Risk / premium balance is disturbed because the liability standard as
prevailing in a future date will decide the outcome of the events that has already taken place is
the past and which incidentally was underwritten in the past based on the then prevailing
condition. Besides it is very difficult to quantify objectively the loss on account of pain /
suffering / mental agony, damage to eco-system, environment, etc. Keeping the above factors in
view and the requirements of the market, Indian Insurance Company have many liability
products to offer. However, in order to keep their financial commitments within their limit of
retention, the insurance companies sets out two limits called AOA (Any one accident limit) and
AoY (Any one year limit) in all liability insurance policies. In liability claims, at times, the
insured event do not occur suddenly and accidentally but manifests itself only gradually and
hence it becomes difficult to ascertain whether cover exists from a time related point of view.
These are called gradual loss event. Therefore the following three concepts typical to liability
insurance need to be understood:
Retroactive date - It is the date when the first policy issued commences and will continue to
be the retroactive date for subsequent policies if renewed without break.
Policy period. It is the one year policy period as depicted on the face of the policy.
Period of insurance - It means the period commencing from the retroactive date and
continues, if the policies are renewed without break, till the expiry date in the last policy.
In relation to the claims, to find out whether insurance coverage in a particular case applies or
not, there are three types of policy wordings.
1) Occurrence basis: The damage / injury must occur during policy period. Claim may occur
after expiry also.
2) Claims made basis: the claim is made during the policy period irrespective of when the
negligence occurred.
3) Acts committed basis: The negligent act must occur during the policy period.

The courts, however, have interpreted the wordings in their own way and there are conflicting
judgments specially in USA. In India, the indemnity clause generally provide the cover for
Claims arising out of accidents, during the period of insurance
First made during the policy period.
This means that the event must occur during the period of insurance and the policy is
continuously in force without break till the time the claims is reported.
The following liability insurance products are available in Indian market.
Public liability for industrial and non-industrial risk.
Product liability
Professional indemnity for Doctors / Solicitors, etc.
Employers liability
Directors and Officers liability
Act policy under PLI Act (hazardous goods) 1991.
Motor, marine hull and aviation policies also cover T.P. liability.
CAR, EAR, IAR, etc have provision to extend cover to T.P. liability.
Depending upon the specific needs of a client, tailor made policy can also be made. Some of the
private insurance companies have come out with products like commercial general liability
insurance cover.
It should be noted that liability insurance by its very nature has the potential to result is heavy
losses of catastrophic nature. Hence the reinsurance support is required. However, in view of
limited insurance capacity, higher premium, increased deductibles a need is felt about alternative
risk transfer mechanism (ART). This is being attempted by transfer of risk through capital
market instruments e.g. CAT Bonds. Therefore, optimized risk transfer at optimal price may
involve combination of insurance & ART. In this regard a new concept is gaining currency in
European market to avoid complications from liability laws and unpredictable nature of court
judgments. The concept of First party cover takes the place of liability insurance specially for
covering environmental liability. Instead of the tort-fearer taking the policy, the would be
aggrieved party takes the First party covers. In the event of any damage, instead of locating the

tort fearer, the aggrieved party without going through the court mechanism claims compensation
from the insurance company.
The ever-increasing entitlement - mentality of society, the widening net of liability legislation,
and the trend of court judgments may well have a very negative effect on the economy and more
so on small entrepreneurship. We have to think of innovative ways to come out with solutions,
which takes care of the need of not only big organizations but also SSIs and SMEs who are the
most vulnerable. The solutions must be cost effective and innovative in nature.

Module 3: (8 Hours)
Risk Measurement-Evaluating the Frequency and Severity of Losses-Risk Control-0-Risk
Management Decision Methods-Pooling Arrangements and Diversification of Risk.
Advanced Issues in Risk Management: The Changing Scope of Risk Management-Insurance
Market Dynamics-Loss Forecasting-Financial Analysis in Risk Management --Decision Making-
Other Risk Management Tools
Evaluating the Frequency

Frequency- Since standard deviation is the most common proxy for risk (even VAR measures are
driven ultimately by standard deviation), the easiest way to approach the problem of risk
measurement is to catalogue the various inadequacies of standard deviation as a risk measure.
Severity Method
An actuarial method for determining the expected number of claims that an insurer will receive
during a given time period, and how much the average claim will cost. Frequency-severity
method uses historical data to estimate the average number of claims and the average cost of
each claim. The method multiplies the average number of claims by the average cost of a claim.
Insurers use sophisticated models to determine the likelihood that they will have to pay out a
claim. Ideally, the insurer would prefer receiving premiums for underwriting new insurance
policies without ever having to pay out a claim, but this is a very unlikely scenario. Instead,
insurers develop estimates as to how many claims they may expect to see and how expensive the
claims will be based on the types of policies they provide to policyholders.
The frequency-severity method is one option that insurers use to develop models. Frequency
refers to the number of claims that an insurer expects to see. High frequency means that a large
number of claims is expected to come in. Severity refers to the cost of a claim, with high severity
claims being more expensive than average estimates and low severity claims being less
expensive than the average. The average cost of claims may be estimated based off of historical
cost figures.
Because the frequency-severity method looks at past years in determining average costs for
future years it is less influenced by more volatile recent periods. This means that it is not reliant
on loss development factors based off of more recent years. However, this means that the method
is also slower to adapt to increases in volatility. For example, an insurer providing flood

insurance will adapt more slowly to an increase in the severity or frequency of flood damage
claims caused by recent rising water levels.
Risk control
Risk management is a series of steps whose objectives are to identify, address, and eliminate
software risk items before they become either threats to successful software operation or a major
source of expensive rework. (Boehm, 1989)
Risk financing techniques:

This Chapter on Risk Financing presents basic concepts and theory relative to risk
management. State agencies should recognize that application of risk financing techniques may
depend upon appropriate enabling legislation before implementation may occur.
Retention of Risk1
The financing of risks and losses is said to be retained if the funding source for payment of the
losses originates from and remains within the organization until the loss is actually paid. The
state of Texas retains risks unless specific insurance is purchased, and such insurance purchases
are authorized by legislation. Financing risks through retention can be accomplished by any of
the following techniques.
Expensing of Losses
Current expensing of losses involves the payment of losses directly from the current operating
budget or appropriation. That is, the loss is expended or paid out of the current years
operating funds. Current expensing typically does not provide for a formally recognized funding
source from which losses are paid. Therefore, expensing of losses is suitable only for payment of
small losses such as repairing or replacing a broken typewriter.
Expensing is not suitable for funding large losses.
Reserves
Reserves may be established in two ways.
(1) Unfunded Reserve An unfunded reserve is established when the state agency recognizes a
loss will occur, but specific funds or assets are not set aside from which the loss may be paid. An
example of an unfunded reserve is an account that is established to track uncollectible fees or
taxes owed to the state.

(2) Funded Reserve A funded reserve is created when funds are set aside specifically for
payment of losses. The funded reserve cannot be utilized for any other purpose than payment of
claims. An example of a funded reserve might be the establishment of a fund from which tort
claims against the organization are paid.
Borrowing
Borrowing is a method that may be utilized by an organization to pay for losses that have not
been previously funded or insured. However, state agencies are not able to borrow since all
appropriations and funding sources must be approved by the Legislature. Therefore, borrowing is
not an option for state agencies as a risk financing technique.
Self Insurance
Self insurance by the state involves the establishment of an entity within state government which
functions in the same manner as a commercial insurer. Premiums are collected from the
various agencies, commissions, and institutions of higher education, etc. within the state, and
claims and losses are adjusted and paid from the fund created by the premiums paid. Self
insurance is practical only for large entities. An example of this is the Workers Compensation
Payment program administered by SORM.
Transfer of Risk1
The financial burden of losses can be transferred from the entity incurring the loss to an outside
entity. This may be accomplished through the purchase of commercial insurance or through a
contractual transfer.
Insurance Transfer of Risk
Insurance is a contractual relationship that exists when one party (the Insurer) for a consideration
(the Premium) agrees to reimburse another party (the Insured or third party on behalf of the
Insured) for a loss to a specified subject (the Risk) caused by designated contingencies (the
Hazards or Perils).
When commercial insurance is purchased the insured entity pays premiums to the insurer. The
insurer then pools the premiums paid by all insured entities that have purchased the same type of
insurance. In this manner the risks are spread among all insured, and premiums are kept to a
minimum. The insurer is then legally responsible for payment of all claims and losses, subject to

the terms, exclusions and limitations of the policy, rather than the entity incurring the claim or
loss. Insurance is discussed in more detail in RMTSA Section One, Insurance.
Contractual Transfer of Risk
Contractual transfer of risk involves a legal transfer of the financial responsibility for payment of
losses, but does not involve the purchase of insurance. Such noninsurance transfers typically
involve the use of a hold harmless agreement. Such an agreement may be required by a state
agency that allows the use of public facility by a third party. The state agency would require the
third party to sign a contract to hold the state agency harmless for losses that may arise due to the
third partys use of the facility. The contract would need to specify the type of losses that fall
within the contract. A state agency should check with the agencys general counsel regarding
applicability of hold harmless agreements.
The Risk Management DecisionReturn to the Example

Dana, the risk manager of Energy Fitness Centers, also uses a risk management matrix to decide
whether or not to recommend any additional loss-control devices. Using the data in Table 4.3,
Net Present Value (NPV) of Workers Compensation Premiums Savings for Energy Fitness
Centers When Purchasing Innovative Safety Belts for $50,000 and Figure 4.3, Workers
Compensation Frequency and Severity of Energy Fitness CentersActual and Trended, Dana
compared the forecasted frequency and severity of the workers compensation results to the data
of her peer group that she obtained from the Risk and Insurance Management Society (RIMS)
and her broker. In comparison, her loss frequency is higher than the median for similarly sized
fitness centers. Yet, to her surprise, EFCs risk severity is lower than the median. Based on the
risk management matrix she should suggest to management that they retain some risks and use
loss control as she already had been doing. Her cost-benefit analysis from above helps reinforce
her decision. Therefore, with both cost-benefits analysis and the method of managing the risk
suggested by the matrix, she has enough ammunition to convince management to agree to buy
the additional belts as a method to reduce the losses.
To understand the risk management matrix alternatives, we now concentrate on each of the cells
in the matrix.
Risk TransferInsurance

The lower-left corner of the risk management matrix represents situations involving low
frequency and high severity. Here we find transfer of riskthat is, displacement of risk to a
third, unrelated partyto an insurance company. We discuss insuranceboth its nature and its
operations, Insurance Operations. In essence, risk transference involves paying someone else to
bear some or all of the risk of certain financial losses that cannot be avoided, assumed, or
reduced to acceptable levels. Some risks may be transferred through the formation of a
corporation with limited liability for its stockholders. Others may be transferred by contractual
arrangements, including insurance.
CorporationsA Firm
The owner or owners of a firm face serious potential losses. They are responsible to pay debts
and other financial obligations when such liabilities exceed the firms assets. If the firm is
organized as a sole proprietorship, the proprietor faces this risk. His or her personal assets are not
separable from those of the firm because the firm is not a separate legal entity. The proprietor has
unlimited liability for the firms obligations. General partners in a partnership occupy a similar
situation, each partner being liable without limit for the debts of the firm.
Because a corporation is a separate legal entity, investors who wish to limit possible losses
connected with a particular venture may create a corporation and transfer such risks to it. This
does not prevent losses from occurring, but the burden is transferred to the corporation. The
owners suffer indirectly, of course, but their loss is limited to their investment in the corporation.
A huge liability claim for damages may take all the assets of the corporation, but the
stockholders personal assets beyond their stock in this particular corporation are not exposed to
loss. Such a method of risk transfer sometimes is used to compartmentalize the risks of a large
venture by incorporating separate firms to handle various segments of the total operation. In this
way, a large firm may transfer parts of its risks to separate smaller subsidiaries, thus placing
limits on possible losses to the parent company owners. Courts, however, may not approve of
this method of transferring the liability associated with dangerous business activities. For
example, a large firm may be held legally liable for damages caused by a small subsidiary
formed to manufacture a substance that proves dangerous to employees and/or the environment.
Contractual Arrangements
Some risks are transferred by a guarantee included in the contract of sale. A noteworthy example
is the warranty provided a car buyer. When automobiles were first manufactured, the purchaser

bore the burden of all defects that developed during use. Somewhat later, automobile
manufacturers agreed to replace defective parts at no cost, but the buyer was required to pay for
any labor involved. Currently, manufacturers typically not only replace defective parts but also
pay for labor, within certain constraints. The owner has, in effect, transferred a large part of the
risk of purchasing a new automobile back to the manufacturer. The buyer, of course, is still
subject to the inconvenience of having repairs made, but he or she does not have to pay for them.
Other types of contractual arrangements that transfer risk include leases and rental agreements,
hold-harmless clauses and surety bonds. Perhaps the most important arrangement for the transfer
of risk important to our study is insurance.
Insurance is a common form of planned risk transfer as a financing technique for individuals and
most organizations. The insurance industry has grown tremendously in industrialized countries,
developing sophisticated products, employing millions of people, and investing billions of
dollars. Because of its core importance in risk management, insurance is the centerpiece in most
risk management activities.
Risk Assumption
The upper-left corner of the matrix in Table 4.4, The Traditional Risk Management Matrix (for
One Risk), representing both low frequency and low severity, shows retention of risk. When an
organization uses a highly formalized method of retention of a risk, it is said the organization has
self-insured the risk. The company bears the risk and is willing to withstand the financial losses
from claims, if any. It is important to note that the extent to which risk retention is feasible
depends upon the accuracy of loss predictions and the arrangements made for loss payment.
Retention is especially attractive to large organizations. Many large corporations use captives,
which are a form of self-insurance. When a business creates a subsidiary to handle the risk
exposures, the business creates a captive. As noted above, broadly defined, a captive insurance
company is one that provides risk management protection to its parent company and other
affiliated organizations. The captive is controlled by its parent company. We will provide a more
detailed explanation of captives in Chapter 6, The Insurance Solution and Institutions. If the
parent can use funds more productively (that is, can earn a higher after-tax return on investment),
the formation of a captive may be wise. The risk manager must assess the importance of the
insurers claims adjusting and other services (including underwriting) when evaluating whether
to create or rent a captive.

Risk managers of smaller businesses can become part of a risk retention group.[53] A risk
retention group provides risk management and retention to a few players in the same industry
who are too small to act on their own. In this way, risk retention groups are similar to group self-
insurance. We discuss them further in Chapter 6, The Insurance Solution and Institutions.
Risk Reduction
Moving over to the upper-right corner of the risk management matrix in Table 4.4, The
Traditional Risk Management Matrix (for One Risk), the quadrant characterized by high
frequency and low severity, we find retention with loss control. If frequency is significant, risk
managers may find efforts to prevent losses useful. If losses are of low value, they may be easily
paid out of the organizations or individuals own funds. Risk retention usually finances highly
frequent, predictable losses more cost effectively. An example might be losses due to wear and
tear on equipment. Such losses are predictable and of a manageable, low-annual value. We
described loss control in the case of the fitness center above.
Loss prevention efforts seek to reduce the probability of a loss occurring. Managers use loss
reduction efforts to lessen loss severity. If you want to ski in spite of the hazards involved, you
may take instruction to improve your skills and reduce the likelihood of you falling down a hill
or crashing into a tree. At the same time, you may engage in a physical fitness program to
toughen your body to withstand spills without serious injury. Using both loss prevention and
reduction techniques, you attempt to lower both the probability and severity of loss.
Loss preventions goal seeks to reduce losses to the minimum compatible with a reasonable level
of human activity and expense. At any given time, economic constraints place limits on what
may be done, although what is considered too costly at one time may be readily accepted at a
later date. Thus, during one era, little effort may have been made to prevent injury to employees,
because employees were regarded as expendable. The general notion today, however, is that such
injuries are prevented because they have become too expensive. Change was made to adapt to
the prevailing ideals concerning the value of human life and the social responsibility of business.
Risk Avoidance
In the lower-right corner of the matrix in Table 4.4, The Traditional Risk Management Matrix
(for One Risk), at the intersection of high frequency and high severity, we find avoidance.
Managers seek to avoid any situation falling in this category if possible. An example might be a

firm that is considering construction of a building on the east coast of Florida in Key West.
Flooding and hurricane risk would be high, with significant damage possibilities.
Of course, we cannot always avoid risks. When Texas school districts were faced with high
severity and frequency of losses in workers compensation, schools could not close their doors to
avoid the problem. Instead, the school districts opted to self-insure, that is, retain the risk up to a
certain loss limit
Not all avoidance necessarily results in no loss. While seeking to avoid one loss potential,
many efforts may create another. Some people choose to travel by car instead of plane because
of their fear of flying. While they have successfully avoided the possibility of being a passenger
in an airplane accident, they have increased their probability of being in an automobile accident.
Per mile traveled, automobile deaths are far more frequent than aircraft fatalities. By choosing
cars over planes, these people actually raise their probability of injury.
Pooling Arrangements and Diversification of Risk
Pooling arrangement means sharing loss and risks equally or split evenly any accident costs. As a
result pooling arrangements reduce risks (standard deviation) for each participant. In pooling
arrangements the average loss is paid by each
person.The probability distribution of accident costs facing each person is reduced by poolingarr
angements. The pooling arrangement decreases the probabilities of the extreme outcomes.
In pooling arrangements each persons risk is reduced but each persons expected accident cost is
unchanged.
Advanced Issues in Risk Management
Current Issues in Risk ManagementStructure of the Presentation:
1. What are we good at?
2. Where may we see improvements?
3. What are we bad at?
4. Where are we most vulnerable?
Changing Scope of Risk Management
Every failing project I've seen has had an informal scope of "the sun, the moon, the sky and the
stars." In other words, management and the end users are convinced that they must have and will

receive the perfect solution right out of the gate. They never get to the gate. Successful
practitioners reduce scope to something that's manageable for the first release and defer the rest
for subsequent releases. You won't be able to do this until everyone understands what's at stake.
Scope management
You know you're doing real scope management when the sponsor, developer, and users became
comfortable with the fact that there will be future iterations, and in short order. When a team
acknowledges that theyre on a long journey, the sprint mentality melts away. As risk increases
(for whatever reason), the best approach is to tighten scope. Having an accurate risk and
feasibility picture gives you the negotiating power to establish a reasonable scope for the first
release (and the next, and the next...).
The key is to keep the scope reasonable, and reasonable means you're focusing on one thing at a
time. In software, this usually means one component. Most projects I manage focus on the
implementation of a single new component along with selected fixes and enhancements for
previously delivered components during an iteration. Conceptually, this works for everyone but
Project Management Professionals (PMPs); they seem to have a hard time getting their minds
around doing things as cycles within cycles.
Insurance Market Dynamics

Insurance markets have changed radically and deeply in the past twenty years. Deregulation,
globalization of insurance institutions, intensified competition, electronic commerce,
bancassurance, and the emergence of new risks are among the challenges faced by insurance
markets. Although important global trends are reshaping insurance markets, the emphasis on
globalization overlooks the local diversity of insurance markets worldwide.
Loss Forecasting
The use of historic data to determine the direction of future trends. Forecasting is used by
companies to determine how to allocate their budgets for an upcoming period of time. This is
typically based on demand for the goods and services it offers, compared to the cost of producing
them. Investors utilize forecasting to determine if events affecting a company, such as sales
expectations, will increase or decrease the price of shares in that company. Forecasting also
provides an important benchmark for firms which have a long-term perspective of operations.

Financial risk management and decision making

Financial risk management is the practice of economic value in a firm by using financial
instruments to manage exposure to risk, particularly credit risk and market risk. Other types
include Foreign exchange risk, Shape risk, Volatility risk, Sector risk, Liquidity risk, Inflation
risk, etc. Similar to general risk management, financial risk management requires identifying its
sources, measuring it, and plans to address them.
RISK ASSESSMENT TOOLS

Risks must be identified correctly before an organization can take the next step. Assessing the
wrong list of risks or an incomplete list of risks is futile. Organizations should make every
possible effort to ensure they have identified
their risks correctly using some or all of the approaches discussed. The act of identifying risks is
itself a step on the risk assessment road. Any risks identified, almost by default, have some
probability of influencing the organization.
Categories
Once risks are identified, some organizations find it helpful to categorize them. This may be a
necessity if the risk identification process produces hundreds of risks, which can be
overwhelming and seem unmanageable. Risk categories include hazard, operational, financial,
and strategic. Other categories are controllable or non-controllable and external or internal.
Categorizing risk requires an internal risk language or vocabulary that is common or unique to
the organization in total, not just to a particular subunit or silo. Studies have shown that an
inconsistent language defining risks across an organization is an impediment to an effective
ERM strategy. Risk terms would certainly vary between a pharmaceutical company and a
technology company or between a nonprofit and an energy company. Several risks could be
grouped around a broader risk, such as reputation risk. Other methods for categorizing risk can
be financial or nonfinancial and insurable or non-insurable. Some companies also categorize
risks as quantifiable or non-quantifiable.
Qualitative vs. Quantitative
As Exhibit 6 shows, risk assessment techniques can vary from qualitative to quantitative. The
qualitative techniques can be a simple list of all risks, risk rankings, or risk maps. A list of risks

is a good starting point. Even though no quantitative analysis or formal assessment has been
applied to the initial list of risks, the list and accompanying knowledge is valuable. Some risks
on the list may not be quantifiable. For these risks, identifying them and adding them to a
priority list may be the only quantification possible. Organizations should not be concerned that
they cannot apply sophisticated modeling to every risk.
Risk Rankings
Once an organization has created its list of risks, it can begin to rank them. Ranking requires the
ERM team to prioritize the risks on a scale of importance, such as low, moderate, and high.
Although this seems unsophisticated, the results can be dramatic. Organizations find
considerable value in having conversations about the importance of a risk. The conversations
usually lead to questions about why one group believes the risk is important and why others
disagree. Again, this process should use a cross-functional risk team so that perspectives from
across the entire organization are factored into the rankings. This is a critical task requiring open
debate, candid discussion, and data (e.g., tracking, recording, and analysis of historical error rates
on a business process) where possible.

Module 4: (8 Hours)
Introduction to Insurance
Risk and Insurance- Definition and Basic Characteristics of Insurance-Requirements of an
Insurable Risk-Adverse Selection and Insurance-Insurance vs. Gambling Insurance vs. Hedging-
Types of Insurance-Essentials of Insurance Contracts.
Indian Insurance Industry -Historical Framework of Insurance, Insurance sector Reforms in
India-Liberalization of Insurance Markets-Major players of Insurance.
Regulation of Insurance- Insurance Act 1938- eligibility-Registration and Capital requirement-
Investment of assets-Approved investments-Licensing of insurance agents- IRDA-Duties and
powers of IRDA-IRDA Act 1999-IRDA regulations for general insurance-reinsurance, life
insurance, micro insurance, licensing of insurance agents, registration of insurance companies
and protection of policyholders interest.
Definition of Insurance
A contract (policy) in which an individual or entity receives financial protection or
reimbursement against losses from an insurance company. The company pools clients' risks to
make payments more affordable for the insured.
Basic Characteristics of Insurance

It is a contract for compensating losses.
Premium is charged for Insurance Contract.
The payment of Insured as per terms of agreement in the event of loss.
It is a contract of good faith.
It is a contract for mutual benefit.
It is a future contract for compensating losses.
It is an instrument of distributing the loss of few among many.
The occurrence of the loss must be accidental.
Insurance must be consistent with public policy.
Nature of Insurance
Sharing of Risks
C0-operative Device

Valuation of Risk
Payment made on contingency
Amount of Payment
Large Number of Insured Persons
Insurance is not gambling
Insurance is not charity
Functions of Insurance
Primary Function
Provision of certainty of payment at the time of loss
Provision of protection Risk sharing
Secondary Function
Prevention of loss
Provision of Capital
Improvement of efficiency
Ensuring welfare of the Society
Requirements of insurable risk

Requirements of an Insurable Risk
No catastrophic lossto allow the pooling technique to workexposures to catastrophic
loss can be managed by:
Dispersing coverage over a large geographic area
Using reinsurance
Catastrophe bonds
Calculable chance of lossto establish an adequate premium
Economically feasible premiumso people can afford to buyPremium must be
substantially less than the face value of the policy
Based on these req.

Requirements of insurable risk

1. A large number of homogeneous exposures (in order for the deviation of actual losses
from expected losses to approach zeroand the creditability of the prediction to
approach one).
2. Loss must be definite in time and amount.
3. Loss must be fortuitous. An insured cannot cause the loss to happen; it must be due to
chance.
4. Must not be an exposure to catastrophic loss; risks must be spread over a large
geographical area to prevent their concentration. Re-insurance often is used to spread
potentially catastrophic risks.
5. Premium must be reasonable in relation to the potential loss. In theory, one could even
insure against a pencil point breaking, but the premium would be much greater than any
possible loss.
Adverse Selection and Insurance

Adverse selection: Greater coverage more likely to be selected by sicker people, thus making
(relative) prices too high and
coverage too low
Moral hazard: Once
insured, individuals consume
more care than optimal because
they dont internalize the full
price (= social cost?)
Gambling vs. Insurance

Gambling and insurance are two
different things. Honest.
People often joke about how
insurance is really nothing more
than gambling betting that something may or may not happen to a house, a car or a life.
Beyond the science of actuaries, there is a distinct difference. It all boils down to risk.

Gambling introduces risk where none exists.

Insurance mitigates risk where risk exists.
Think about it. What is the chance you are going to roll a seven on the craps table? You are at
no risk to roll a seven.
What is the chance you or I will die tomorrow? I guarantee that both you and I will die at some
point hopefully not tomorrow but it will happen. Guaranteed. There is a certain and
unavoidable risk that we will die.
There are three ways to handle risk. Retain the risk. Avoid the risk. Transfer the risk.
Transferring the risk is insurance.
Retaining the risk without transferring it is self-insurance. You will bear the cost of the loss
in entirety.
Avoiding the risk walking to the store instead of taking the car will keep you from being a
driver in a car accident.
Transferring the risk purchasing an insurance contract makes a third party the insurance
company liable for payments due to someone that you injur or are indebted due to your
actions. If you hit a pedestrian with your car, your insurance company is contractually obligated
to defend you in court and to pay any damages to the injured party to the extent of the contract
you have entered into with the insurance company.
The fact that risk is not tangible creates a certain comfort level within even the most reasonable
people. It will always happen to the next guy. Risk is real. It continually surrounds us. It can
be tragic not to believe in its existence.
The insurance and gambling sectors would converge? Gambling was, until recently, limited to
a fairly restricted set of biased odds products (e.g. lotteries) or specific sporting events (e.g. horse
racing).Today, gamblers can bet on rarer sporting events, financial markets, the weather or
indeed anything in which they can interest other gamblers. The advent of on-line betting (be it
internet, mobile phone or interactive television) and the growth of spread betting (as opposed to
simple fixed odds betting) has transformed the sector. The risk and return profile of many such
betting products is often almost indistinguishable from equivalent financial products, but with
greater flexibility and tax advantages. Insurers - beware. Derivatives merchants - beware. Risk
managers - sit up and notice. Given the sums involved (current estimates for worldwide betting

vary enormously, but 100bn per annum is a reasonable punt) this sector should concern
financial institutions and in particular insurers. Consumer gambling
markets may well transform wholesale finance as we know it by removing some of the venerable
intermediary institutions in markets such as banking and insurance allowing consumers to
hedge directly other consumers risks. Robert Shiller, writing in The Economist on 20 March
2003, said information technology will allow us to produce large international markets for a
complex array of aggregated risks that today are not traded at all.
At a conference last November at the Centre for the Study of Financial Innovation, a number of
ideas were is cussed showing the overlaps between betting and traditional risk transfer products,
for instance:
weather derivative markets might function better with consumers or SMEs taking the
opposite side of wholesale contracts with utilities for outdoor events, weddings or utility
bills;
sports contingency insurance for relegation or players bonuses might be held directly by
opposing fans bets;
individual mortgage insurance based on indices of local house prices
film hedging based on bets of opening audience numbers or take.
The market is getting large enough to warrant a look at consumer protection through increased
regulation. In any event, tax efficiency and low cost of transactions will only attract substantial
business if the risk transfer betting offerings are also secure and from a trusted source. Our key
bet is that on line gambling markets will soon be quite analogous to financial markets.
Hedging: A hedge is an an investment to reduce the risk of adverse price movements in an asset.
Normally, a hedge consists of taking an offsetting position in a related security, such as a futures
contract.
Types of Insurance
Insurance, which is based on a contract, may be broadly classified into the following types.
(i) Life Insurance
(ii) Fire Insurance
(iii)Marine Insurance, and
(iv)Other types such as burglary insurance, motor vehicle insurance, etc.

Until recently Life Insurance Corporation of India (LIC) and General Insurance Corporation
with its subsidiaries happened to be the only organizations engaged in life and general insurance
business in India
OBJECTIVES
At the end of this lesson you will be able to know;
Features of commercial contract
Principles of contracts for insurance
Essentials of Insurance Contract

A. Elements of General Contract
1. Offer & Acceptance
2. Consideration
3. Legal capacity to contract or competency
4. Consensus ad idem
5. Legality of object
B. Elements of Special Contract relating to Insurance
1. Life Insurance
a. Utmost Good Faith (Uberrima Fides)
b. Insurable Interest
2. General Insurance
a. Utmost Good Faith (Uberrima Fides)
b. Insurable Interest
c. Indemnity
d. Subrogation
e. Proximate Cause
The essentials of any Insurance Contract are discussed as under with reference to the life
Insurance only.
1. Offer & Acceptance:
In Life Insurance an offer can be made either by the Insurance company or the applicant
(proposer) & the acceptance will follow. e.g., subsequently (a) An offer made by the Insurance

company to proposer that the premium amount will be Rs.100/- per annum for the Insurance
amount of Rs.1000/-. It is for the proposer to accept the offer or not.
(b) An advertisement in the newspaper about the availability of different life Insurance policies is
an invitation for an offer. If a proposer makes an application then it will be offer from the
applicant and the Insurance company may or may not accept it.
(c) An offer may be considered accepted either when the Insurance company issues the policy or
the first premium is paid by the applicant.
As stated above in example (a) if the applicant pays the first premium of Rs.100/- to the
Insurance company then the contract is completed as both the parties have accepted the offer.
Similarly, if the company issues the policy in above stated example (b) then the offer is accepted
by the Insurance company & the contract is completed. In fact, in life Insurance contract the
effective date of the policy is very important; when the premium is paid with the application but
no conditional receipt is issued the contract is not in force until the policy is delivered to the
applicant. The payment of the premium with the application constitutes the offer and the delivery
of policy is its acceptance.
Further, if the premium is paid with the application & conditional receipt is issued, the effective
date of the contract depends upon the provisions of the conditional receipt. There are three types
of conditions as follows: (a) The condition may be that the Insurance becomes effective as of the
date of the application or medical examination whichever is later. A claim arising after this date
will be paid even if the application papers have not reached the competent / Approving
Authority, provided of course, that the facts on the application & the results of the medical
examination are such that the company would have accepted the application had the applicant
lived.
(b) The second type of conditional receipt used by a company is the approval form, which
provides coverage beginning with the date the application is approved by the company. This
form does not offer the insured protection for the period from the date of the application until it
is approved by the company.
A third type of receipt is the unconditional binding receipt. According to this receipt the
company binds the Insurance from the date of the application until the policy is issued or the
application is rejected. The companies using this type of receipt place a time limit usually from

30 to 60 days. This binding receipt is beneficial to the prospects because he becomes insured
from the time the application is filed. This form of receipt is not widely used. The offer or
proposal and its acceptance may be verbal or in writing but in Insurance contracts these are in
writing. In General Insurance the Insured offers to purchase an insurance from the Insurer and
this offer is in the form of a proposal form and the Insurer after studying the proposal can either
reject the proposal or accept it. In case he accepts he issues a cover note or a letter of acceptance.
In the latter event the acceptance letter becomes a counter offer or proposal, which is accepted on
payment of premium by the insured.
Indian Insurance Industry:

Historical Framework of Insurance
In India, insurance has a deep-rooted history. Insurance in various forms has been mentioned in
the writings of Manu (Manusmrithi), Yagnavalkya (Dharmashastra) and Kautilya(Arthashastra).
The fundamental basis of the historical reference to insurance in these ancient Indian texts is the
same i.e. pooling of resources that could be re-distributed in times of calamities such as fire,
floods, epidemics and famine. The early references to Insurance in these texts have reference to
marine trade loans and carriers' contracts.
Insurance in its current form has its history dating back until 1818, when Oriental Life Insurance
Company[3] was started by Anita Bhavsar in Kolkata to cater to the needs of European
community. The pre-independence era in India saw discrimination between the lives of
foreigners (English) and Indians with higher premiums being charged for the latter. In
1870, Bombay Mutual Life Assurance Society became the first Indian insurer.
At the dawn of the twentieth century, many insurance companies were founded. In the year 1912,
the Life Insurance Companies Act and the Provident Fund Act were passed to regulate the
insurance business. The Life Insurance Companies Act, 1912 made it necessary that the
premium-rate tables and periodical valuations of companies should be certified by an actuary.
However, the disparity still existed as discrimination between Indian and foreign companies. The
oldest existing insurance company in India is the National Insurance Company , which was
founded in 1906, and is still in business.
The Government of India issued an Ordinance on 19 January 1956 nationalising the Life
Insurance sector and Life Insurance Corporation came into existence in the same year. The Life

Insurance Corporation (LIC) absorbed 154 Indian, 16 non-Indian insurers as also 75 provident
societies245 Indian and foreign insurers in all. In 1972 with the General Insurance Business
(Nationalisation) Act was passed by the Indian Parliament, and consequently, General Insurance
business was nationalized with effect from 1 January 1973. 107 insurers were amalgamated and
grouped into four companies, namely National Insurance Company Ltd., the New India
Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance
Company Ltd. The General Insurance Corporation of India was incorporated as a company in
1971 and it commence business on 1 January 1973.
The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private
sector. Before that, the industry consisted of only two state insurers: Life Insurers (Life Insurance
Corporation of India, LIC) and General Insurers (General Insurance Corporation of India, GIC).
GIC had four subsidiary companies. With effect from December 2000, these subsidiaries have
been de-linked from the parent company and were set up as independent insurance
companies: Oriental Insurance Company Limited, New India Assurance Company
Limited, National Insurance Company Limited and United India Insurance Company Limited.
Soon after rolling out foreign direct investment (FDI) in multi-brand retail and aviation in a
renewed surge of reforms, Finance Minister P. Chidambaram, on a fast-forward mission mode, is
keen on raising the FDI cap in the insurance sector to 49 per cent from the existing 26 per cent.
While work is in progress in this regard at a feverish pitch and a Cabinet note is under
preparation for approval of the higher FDI limit in the insurance sector, the UPA government is
also engaged in assessing the political fall-out of the financial sector reform.
Such as exercise, according to government sources, is essential as though the Bill on the
insurance sector was tabled in the Rajya Sabha with a proposed higher FDI limit of 49 per cent,
the Parliamentary Standing Committee on Finance had suggested retention of the investment cap
at 26 per cent. Even in May, the government was forced to postpone a decision on hiking the FDI
limit following pressure from its own coalition partners.
However, with the Trinamool Congress out of the way and the Samajwadi Party lending outside
support, the minority government appears to be ready in trying to push the insurance sector
reforms through, just as the Narasimha Rao government had succeeded in initiating the reform
measures in 1991-92 when Prime Minister Manmohan Singh was the then Finance Minister.

The move assumes significance as at the insurance summit in Mumbai earlier this week,
Insurance Regulatory and Development Authority (IRDA) Chairman J. Hari Narayan had
stressed the need for larger investments for growth of the sector while noting that a hike in FDI
limit would be welcome.
Faster approval of policies
Alongside, IRDA is also working on developing a mechanism for faster clearance of insurance
policies aimed at encouraging companies to roll out low premium products as that would
increase insurance penetration throughout the country.
Reform of the Insurance Sector in India

No review of financial sector reforms in India can be complete without reference to the need for
reforms in the insurance sector. India is one of only four countries - the other three being Cuba,
North Korea and Myanmar - where insurance is a public sector monopoly! The rationale of
liberalising the banking system and encouraging competition among the three major participants
viz. public sector banks, Indian private sector banks and foreign banks applies equally to
insurance. There is a strong case for ending the public sector monopoly in insurance and opening
it up to private sector participants subject to suitable prudential regulation.
Cross country evidence suggests that contractual savings institutions are an extremely important
determinant of the aggregate rate of savings and insurance and pension schemes are the most
important form of contractual savings in this context. Their importance will increase in the years
ahead as household savings capacity increases with rising per capita incomes, life expectancy
increases and as traditional family support systems, which are a substitute for insurance and
pensions, are eroded. A competitive insurance industry, providing a diversified set of insurance
products to meet differing customer needs, can help to increase savings in this situation and to
allocate them efficiently. The insurance and pensions industry typically has long term liabilities
which it seeks to match by investing in long term secure assets. A healthy insurance is therefore
an important source of long term capital in domestic currency which is especially for
infrastructure financing. Reforms in insurance will therefore strengthen the capital market at the
long term end by adding new players in this segment of the market, giving it greater depth or
liquidity.

It is relevant to ask why these developments are less likely if insurance remains a public sector
monopoly. One reason is that the industry suffers from a relatively high requirement for
mandatory investment in government securities. However this implies that it is the mandatory
requirement and not the public sector monopoly which is the real constraint. The fact is that the
insurance industry does not fully utilise even the flexibility available at present for investment in
corporate securities. This is principally because lack of competition in the insurance sector
means there is no pressure to improve the return offered to the investor. Competition will
increase the pressure to improve returns and push insurance companies to move out of
government securities to seek higher returns in high quality corporate debt. Needless to say, the
process would be greatly expedited if the fiscal deficit is also reduced resulting in a fall in the
interest rate on government securities. Reforms in insurance are therefore more likely to create a
flow of finance for the corporate sector if we can simultaneously make progress in reducing the
fiscal deficit.
Liberalization of Insurance Markets
The Malhotra Committee had recommended opening up the insurance sector to new private
companies as early as 1994. It has taken time to build a consensus on this issue but a proposal to
open up insurance, allowing foreign equity upto 26%, has now been submitted to the Cabinet. If
approved it will require legislation to remove the existing government monopoly and the earliest
that this can be done is some time in 1999. This means new licenses to competing insurers can
only be issued by the end of 1999 and since the new entrants will have to build up their business
from scratch, it will take 5 to 10 years before private insurance companies, even with foreign
partners, can reach significant levels. The sooner we start the sooner we will get the benefit of
better service for the consumer, and the sooner it will be possible to finance infrastructure from
the capital market.
Major players in Insurance market

Leading Insurers in India
Following are the leading insurers in India:
Life Insurance Corporation of India
Tata AIG General Insurance
Bajaj Allianz General Insurance

New India Assurance

ICICI Prudential Life Insurance
IFFCO TOKIO General Insurance
ICICI Lombard General Insurance
Oriental Insurance
Birla Sun Life Insurance
HDFC Standard Life Insurance
Life Insurance Corporation (LIC) is the biggest life insurer in India and totally owned by the
union government. It specializes in individual life insurance, pension plans, and group insurance
plans. It has several subsidiaries including the following:
Life Insurance Corporation of India International
LIC Housing Finance
LIC Nepal
LICHFL Care Homes
LIC Lanka
The organization has in excess of 12 million policyholders and more than 9 lakh agents. Till date
it has issued in excess of 120 million policies. A major reason for the organizations success over
the years has been its adaptability.
It was introduced to computers during 1964 and since then has been utilizing information
technology for serving its customers. It is also a rewarding option when it comes to work
opportunities, especially for sales agents who are provided training at par with international
standards, and a lot of independence for working. In all, the financial prowess of this insurer is
yet to be matched.
Tata AIG General Insurance
One of the major reasons behind the growth of Tata AIG General Insurance has been its
employees. The organization regards its employees as valuable assets and takes pride in the fact
that it has one of the finest workforces in the general insurance industry.
Tata AIG General is regarded as one of the major names in the general insurance sector of India

and has recently won the 5th position among the top companies to work for in the financial
services and banking sectors. This was done in a survey done by People Strong, a well known
HR consultancy, on behalf of Business Today. In fact, it was the only general insurer to be
featured in that survey.
One of the major reasons why employees loved working at Tata AIG was the growth and career
opportunities afforded by the organization followed by the remuneration and other financial
benefits. As per its employees Tata AIG also offers other benefits like:
Performance evaluation
Creating the proper balance between work and life
HR initiatives
Brand image
Efforts made by line managers to connect and engage with the employees on a consistent
basis to make sure they are developing personally and professionally
Competent process for performance management
Employee development, inter-personal relationship building, team building, and skill
enhancement programs on a regular basis
Bajaj Allianz General Insurance
Bajaj Allianz General Insurance has the backing of Allianz, which is one of the leading insurers
of the world and Bajaj, which is among the top motorcycle manufacturers in India. It is a leading
name when it comes to property insurance.
Bajaj Allianz offers a wide range of general insurance products and services through a network
that comprises 200 offices across India. Following are some areas where it operates:
Auto
Health
Homeowners
Travel
Commercial
Majority of its yearly revenue comes from automotive insurance. It was established during 2001
and since then has become one of the leading names in the general insurance sector.

New India Assurance

New India Assurance is one of the leading names in the Indian insurance industry thanks to its
pioneering efforts in several areas such as satellite insurance. Yet another reason of its current
stature is its presence it has a substantial amount of offices in India as well as outside the
country.
The skill levels among the employees of the insurer are commendable enough and the
organization also has 1068 offices in India that are totally automated. It also enjoys a good
capital position and operating performance that have helped it create a strong position in the
market.
At present the organization has also extended its wings outside India with offices in areas such as
Japan, Fiji, UK, Australia, and the Middle East.
ICICI Prudential Life Insurance
ICIC Prudential Life Insurance has a big network comprising more than 1900 branches, which
includes 1074 micro offices and more than 210,000 advisors. It is one of the earliest life insurers
to have received the AAA (Ind) National Financial Strength rating from Fitch.
For three straight years it has been voted the Most Trusted Private Life Insurer a testament of
its performance and growth over the years.
IFFCO TOKIO General Insurance
IFFCO TOKIO has a good network comprising 110 offices across the country and 51 Strategic
Business Units. It is also the sole insurer in India that has a totally owned distribution channel
named IFFCO-TOKIO Insurance Services Ltd for catering its retail clients.
At present it operates in 350 odd towns with approximately 1400 employees. It is also among the
first insurers to have underwritten big policies for automobile and fertilizer companies. The
policies were based on global rates and provided clients a proper level of premium outflow.
ICICI Lombard General Insurance operates in various domains such as general insurance,
insurance claims management, reinsurance, and investment management and is also the biggest
general insurer among the privately held companies of India.

ICICI Lombard has risen to the top of the pile in a short time span. It is also the first India based
organization to have received the ISO 9001:2000 official recognition. ICRA has given it the
iAAA rating, which indicates that it has the highest level of capability when it comes to paying
claims.
It is also the first organization to have provided digitally signed documents via its web based
interface. ICICI Lombard has also been awarded several times for its functioning and quality of
its products.
Oriental Insurance
Oriental Insurance is positioned fairly well when it comes to rankings and has received top
honors from some of the leading credit rating agencies of India. AM Best, an international rating
agency has given it a B++ rating, which is a good ranking. It has 26 regional offices and at least
900 operating offices in India. Besides, it functions in locations such as Nepal, Dubai, and
Kuwait.
Birla Sun Life Insurance has always been a major contributor to the development and growth of
Indias life insurance sector and is presently rated as one of the top 5 private life insurers in the
country.
It is also the first financial services provider to have come up with business continuity plans,
Unit Linked Life Insurance plans and free look facilities in India.
The organization believes in values like passion, commitment, and support for consumers and
assists people with their risk management. It caters to both individual as well as institutional
clients.
HDFC Standard Life Insurance (now, HDFC Life) is one of the leading names among the private
enterprises functioning in India. It deals in both group and individual insurance products. They
also possess sufficient financial capability to take care of long term investments in a resourceful
and safe manner.

It has a commendable presence in more than 700 towns and cities and has 568 branches. It has
employed approximately 2 lakh financial advisors for dealing with different requirements of their
customers such as protection, investments, pension, health, and savings. It also offers customized
plans for the convenience of its clients.
Insurance Companies in India

Aviva Life Insurance
Bajaj Allianz Life Insurance
ING Vysya Life Insurance
Max Life Insurance Company
MetLife India Insurance
Reliance Life Insurance
Sahara India Life Insurance
SBI Life Insurance
Tata AIG Insurance Company Ltd
Om Kotak Mahindra Insurance Company
Agriculture Insurance Company of India Ltd
Amsure Insurance
ANZ Insurance
Cholamandalam General Insurance
Employee's State Insurance Corporation
IFFCO-Tokio General Insurance
National Insurance Company Ltd
Oriental Insurance Company Ltd
Peerless Smart Financial Solutions
Royal Sundaram Alliance Insurance India
Tata AIG Insurance Company Ltd

Export Credit Guarantee Corporation of India Ltd
The Insurance Act, 1938

[As Amended By Insurance (Amendment) Act, 2002]
"Insurer" means-
(a) any individual or unincorporated body of individuals or body corporate incorporated
under the law of any country other than India, carrying on insurance business not being a person
specified in sub-clause (c) of this clause which-
(i) carries on that business in India, or
(ii) has his or its principal place of business or is domiciled in India, or
(iii) with the object of obtaining insurance business, employs a representative, or maintains a
place of business, in India
PROVISIONS APPLICABLE TO INSURERS
Prohibition of transaction of insurance business by certain persons.
Eligibility
2C. (1) Save as hereinafter provided, no person shall, after the commencement of the
Insurance (Amendment) Act, 1950 (47 of 1950), begin to carry on any class of insurance
business in India and no insurer carrying on any class of insurance business in India shall after
the expiry of one year from such commencement, continue to carry on any such business unless
he is-
(a) a public company, or
(b) a society registered under the Co-operative Societies Act, 1912 (2 of 1912), or under any other
law for the time being in force in any State relating to co-operative societies, or
(c) a body corporate incorporated under the law of any country outside India not being of the nature
of a private company:
Provided that the Central Government may, by notification in the official Gazette, exempt from
the operation of this section to such extent for such period and subject to such conditions as it
may specify, any person or insurer for the purpose of carrying on the business of granting
superannuation allowances and annuities of the nature specified in sub-clause (c) of clause (11)
of Section 2 or for the purpose of carrying on any general insurance business:

Provided further that in the case of an insurer carrying on any general insurance business no
such notification shall be issued having effect for more than three years at any one time:
Provided also that no insurer other than an Indian insurance company shall begin to carry on any
class of insurance business in India under this Act on or after the commencement of the
Insurance Regulatory and Development Authority Act, 1999.
(2) Every notification issued under subsection (1) shall be laid before Parliament as soon as may
be after it is issued.
(3) Notwithstanding anything contained in sub-section (1), an insurance co-operative society
may carry on any class of insurance business in India under this Act on or after the
commencement of the Insurance (Amendment) Act, 2002
Registration
3. (1) No person shall, after commencement of this Act, being to carry on any class of insurance
business in India and no insurer carrying on any class of insurance business in India shall, after
the expiry of three months from the commencement of this Act, continue to carry on any such
business, unless he has obtained from the Authority a certificate of registration for the particular
class of insurance business:
Provided that in case of an insurer who was carrying on any class of insurance business in India
at the commencement of this Act, failure to obtain a certificate of registration in accordance with
the requirements of this sub-clause shall not operate to invalidate any contract of insurance
entered into by him if before such date as may be fixed in this behalf by the Central Government
by notification in the official Gazette, he has obtained that certificate:
Provided further that a person or insurer, as the case may be, carrying on any class of insurance
business in India, on or before the commencement of the Insurance Regulatory and Development
Authority Act, 1999, for which no registration certificate was necessary prior to such
commencement, may continue to do so for a period of three months from such commencement
or, if he had made an application for such registration within the said period of three months, till
the disposal of such application:
Provided also that any certificate of registration, obtained immediately before the
commencement of the Insurance Regulatory and Development Authority Act, 1999, shall be
deemed to have been obtained from the Authority in accordance with the provisions of this Act

(2) Every application for registration shall be made in such manner as may be determined by the
regulations made by the Authority and shall be accompanied by-
(a) a certified copy of the memorandum and articles of association, where the applicant is a company
and incorporated under the Indian Companies Act, 1913 (7 of 1913), or under the Indian
Companies Act, 1882 (6 of 1882), or under the Indian Companies Act, 1866 (10 of 1866); or
under any Act repealed thereby,] or, in the case of any other insurer specified in sub-clause (a)
(ii) or sub-clause (b) of clause (9) of section 2, a certified copy of the deed of partnership or of
the deed of constitution of the company, as the case may be, or, in the case of an insurer having
his principal place of business or domicile outside India, the document specified in Clause (a) of
Section 63;
(b) the name, address and the occupation, if any, of the directors where insurer is a company
incorporated under the Indian Companies Act, 1913 (7 of 1913), or under the Indian Companies
Act, 1882 (6 of 1882), or under the Indian Companies Act, 1866 (10 of 1866), or under any Act
repealed thereby, and in the case of an insurer specified in sub-clause (a) (ii) of clause (9) of
section 2 the names and addresses of the proprietors and of the manager in India, and in any
other case the full address of the principal office of the insurer in India, and the names of the
directors and the manager at such office and the name and address of someone or more persons
resident in India, authorised to accept any notice required to be served on the insurer;
(c) a statement of the class or classes of insurance business done or to be done, and a
statement that the amount required to be deposited by section 7 or section 98 before application
for registration is made has been deposited together with a certificate from the Reserve Bank of
India showing the amount deposited;
(d) where the provisions of section 6 or section 97 apply, a declaration verified by an affidavit made
by the principal officer of the insurer authorised in that behalf that the provisions of those
sections as to paid-up equity capital or working capital have been complied with;
(e) in the case of an insurer having his principal place of business or domicile outside India, a
statement verified by an affidavit made by the principal officer of the insurer setting forth the
requirements (if any) not applicable to nationals of the country in which such insurer is
constituted, incorporated or domiciled which are imposed by the laws or practice of that country
upon Indian nationals as a condition of carrying on insurance business in that country;

(f) a certified copy of the published prospectus, if any, and of the standard policy forms of the
insurer and statements of the assured rates, advantages, terms and conditions to be offered in
connection with insurance policies together with a certificate in connection with life insurance
business by an actuary that such rates, advantages, terms and conditions are workable and sound
Renewal of registration
3A. (1) An insurer who has been granted a certificate of registration under section 3 shall have
the registration renewed annually for each year after that ending on the 4[31st day of March,
after the commencement of the Insurance Regulatory and Development Authority Act, 1999.
(2) An application for the renewal of a registration for any year shall be made by the insurer to
the Authority before the 31st day of December of the preceding year, and shall be accompanied
as provided in sub-section
(3) by evidence of payment of the fee as determined by the regulations made by the Authority
which may vary according to the total gross premium written direct in India, during the year
preceding the year in which the application is required to be made under this section, by the
insurer in the class of insurance business to which the registration relates but shall not
(i) exceed one-fourth of one per cent. of such premium income or rupees five crores, whichever is
less;
(ii) be less, in any case, than five hundred rupees for each class of insurance business
Register of policies and register of claims
14. Every insurer, in the case of an insurer specified in sub-clause (a)(ii) or sub-clause (b) of
clause (9) of section 2 in respect of all business transacted by him, and in the case of any other
insurer in respect of the insurance business transacted by him in India, shall maintain-
(a) a register or record of policies, in which shall be entered, in respect of every policy issued by the
insurer, the name and address of the policy-holder, the date when the policy was effected and a
record of any transfer, assignment or nomination of which the insurer has notice, and
(b) a register or record of claims, in which shall be entered every claim made together with the date of
the claim, the name and address of the claimant and the date on which the claim was discharged,
or, in the case of a claim which is rejected, the date of rejection and the grounds there for.
Submission of retunes
15. (1) The audited accounts and statements referred to in section 11 or sub-section (5) of section
13 and the abstract and statement referred to in section 13 shall be printed, and four copies

thereof shall be furnished as returns to the Authority within six months from the end of the
period to which they refer:
Provided that the said period of six months shall in the case of insurers having their principal
place of business or domicile outside India and in the case of insurers constituted, incorporated
or domiciled in India but also carrying on business outside India be extended by three months,
and provided further that the Central Government may in any case extend the time allowed by
this sub-section for the furnishing of such returns by a further period not exceeding three months.
(2) Of the four copies so furnished one shall be signed in the case of a company by the chairman
and two directors and by the principle officers of the company and, if the company has a
managing director or managing agent, by that director or managing agent, in the case of a firm,
by two partners of the firm, and, in the case of an insurer being an individual, by the Insurer
himself and one shall be signed by the auditor who made the audit or the actuary who made the
valuation, as the case may be.
(3) Where the insurer's principal place of business or domicile is outside India, he shall forward
to the Authority, along with the documents referred to in section 11, the balance-sheet, profit and
loss account and revenue account and the valuation reports and valuation statements, if any,
which the insurer is required to file with the public authority of the country in which the insurer
is constituted, incorporated or domiciled, or, where such documents are not required to be filed, a
certified statement showing the total assets and liabilities of the insurer at the close of the period
covered by the said documents and his total income and expenditure during that period.
Capital requirement Investment of assets & Approved investments
Capital charges for the separate asset classes to see whether insurers have a comparative
advantage over banks, from a regulatory perspective. We will also assess the pricing, risk,
liquidity and insurers allocation to these investments, when applicable.
However, it should be noted that relative capital charges for certain investments, and the
corresponding risk, return and liquidity profile are not the only motives for making asset
allocation decisions. As an example, a recent study by Hring (2013) shows that Solvency II
capital charges are unlikely to influence asset allocation, since investment decisions are also
driven by the need of achieving a certain rating for the insurance group. Other issues such as tax,

accounting, or general strategic considerations can also play a significant role in making
investment decisions.
Securitisations: insurers face prohibitively high capital charges
Securitisations can provide a solution for banks lending constraints identified in the previous
chapters. Insurers benefit from securitisations as they gain access to diversified loan portfolios
which would have otherwise been the exclusive business of banks. As such, insurers can use
banks expertise in performing loan underwriting, risk monitoring and resolution of non-
performing loans.
Previous chapters in this report have shown that banks are divesting their securitisations as a
result of the higher risk weights introduced by Basel III. The origination of
securitisations has also become more expensive as the skin in the game rule
increases risk exposure to securitisations for originating banks.
Licensing of insurance agents:

On behalf of "Insurance Regulatory and Development Authority of India" we conduct "pre
recruitment test" for insurance advisors. To facilitate insurance companies to deploy more agents
and also to offer choice to the candidates who are tech savvy we conduct this examination in
electronic mode.
Eligibility for examinations

Regulation 4 of the regulations (i.e. IRDA (licensing of Insurance Agents) /Regulations, 2000)
requires that a person desiring to obtain or renew a license to act as an insurance agent or a
composite insurance agent shall possess the minimum qualification of a pass in 12th standard or
equivalent examination conducted by any recognized Board/Institution, where the applicant
resides in a place with a population of five thousand or more as per the last census, and a pass in
10th standard or equivalent examination from a recognized Board/Institution if the applicant
resides in any other place.
According to the Regulation 5 of the regulations (i.e. IRDA (licensing of Insurance Agents)
/Regulations, 2000), the person desiring to obtain or renew a license to act as an agent is required
to :

i) complete from an approved institution 50 hrs. of training (ie. In case of candidate seeking
agency license for the first time) and 25 hrs. of training (ie. In case of candidate seeking renewal
of license), candidate who is seeking license for the first time to act as composite (ie.
Life/General) insurance agent has to complete 75 hrs. of training.
Procedure for enrollment:
A) Please Click on Below mentioned link for Registration of Candidates in Mumbai and out side
Mumbai centers for NSE.IT Limited
Instructions to be followed while submitting forms online
1. With effect from 01st Feb 2010, all the candidates have to register through IRDA Portal.
2. A Unique Reference Number would be generated for each candidate at the time of
registration.
3. Preferred Examination Date is mandatory.
4. Ensure that the status of the URN is Confirmed For Exams, before sending the DDs to
NSE.IT Limited
5. Care to be taken while uploading Photo and Signature :-
1. The photo and signature uploaded on the portal should be clear.
2. 80% of the photograph should cover the candidates face.
3. Photograph should be a recent one and the size should be between 5 KB and 50 KB
4. Candidates signature should be clear and the size should be between 5 KB and 10
KB.
6. Insurance company should ensure that the contact details updated on IRDA Portal for
communicating the exam related information is correct.
7. Insurance Company should select the appropriate Payment mode on IRDA Portal.
a) Insurance Companies maintaining credit balance with NSE.IT Ltd should select
CR option in payment field.
b) Insurance Companies sending Demand Draft at NSEIT should select DD option
in payment field. The exams would be scheduled only after receipt (and clearance

by bank) of Valid Demand Draft (Please refer below mentioned Check Points for
Valid DD).
Demand Draft has to be sent to the following address:
NSE.IT Ltd
Online Exams Dept.
Ground floor, Andheri-Kurla Road,
Opposite Lotus Suites, Behind Trade Star Bldg,
Andheri (East), Mumbai 400059
Tel: 022- 42706500
Email: iiiexam_reg@nseit.co.in
c) Demand Draft should be in favor of NSE.IT Ltd and payable at Mumbai.
d) Only Demand Drafts drawn from Nationalized Banks are accepted.
e) For every batch of candidates scheduled, a single DD will be accepted. (Quote the
Batch number generated while requesting the online exam schedule on IRDA
portal)
f) A covering letter is also to be sent with the Demand Draft with the following
information :
Name of the Coordinator
Mobile Number
Landline Number
Email ID of the coordinator
List of candidates with name, URN and Batch number (as generated on
IRDA portal while registering the candidates).
8. The exam scheduling will be done either on preferred exam date provided or any
subsequent date based on availability.
9. Any other mode of requests for reservation of seats will not be entertained.
Contact details for the NSE.ITs H.O
Telephone number 022-42706500.
E-mail address iiiexam_reg@nseit.co.in

Address NSE.IT Ltd (Online Exam Center), Ground floor, Andheri-Kurla Road,
Opposite Lotus Suites, Behind Trade Star Building, Andheri (East), Mumbai
400059
Working Days - Monday Friday 9.30am to 05.30pm
10. The confirmation of Exam Date and Time would be mailed to the Insurance Companies
and Hall Tickets would be updated on IRDA portal by evening.
11. Training Completion Certificate status should be updated by ATIs on the Portal by 06.00
PM on previous working day (i.e. Sundays and Public Holidays will not be considered as
working days) before the scheduled exam date of the candidate.
Check Points of Valid DD
Bank Name Favouring

Nationalized bank name
DD Issue
date
DD
amount
Payable at
Mumbai
Signature
DD NO
MICR NO
The Demand Draft has to be checked for the following:

1. The DD should be drawn in favour of NSE.IT Ltd.

2. Check the Issuing date and Validity period of the DD: Some are valid for six months while
others are valid for three months only. The date must be clearly visible.
Note: On the date of receipt by NSEIT, the DD must be valid for at least another 20 days. Example:
The issuing date of the DD is 4 May 2011. The validity period is stated as six months. So the expiry
date would be 4 November 2011. NSEIT receives it on 2 November 2011, which is technically
within the validity period. However, for all practical reasons, it may not reach the bank before
expiry. So the DD shall be treated as invalid.
The draft would be treated as valid if only it is received by 15 October 2011.
3. DD amount should not be excess. It should match with the URN contained in 1 batch.
4. DDs issued by nationalized will only be accepted.
5. DD must be payable at Mumbai. In case Mumbai is not mentioned, the number indicating
payable at par should be mentioned.
6. Stamp and signature of the bank official must be clearly visible.
7. Amount in numbers and words should match
8. In case of any correction or overwriting, it must be signed by the same signatory.
In case the DD bears the statement Valid only if computer printed, and the entries are made
manually, then it will be treated as invalid
Capital requirement has specified in the with respect to insurance since, major players are under
the supervision of IRDA
IRDA: INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY:-
The Insurance Regulatory and Development Authority, constituted under the IRDA Act, 1999,
provide for the establishment of an authority to protect the interest policyholders, to regulate,
promote and ensure orderly growth of the life insurance industry.
Business Requirement:-
A company will not be issued a license unless the IRDA is satisfied with the sound
financial condition, the general character of management, the volume of business, the capital

structure, earning prospects for the insurers and that the interests of the general public will be
served if registration is granted to the insurer.
Foreign insurance companies have been allowed to have a maximum 26% share holding.
No life insurance company can be registered under the Act unless they have a paid up capital of
Rs.100 crores. Every life insurer shall deposit with the reserve bank of India one percent of the
total gross premium written in India in any financial year, not exceeding Rs.10 crores.
This amount would not be susceptible to any assignment or charge nor would it be
available for the discharge of any liabilities other than liabilities arising out of policies issued, so
long as any such liabilities remain undercharged.
Investment of Assets:-
Every insurer is required to invest, and keep invested, assets equivalent to not less than
the net liabilities as follows:
a. 25 % in government securities,
b. a least 25% of the said sum in government securities or other approved securities and
c. the balance in any approved investment rated as very stron or more by reputed rating
agencies, which include various debt instruments on which dividend on its ordinary
shared for the five years immediately preceding or for at least five out of the six or seven
years immediately preceding have been paid and which have priority in payment over
ordinary shares of the company in winding up.
The IRDA may in the interest of the policyholders directions relation the time, manner
and other conditions and investments of assets to be held by an insurer. The IRDA may also
direct the insurer to realize the investment, if it sees the investments to be unsuitable or
undesirable. The Act prohibits an insurer from directly or indirectly investing policyholder funds
outside India.
Further, every insurer has to always maintain an excess of the value of his assets over the
amount of his liabilities of not less than Rs. 50 crores in the case of an insurer carrying of life
insurance business. If at any time an insurer does not maintain the required solvency margin, he

is required to submit a financial plan, as per directions issued by the IRDA, indicating a plan of
action to correct the deficiency within three months.
In order to ensure that the company does not risk the money of the policyholders, the
Act provides that an insurer who does not comply with the aforesaid provisions may be deemed
to be insolvent and may be would up by the court.
Insurers are required to get an actuary to investigate the financial conditions of the life
insurance business including a valuation of liabilities every year in order to ensure continual
compliance
In order to maintain transparency in its dealings, insurers would have to keep separate
account relating to funds of shareholders and policyholders.
Scope of Insurance Regulatory and Development Authority:

The Insurance Regulatory and Development Authority has been authorized to register the new
insurance companies in India. The list of new insurance companies also includes the
collaborations of the renowned insurance companies overseas with the existing Indian
companies. The insurance companies in India are required to approach the Insurance Regulatory
and Development Authority for the purpose of renewal of the of the insurance registration. The
Insurance Regulatory and Development Authority are allowed to withdraw registration of the
companies and even cancel the registration of a company if required. It is also authorized to
modify the registration procedure for a company.
Function of Insurance Regulatory and Development Authority:

As mentioned earlier that the Insurance Regulatory and Development Authority was established
to safeguard the interests of the policyholders. The Insurance Regulatory and Development
Authority ensures it through various ways such as:
Nomination by Policyholders
Settlement of insurance claim
Practical training for Insurance agents and other intermediaries
Insurable Interest

Surrender value of Policyholders

Code of conduct of Insurance intermediaries
Assistance in gaining correct information about policies
Creation of management information system
Promotion of Self regulation within the insurance sector
Committees of Insurance Regulatory and Development Authority:
The statutory advisory committee regulates the functioning of the Insurance Regulatory and
Development Authority. The organization has also setup the Insurance Law Reforms Committee
that includes prominent personalities like Dr K.C. Misra, Mr. T. Viswanathan, N. Govardhan,
and Mr. Liaquat Khan..
IRDA-Duties and powers of IRDA
Section 14 of IRDAI Act, 1999 lays down the duties, powers and functions of IRDAI..
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.
Without prejudice to the generality of the provisions contained in sub-section (1), the
powers and functions of the Authority shall include,
issue to the applicant a certificate of registration, renew, modify, withdraw, suspend
or cancel such registration;
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;
specifying requisite qualifications, code of conduct and practical training for
intermediary or insurance intermediaries and agents
specifying the code of conduct for surveyors and loss assessors;
promoting efficiency in the conduct of insurance business;
promoting and regulating professional organisations connected with the insurance and
re-insurance business;

levying fees and other charges for carrying out the purposes of this Act;
calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance intermediaries
and other organisations connected with the insurance business;
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);
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;
regulating investment of funds by insurance companies;
regulating maintenance of margin of solvency;
adjudication of disputes between insurers and intermediaries or insurance
intermediaries;
supervising the functioning of the Tariff Advisory Committee;
specifying the percentage of premium income of the insurer to finance schemes for
promoting and regulating professional organisations referred to in clause (f);
specifying the percentage of life insurance business and general insurance business to
be undertaken by the insurer in the rural or social sector; and
exercising such other powers as may be prescribed
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY OF INDIA
3. ESTABLISHMENT AND INCORPORATION OF AUTHORITY

1. With effect from such date as the Central Government may, by
notification, appoint, there shall be established, for the purposes of this
Act, an Authority to be called "the Insurance Regulatory and
Development Authority".
2. The Authority shall be a body corporate by the name aforesaid having
perpetual succession and a common seal with power, subject to the
provisions of this Act, to acquire, hold and dispose of property, both

movable and immovable, and to contract and shall, by the said name,
sue or be sued.
3. The head office of the Authority shall be at such place as the Central
Government may decide from time to time.
4. The Authority may establish offices at other places in India.
4. COMPOSITION OF AUTHORITY The Authority shall consist of the following

members, namely:-
a Chairperson;
not more than five whole-time members;
not more than four part-time members,
to be appointed by the Central Government from amongst persons of ability, integrity and
standing who have knowledge or experience in life insurance, general insurance, actuarial
science, finance, economics, law, accountancy, administration or any other discipline which
would, in the opinion of the Central Government, be useful to the Authority:
Provided that the Central Government shall, while appointing the Chairperson and the whole-
time members, ensure that at least one person each is a person having knowledge or experience
in life insurance, general insurance or actuarial science, respectively.
5. TENURE OF OFFICE OF CHAIRPERSON AND OTHER MEMBERS.--(1) The

Chairperson and every other whole-time member shall hold office for a term of five years from
the date on which he enters upon his office and shall be eligible for reappointment:
Provided that no person shall hold office as a Chairperson after he has attained the age of sixty-
five years:
Provided further that no person shall hold office as a whole-time member after he has attained
the age of sixty-two years.
(2) A part-time member shall hold office for a term not exceeding five years from the date
on which he enters upon his office.
(3) Notwithstanding anything contained in sub-section (1) or sub-section (2), a member
may -

o relinquish his office by giving in writing to the Central Government notice of not
less than three months; or
o be removed from his office in accordance with the provisions of section
6. REMOVAL FROM OFFICE

o The Central Government may remove from office any member who-
o is, or at any time has been, adjudged as an insolvent; or
o has become physically or mentally incapable of acting as a member; or
o has been convicted of any offence which, in the opinion of the Central
Government, involves moral turpitude; or
o has acquired such financial or other interest as is likely to affect prejudicially his
functions as a member; or
o has so abused his position as to render his continuation in office detrimental to the
public interest.
o No such member shall be removed under clause (d) or clause (e) of sub-section (1) unless
he has been given a reasonable opportunity of being heard in the matter.
7. SALARY AND ALLOWANCES OF CHAIRPERSON AND MEMBERS.

(1) The salary and allowances payable to, and other terms and conditions of
service of, the members other than part-time members shall be
such as may be prescribed.
(2) The part-time members shall receive such allowances as may be
prescribed.
(3) The salary, allowances and other conditions of service of a member shall
not be varied to his disadvantage after appointment.
8. BAR ON FUTURE EMPLOYMENT OF MEMBERS

The Chairperson and the whole-time members shall not, for a period of two years from the date
on which they cease to hold office as such, except with the previous approval of the Central
Government, accept-

Any employment either under the Central Government or

under any State Government; or
Any appointment in any company in the insurance sector.
9. ADMINISTRATIVE POWERS OF CHAIRPERSON

The Chairperson shall have the powers of general superintendence and direction in respect of all
administrative matters of the Authority.
10. MEETINGS OF AUTHORITY

(1) The Authority shall meet at such times and places and shall observe such rules and
procedures in regard to transaction of business at its meetings (including quorum
at such meetings) as may be determined by the regulations.
(2) The Chairperson, or if for any reason he is unable to attend a meeting of the Authority,
any other member chosen by the members present from amongst themselves at the
meeting shall preside at the meeting.
(3) All questions which come up before any meeting of the Authority shall be decided by a
majority of votes by the members present and voting, and in the event of an
equality of votes, the Chairperson, or in his absence, the person presiding shall
have a second or casting vote.
(4) The Authority may make regulations for the transaction of business at its meetings.
DUTIES, POWERS AND FUNCTIONS OF AUTHORITY remain same as IRDA duties

and functions
18. POWER OF CENTRAL GOVERNMENT TO ISSUE DIRECTIONS.-- (1)

Without prejudice to the foregoing provisions of this Act, the Authority shall, in exercise of its
powers or the performance of its functions under this Act, be bound by such directions on
questions of policy, other than those relating to technical and administrative matters, as the
Central Government may give in writing to it from time to time.
PROVIDED that the Authority shall, as far as practicable, be given an opportunity to express its
views before any direction is given under this sub-section.

(2) The decision of the Central Government, whether a question is one of policy or not,
shall be final.
19. POWER OF CENTRAL GOVERNMENT TO SUPERSEDE AUTHORITY.--(1) If at

any time the Central Government is of the opinion-
(a) that, on account of circumstances beyond the control of the Authority, it is unable
to discharge the functions or perform the duties imposed on it by or under the provisions of this
Act, or
(b) that the Authority has persistently defaulted in complying with any direction given
by the Central Government under this Act or in the discharge of the functions or performance of
the duties imposed on it by or under the provisions of this Act and as a result of such default the
financial position of the Authority or the administration of the Authority has suffered; or
(c) that circumstances exist which render it necessary in the public interest so to do,
the Central Government may, be notification and for reasons to be specified therein, supersede
the Authority for such period, not exceeding six months, as may be specified in the notification
and appoint a person to be the Controller of Insurance under section 2B of the Insurance Act,
1938 (4 of 1938), if not already done :
Provided that before issuing any such notification, the Central Government shall give a
reasonable opportunity to the Authority to make representations, if any, of the Authority.
(2) Upon the publication of a notification under sub-section(1) superseding the Authority, -
(a) the Chairperson and other members shall, as from the date of supersession, vacate
their offices as such;
(b) all the powers, functions and duties which may, by or under the provisions of this
Act, be exercised or discharged by or on behalf of the Authority shall, until the Authority is
reconstituted under sub-section(3), be exercised and discharged by the Controller of Insurance;
and
(c) all properties owned or controlled by the Authority shall, until the Authority is
reconstituted under sub-section(3), vest in the Central Government.
(3) On or before the expiration of the period of supersession specified in the notification
issued under sub-section(1), the Central Government shall reconstitute the Authority by a fresh
appointment of its Chairperson and other members and in such case any person who had vacated

his office under clause(a) of sub-section(2) shall not be deemed to be disqualified for
reappointment.
(4) The Central Government shall cause a copy of the notification issued under sub-
section(1) and a full report to any action to be laid before each House of Parliament at the
earliest.
20. FURNISHING OF RETURNS, ETC., TO CENTRAL GOVERNMENT

(1) The Authority shall furnish to the Central Government at such time and in such
form and manner as may be prescribed, or as the Central Government may direct
to furnish such returns, statements and other particulars in regard to any proposed
or existing programme for the promotion and development of the insurance
industry as the Central Government may, from time to time, require.
(2) Without prejudice to the provisions of sub-section(1), the Authority shall, within
nine months after the close of each financial year, submit to the Central
Government a report giving a true and full account of its activities including the
activities for promotion and development of the insurance business during the
previous financial year.
(3) Copies of the reports received under sub-section(2) shall be laid , as soon as may
be after they are received, before each House of Parliament.
21. CHAIRPERSON, MEMBERS, OFFICERS AND OTHER EMPLOYEES OF

AUTHORITY TO BE PUBLIC SERVANTS.---The Chairperson, members, officers and other
employees of Authority shall be deemed, when acting or purporting to act in pursuance of any of
the provisions of this Act, to be public servants within the meaning of section 21 of the Indian
Penal Code (45 of 1860).
22. PROTECTION OF ACTION TAKEN IN GOOD FAITH.-- No suit, prosecution or other

legal proceedings shall lie against the Central Government or any officer of the Central
Government or any member, officer or other employee of the Authority for anything which is in

good faith done or intended to be done under this Act or the rules or regulations made
thereunder:
Provided that nothing in this Act shall exempt any person from any suit or other proceedings
which might, apart from this Act, be brought against him.
23. DELEGATION OF POWERS

(1) The Authority may, by general or special order in writing, delegate to the
Chairperson or any other member or office of the Authority subject to such
conditions, if any, as may be specified in the order such of its powers and
functions under this Act as it may deem necessary.
(2) The Authority may, by a general or special order in writing, also form committees
of the members and delegate to them the powers and functions of the Authority as
may be specified by the regulations.
24. POWER TO MAKE RULES

(1) The Central Government may, by notification, make rules for carrying out the provisions
of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such rules
may provide for all or any of the following matters, namely :
a. the salary and allowances payable to, and other terms and conditions of service of,
the members other than part-time members under sub-section(1) of section 7;
(a) the allowances to be paid to the part-time members under
sub-section(2) of section 7;
(b) such other powers that may be exercised by the Authority
under clause (q) of sub-section(2) of section 14;
(c) the form of annual statement of accounts to be maintained
by the Authority under sub-section(1) of section 17;
(d) the form and the manner in which and the time within
which returns and statements and particulars are to be

furnished to the Central Government under sub-

section(1) of section 20;
(e) the matters under sub-section(5) of section 25 on which the
Insurance Advisory Committee shall advise the
Authority;
(f) any other matter which is required to be, or may be,
prescribed, or in respect of which provision is to be or
may be made by rules.
25. ESTABLISHMENT OF INSURANCE ADVISORY COMMITTEE

The Authority may, by notification, establish with effect from such date as
it may specify in such notification, a Committee to be known as the
Insurance Advisory Committee.
The Insurance Advisory Committee shall consist of not more than twenty-
five members excluding ex-officio members to represent the interests of
commerce, industry, transport, agriculture, consumer fora, surveyors,
agents, intermediaries, organisations engaged in safety and loss
prevention, research bodies and employees' association in the insurance
sector.
The Chairperson and the members of the Authority shall be the ex officio
Chairperson and ex officio members of the Insurance Advisory
Committee.
The objects of the Insurance Advisory Committee shall be to advise the
Authority on matters relating to the making of the regulations under
section 26.
Without prejudice to the provisions of sub-section(4), the Insurance
Advisory Committee may advise the Authority on such other matters as
may be prescribed.
26. POWER TO MAKE REGULATIONS

o The Authority may, in consultation with the Insurance Advisory

Committee, by notification, make regulations consistent with this Act and
the rules made thereunder to carry out the purposes of this Act.
o In particular, and without prejudice to the generality of the foregoing
power, such regulations may provide for all or any of the following
matters, namely :-
o the time and places of meetings of the Authority and the procedure to be
followed at such meetings including the quorum necessary for the
transaction of business under sub-section(1) of section 10;
o the transactions of business at its meetings under sub-section(4) of section
10;
o the terms and other conditions of service of officers and other employees
of the Authority under sub-section(2) of section 12;
o the powers and functions which may be delegated to Committees of the
members under sub-section(2) of section 23; and
o any other matter which is required to be, or may be, specified by
regulations or in respect of which provision is to be or may be made by
regulations.
27. RULES AND REGULATIONS TO BE LAID BEFORE PARLIAMENT.--Every rule

and every regulation made under this Act shall be laid, as soon as may be after it is made, before
each House of Parliament, while it is in session, for a total period of thirty days which may be
comprised in one session or in two or more successive sessions, and if, before the expiry of the
session immediately following the session or the successive session aforesaid, both Houses agree
in making any, modification in the rule or regulation or both Houses agree that the rule or
regulation should not be made, the rule or regulation shall thereafter have effect only in such
modified form or be of no effect, as the case may be; so, however, that any such modification or
annulment shall be without prejudice to the validity of anything previously done under that rule
or regulation.

28. APPLICATION OF OTHER LAWS NOT BARRED.-- The provisions of this Act
shall be in addition to, and not in derogation of, the provisions of any other law for the time
being in force.
29. POWER TO REMOVE DIFFICULTIES

If any difficulty arises in giving effect to the provisions of this Act,
the Central Government may, by order published in the Official
Gazette, make such provisions not inconsistent with the provisions
of this Act as may appear to be necessary for removing the
difficulty:
o Provided that no order shall be made under this section after the expiry of two years from
the appointed day.
Every order made under this section shall be laid, as soon as may be, after
it is made, before each House of Parliament.
IRDA regulations for registration

INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY OF INDIA
NOTIFICATION
Hyderabad, the 2nd June, 2015
Insurance Regulatory and Development Authority of India (Obligation of Insurer in
respect of Motor
Third Party Insurance Business) Regulations, 2015
F. No. IRDAI/Reg/8/98/2015.In exercise of the powers conferred by Section 114A of the
Insurance Act,
1938 (4 of 1938) read with Sections 14 and 26 of the Insurance Regulatory and Development
Authority Act,
1999 (41 of 1999) and Section 32D of Insurance Act, 1938, the Authority in consultation with
the Insurance Advisory Committee, hereby makes the following regulations, namely:-
Short Title and Commencement of the Regulations
(1) (a) These Regulations may be called the Insurance Regulatory and Development Authority of
India

(Obligation of Insurer in respect of Motor Third Party Insurance Business) Regulations, 2015.
(b) These shall come into force on the date of their publication in the Official Gazette.
Definitions
(2) In these regulations, unless the context otherwise requires,:-
(a) "Act" means the Insurance Act, 1938 (4 of 1938), as amended from time to time;
(b) Authority means the Insurance Regulatory and Development Authority of India established
under the provisions of Section 3 of the Insurance Regulatory and Development Authority Act,
1999 (41 of 1999).
(c) Insurer means the insurance companies registered with the Authority and licensed to
underwrite direct motor insurance business in India.
(d) Motor Third Party Insurance Business consists of the motor third party insurance business
in respect of both, the liability only policies as well as the package policies issued in motor
portfolio.
(e) New Insurer means an insurer which has started its business operations during the
immediate preceding financial year of the financial year for which obligations in respect of
motor third party insurance business are to be fixed.
Obligations
(3) The Obligation of an Insurer in respect to Motor Third Party insurance business for a
Financial Year(X) should be arrived as below:
(i) Total Gross Direct Premium Income(GDPI) under all lines of business of all insurers in the
immediate preceding financial year = A
(ii) Total GDPI under motor insurance business of all insurers in the immediate preceding
financial year = B
(iii) Insurers GDPI under all lines of business in the immediate preceding financial year = C
(iv) Insurers GDPI under motor insurance business in the immediate preceding financial year =
D
(v) Total GDPI under motor third party insurance business of all insurers during the immediate
preceding financial year = E
(vi) Obligation of the Insurer to be met in a financial year
X = C A +D B x E x 90
2 100

Exceptions
(4) The new insurer writing motor insurance business licensed to underwrite motor insurance for
the first time shall be exempted from the application of the obligatory requirement during first
two financial years of its operations including the financial year in which its operations are
started.
(5) Such insurer shall also be excluded from the calculations for determining the minimum
obligatory requirements for other existing insurers for such period till which the minimum
obligatory requirements are not applicable to that insurer.
Submissions
(6) Every insurer shall submit the financial returns to the Authority for every quarter of the
financial year within forty five days of the end of the quarter as per the Schedule MTP A
Schedule MTP- A (Motor Third Party Insurance Business)
(i) Name of the Insurer:
(ii) Registration No. and Date of Registration with the IRDAI:
(iii) Gross Direct Premium Income during immediate preceding FY:
(iv) Gross Direct Motor Third Party Insurance Business Premium during immediate preceding
FY: (v) Statement Period: Quarter ending __________
IRDA (Protection of Policyholders Interests) Regulations, 2002.
Point of Sale
(1) Notwithstanding anything mentioned in regulation 2(e) above, a prospectus of any insurance
product shall clearly state the scope of benefits, the extent of insurance cover and in an explicit
manner explain the warranties, exceptions and conditions of the insurance cover and, in case of
life insurance, whether the product is participating (with-profits) or non-participating (without-
profits). The allowable rider or riders on the product shall be clearly spelt out with regard to their
scope of benefits, and in no case, the premium relatable to all the riders put together shall exceed
30% of the premium of the main product.
Explanation: The rider or riders attached to a life policy shall bear the nature and character of
the main policy, viz. participating or non-participating and accordingly the life insurer shall
make provisions, etc., in its books.

(2) An insurer or its agent or other intermediary shall provide all material information in respect
of a proposed cover to the prospect to enable the prospect to decide on the best cover that would
be in his or her interest.
(3) Where the prospect depends upon the advice of the insurer or his agent or an insurance
intermediary, such a person must advise the prospect dispassionately.
(4) Where, for any reason, the proposal and other connected papers are not filled by the
prospect, a certificate may be incorporated at the end of proposal form from the prospect that the
contents of the form and documents have been fully explained to him and that he has fully
understood the significance of the proposed contract.
(5) In the process of sale, the insurer or its agent or any intermediary shall act according to the
code of conduct prescribed by:
o the Authority
o the Councils that have been established under section 64C of the Act and
o the recognized professional body or association of which the agent or intermediary
or insurance intermediary is a member.
4. Proposal for insurance

(1) Except in cases of a marine insurance cover, where current market practices do not insist on a
written proposal form, in all cases, a proposal for grant of a cover, either for life business or for
general business, must be evidenced by a written document. It is the duty of an insurer to furnish
to the insured free of charge, within 30 days of the acceptance of a proposal, a copy of the
proposal form.
(2) Forms and documents used in the grant of cover may, depending upon the circumstances of
each case, be made available in languages recognised under the Constitution of India.
(3) In filling the form of proposal, the prospect is to be guided by the provisions of Section 45 of
the Act. Any proposal form seeking information for grant of life cover may prominently state
therein the requirements of Section 45 of the Act.
(4) Where a proposal form is not used, the insurer shall record the information obtained orally or
in writing, and confirm it within a period of 15 days thereof with the proposer and incorporate
the information in its cover note or policy. The onus of proof shall rest with the insurer in respect

of any information not so recorded, where the insurer claims that the proposer suppressed any
material information or provided misleading or false information on any matter material to the
grant of a cover.
(5) Wherever the benefit of nomination is available to the proposer, in terms of the Act or the
conditions of policy, the insurer shall draw the attention of the proposer to it and encourage the
prospect to avail the facility.
(6) Proposals shall be processed by the insurer with speed and efficiency and all decisions
thereof shall be communicated by it in writing within a reasonable period not exceeding 15 days
from receipt of proposals by the insurer.
5. Grievance redressal procedure

Every insurer shall have in place proper procedures and effective mechanism to address
complaints and grievances of policyholders efficiently and with speed and the same along-with
the information in respect of Insurance Ombudsman shall be communicated to the policyholder
along-with the policy document and as maybe found necessary.
6. Matters to be stated in life insurance policy

(1) A life insurance policy shall clearly state:
(a) the name of the plan governing the policy, its terms and conditions;
(b) whether it is participating in profits or not;
(c) the basis of participation in profits such as cash bonus, deferred bonus, simple or compound
reversionary bonus;
(d) the benefits payable and the contingencies upon which these are payable and the other terms and
conditions of the insurance contract;
(e) the details of the riders attaching to the main policy;
(f) the date of commencement of risk and the date of maturity or date(s) on which the benefits are
payable;
(g) the premiums payable, periodicity of payment, grace period allowed for payment of the
premium, the date the last instalment of premium, the implication of discontinuing the payment
of an instalment(s) of premium and also the provisions of a guaranteed surrender value.

(h) the age at entry and whether the same has been admitted;
(i) the policy requirements for (a) conversion of the policy into paid up policy, (b) surrender (c)
non-forfeiture and (d) revival of lapsed policies;
(j) contingencies excluded from the scope of the cover, both in respect of the main policy and the
riders;
(k) the provisions for nomination, assignment, and loans on security of the policy and a statement
that the rate of interest payable on such loan amount shall be as prescribed by the insurer at the
time of taking the loan;
(l) any special clauses or conditions, such as, first pregnancy clause, suicide clause etc.; and
(m) the address of the insurer to which all communications in respect of the policy shall be sent.
(n) the documents that are normally required to be submitted by a claimant in support of a claim
under the policy.
(2) While acting under regulation 6(1) in forwarding the policy to the insured, the insurer
shall inform by the letter forwarding the policy that he has a period of 15 days from the date of
receipt of the policy document to review the terms and conditions of the policy and where the
insured disagrees to any of those terms or conditions, he has the option to return the policy
stating the reasons for his objection,when he shall be entitled to a refund of the premium paid,
subject only to a deduction of a proportionate risk premium for the period on cover and the
expenses incurred by the insurer on medical examination of the proposer and stamp duty
charges.
(3) In respect of a unit linked policy, in addition to the deductions under sub-regulation (2) of
this regulation, the insurer shall also be entitled to repurchase the unit at the price of the units on
the date of cancellation.
(4) In respect of a cover, where premium charged is dependent on age, the insurer shall
ensure that the age is admitted as far as possible before issuance of the policy document. In case
where age has not been admitted by the time the policy is issued, the insurer shall make efforts to
obtain proof of age and admit the same as soon as possible.

7. Matters to be stated in general insurance policy
(1) A general insurance policy shall clearly state:

(a) the name(s) and address(es) of the insured and of any bank(s) or any other person having
financial interest in the subject matter of insurance;
(b) full description of the property or interest insured;
(c) the location or locations of the property or interest insured under the policy and, where
appropriate, with respective insured values;
(d) period of Insurance;
(e) sums insured;
(f) perils covered and not covered;
(h) any franchise or deductible applicable;
(i) premium payable and where the premium is provisional subject to adjustment, the basis of
adjustment of premium be stated;
(j) policy terms, conditions and warranties;
(k) action to be taken by the insured upon occurrence of a contingency likely to give rise to a claim
under the policy;
(l) the obligations of the insured in relation to the subject matter of insurance upon occurrence of an
event giving rise to a claim and the rights of the insurer in the circumstances;
(m) any special conditions attaching to the policy;
(n) provision for cancellation of the policy on grounds of mis-representation, fraud, non-disclosure
of material facts or non-cooperation of the insured;
(o) the address of the insurer to which all communications in respect of the insurance contract
should be sent;
(p) the details of the riders attaching to the main policy;
(q) proforma of any communication the insurer may seek from the policyholders to service the
policy.
(2) Every insurer shall inform and keep informed periodically the insured on the requirements to
be fulfilled by the insured regarding lodging of a claim arising in terms of the policy and the
procedures to be followed by him to enable the insurer to settle a claim early.

8. Claims procedure in respect of a life insurance policy

(1) A life insurance policy shall state the primary documents which are normally required to be
submitted by a claimant in support of a claim.
(2) A life insurance company, upon receiving a claim, shall process the claim without delay. Any
queries or requirement of additional documents, to the extent possible, shall be raised all at once
and not in a piece-meal manner, within a period of 15 days of the receipt of the claim.
(3) A claim under a life policy shall be paid or be disputed giving all the relevant reasons, within
30 days from the date of receipt of all relevant papers and clarifications required. However,
where the circumstances of a claim warrant an investigation in the opinion of the insurance
company, it shall initiate and complete such investigation at the earliest. Where in the opinion of
the insurance company the circumstances of a claim warrant an investigation, it shall initiate and
complete such investigation at the earliest, in any case not later than 6 months from the time of
lodging the claim.
(4) Subject to the provisions of section 47 of the Act, where a claim is ready for payment but the
payment cannot be made due to any reasons of a proper identification of the payee, the life
insurer shall hold the amount for the benefit of the payee and such an amount shall earn interest
at the rate applicable to a savings bank account with a scheduled bank (effective from 30 days
following the submission of all papers and information).
(5) Where there is a delay on the part of the insurer in processing a claim for a reason other than
the one covered by sub-regulation (4), the life insurance company shall pay interest on the claim
amount at a rate which is 2% above the bank rate prevalent at the beginning of the financial year
in which the claim is reviewed by it.
9. Claim procedure in respect of a general insurance policy

(1) An insured or the claimant shall give notice to the insurer of any loss arising under contract
of insurance at the earliest or within such extended time as may be allowed by the insurer. On

receipt of such a communication, a general insurer shall respond immediately and give clear
indication to the insured on the procedures that he should follow. In cases where a surveyor has
to be appointed for assessing a loss/ claim, it shall be so done within 72 hours of the receipt of
intimation from the insured.
(2) Where the insured is unable to furnish all the particulars required by the surveyor or where
the surveyor does not receive the full cooperation of the insured, the insurer or the surveyor as
the case may be, shall inform in writing the insured about the delay that may result in the
assessment of the claim. The surveyor shall be subjected to the code of conduct laid down by the
Authority while assessing the loss, and shall communicate his findings to the insurer within 30
days of his appointment with a copy of the report being furnished to the insured, if he so desires.
Where, in special circumstances of the case, either due to its special and complicated nature, the
surveyor shall under intimation to the insured, seek an extension from the insurer for submission
of his report. In no case shall a surveyor take more than six months from the date of his
appointment to furnish his report.
(3) If an insurer, on the receipt of a survey report, finds that it is incomplete in any respect, he
shall require the surveyor under intimation to the insured, to furnish an additional report on
certain specific issues as may be required by the insurer. Such a request may be made by the
insurer within 15 days of the receipt of the original survey report.
Provided that the facility of calling for an additional report by the insurer shall not be resorted to
more than once in the case of a claim.
(4) The surveyor on receipt of this communication shall furnish an additional report within three
weeks of the date of receipt of communication from the insurer.
(5) On receipt of the survey report or the additional survey report, as the case may be, an insurer
shall within a period of 30 days offer a settlement of the claim to the insured. If the insurer, for
any reasons to be recorded in writing and communicated to the insured, decides to reject a claim
under the policy, it shall do so within a period of 30 days from the receipt of the survey report or
the additional survey report, as the case may be.

(6) Upon acceptance of an offer of settlement as stated in sub-regulation (5) by the insured, the
payment of the amount due shall be made within 7 days from the date of acceptance of the offer
by the insured. In the cases of delay in the payment, the insurer shall be liable to pay interest at a
rate which is 2% above the bank rate prevalent at the beginning of the financial year in which the
claim is reviewed by it.
10. Policyholders Servicing

(1) An insurer carrying on life or general business, as the case may be, shall at all times, respond
within 10 days of the receipt of any communication from its policyholders in all matters, such as:
(a) recording change of address;
(b) noting a new nomination or change of nomination under a policy;
(c) noting an assignment on the policy;
(d) providing information on the current status of a policy indicating matters, such as, accrued bonus,
surrender value and entitlement to a loan;
(e) processing papers and disbursal of a loan on security of policy;
(f) issuance of duplicate policy;
(g) issuance of an endorsement under the policy; noting a change of interest or sum assured or perils
insured, financial interest of a bank and other interests; and
(h) guidance on the procedure for registering a claim and early settlement thereof.
11. General
(1) The requirements of disclosure of material information regarding a proposal or policy
apply, under these regulations, both to the insurer and the insured.
(2) The policyholder shall assist the insurer, if the latter so requires, in the prosecution of a
proceeding or in the matter of recovery of claims which the insurer has against third parties.
(3) The policyholder shall furnish all information that is sought from him by the insurer and also
any other information which the insurer considers as having a bearing on the risk to enable the
latter to assess properly the risk sought to be covered by a policy.
(4) Any breaches of the obligations cast on an insurer or insurance agent or insurance
intermediary in terms of these regulations may enable the Authority to initiate action against
each or all of them, jointly or severally, under the Act and/or the Insurance Regulatory and
Development Authority Act, 1999.

Module 5: (8 Hours)
Life Insurance
Basics of Life Insurance-Growth of Actuarial Science-Features of Life Insurance-Life
Insurance Contract-Life Insurance Documents-Insurance Premium Calculations.
Life Insurance Classification-Classification on the Basis Duration-Premium Payment-
Participation in Profit-Number of Persons Assured-Payment of Policy Amount-Money Back
Policies-Unit Linked Plans.
Annuities-Need of Annuity Contracts, Annuity V/s Life Insurance, Classification of Annuities.
A protection against the loss of income that would result if the insured passed away. The named
beneficiary receives the proceeds and is thereby safeguarded from the financial impact of the
death of the insured.
Actuarial Science & its growth
Actuarial science is the quantitative analysis of risk. In addition to mathematics and statistics
courses, students in actuarial science take classes in finance, economics and computer
programming. What Do Actuaries. Actuaries help individuals, businesses and society manage
risk by evaluating the likelihood of future events and creating plans to reduce the negative
financial or emotional impact of undesirable events. Some of the questions that actuaries address
on a daily basis include:
What price best balances an insurance companys risk tolerance with various risk
parameters such as age of the insured, health status, place of residence, and other risk
characteristics?
What would be the economic loss in the event of a fl ood, and how can these costs be
covered?
How large a fund is needed for a company to provide pensions for its employees?
How likely is it for someone to be hospitalized?
o What is the average duration of a hospital stay and how can the costs associated with
each day of hospitalization be provided for?
In the event of a merger, how can the employee benefits plans of the different
organizations be
o reconciled?

How should an investment portfolio be balanced to maximize return and minimize risk?
Actuaries also must take this information and convey it to their companies and customers clearly
and concisely through written reports, graphs, charts, or other visual or oral presentation formats.
Actuaries like to solve complex problems and explain their solutions to others. They enjoy
learning and studying new topics on a regular basis, work well with all types of people, have
strong writing and oral presentation skills and can work independently as well as in teams.
Actuaries tend to be self-motivated and have good business sense. Actuaries must have good
interpersonal skills as well as specialized knowledge in mathematics, statistics, computer
programming, economics and finance.
Features of Life Insurance Contract

Since the life insurance is not an indemnity contract, the insurer, in his part, is required to pay a
definite sum of money agreed on maturity of policy at the death or an amount in installment for a
fixed period or during life. As such, contrary to other insurance policies, it has some distinct
features. The essential features of life insurance are as follows:
1. Insurable interest
The insured or policyholder must have an insurable interest for a valid life insurance contract.
Insurable interest arises out of pecuniary relationship which exists between the insurer and policy
holder, the former or insurer stands to loose by the death of the policy holder or latter and or
continuous to gain by his survival.
In life insurance contract, a person may have insurable interest for his own life as well as lives of
his relatives such as wife, son, daughter etc. No person can purchase life insurance policy for a
third person unless he has financial interest in his life.
2. Utmost good faith
The life insurance requires that the principle of utmost good faith should be preserved by both
the parties; insurer and insured. Utmost good faith between the parties is necessary in all kinds of
contracts. The insured in particular, must disclose all facts accurately and completely with
respect to the object of life policy.
3. Warranties
Warranties are the representations in life insurance which are embodied in the policy and
expressly or impliedly forming part of the basis of the contract. Warranties are the integral part

of the contract. These are the bases of the contract between insured and insurer and if any
statement or information or presentation, whether material or non-material, is untrue the contract
may be void and the premium paid by insured may be forfeited by the insurance company or
insurer.
4. Assignment and nomination
The life insurance policy can be assigned free for a legal consideration or love and affection. The
insured may assigned to anybody on any ground. As such, the assignment shall be complete and
effectual only on the execution of such endorsement either on the policy itself or by a separate
deed.
5. Return of premium
Generally, the amount of premium paid cannot be refunded. however, for the reason of equity,
the premium may be refunded. If it is the case of misrepresentation or breach of warranty, the
insured, in the absence of any express condition to the contrary, can claim for return of premium
paid. But, in case of guilty of fraud in obtaining policy, the insured cannot claim the amount of
premium to be returned.
Life insurance contract:

Life insurance or life assurance, especially in the Commonwealth, is a contract between
an insurance policy holder and an insurer or assurer, where the insurer promises to pay a
designated beneficiary a sum of money (the benefit) in exchange for a premium, upon the death
of an insured person (often the policy holder).
Life insurance documents:

Documents are necessary to evidence the existence of a contract. In life insurance several
documents are in vogue. The documents stand as a proof of the contract between the insurer and
the insured. The major documents in vogue in life insurance are premium receipt, insurance
policy, endorsements etc.
Documents needed at the stage of the proposal

2.2.2 Proposal form is the basic format which is filled in by the proposer who wants to take an
insurance policy. It can be defined as the application for insurance.

A proposal form has three portions

(1) The first gives details about the proposer, his name, address, occupation, the details about
the type of insurance that he wants to take and the name of the nominee to whom the money is
payable in case the policyholder does not survive to take the maturity amount.
(2) The second portion relates to the details of the insurance policy that the proposer already
possesses, the present health conditions and the personal history of his health, any sickness or
accident he might have had. This is a detailed questionnaire and the proposer is expected to reply
to each question truthfully and honestly. A female proposer has to reply to certain additional
questions specific to her gender. (3) The last portion of the proposal form relates to the
declaration. Through this declaration, the proposer
(i) affirms the veracity of the statements made in the proposal form in replying to the question
(ii) affirms that he/she has not suppressed, misrepresented or concealed any fact which may be
material to the risk
(iii) agrees that this declaration along with the proposal form shall form the basis of the contract
and if any information is found to be false the contract will be null and void thus reinforcing the
principle of Uberimma Fides (Utmost good faith).
(iv) further agrees to take the insurance on the terms and conditions decided by the insurer.
The proposer further agrees to keep the insurer informed of any changes in the position relating
to his health or his occupation between now and the issuance of the first premium receipt.
It is thus clear that after the insurer has issued the first premium receipt, the contract is said to
have concluded and thereafter the insurer has no right to change the terms of the contract.
However, the insurer has a right to offer any term and condition before the final acceptance of
the insurance. For example, in case of a female proposer, the insurer may not agree to accept
the risk of the childbirth. In case of certain hazardous occupation like commercial pilots, the
insurer may like to exclude the risk to life due to such occupation. In case of certain deformity,
the risk of accident can be excluded. These exclusions of risks are not normal terms of the policy
contract and therefore have to elicit consent of the proposer. In case of a substandard health, the
insurer may like to accept a reduced risk during the first one or two years of the insurance. The
consent of the insured is a must for such limitations to be imposed. All such special conditions or
riders are mentioned in the policy either by an endorsement or attachment to the document. If the
insurer has taken a Convertible Whole Life Plan which is to be converted to an endowment plan

after 5 years, the necessary condition is endorsed on the policy. The terms and conditions as
mentioned in the policy along with such endorsements as made at the back of the policy govern
the insurance contract and are open to be interpreted by a court. However it may be noted that
agents confidential report and the medical examination (confidential) report are not part of the
contract for insurance.
2.2.3 Age proof
Age is an important factor in deciding the quantum of premium against a policy. The document
proving the age, i.e. age proof must be reliable and the insured has to undertake as to its
truthfulness. An insurer accepts these documents as standard
age proof - 1) Certified extract from municipal records, recorded at the time of birth.
2) Certificate of baptism or extract from Family Bible
3) Extract from school or college records.
4) Extract from service register in case of employees - Government or semi government or such
other reputed institutions which insist on conclusive evidence of age at the time of recruitment.
5) Identity card issued by Defence department.
6) Marriage certificates issued by Roman Catholic Church.
7) Domicile certificate.
8) Passport.
Non-standard age proofs are those which are comparatively less reliable and therefore the
insurer accepts them with a pinch of salt. In other words the insurer takes certain precautions
before accepting such age proofs as final. For example, such age proofs are examined by a senior
officer and not accepted as a matter of routine. Another safeguard is to offer a reduced term of
policy so that the policy matures at a comparatively early age. The maximum age of maturity
may be fixed at a lower age. The insurer even may charge an extra premium to compensate for
the possible understatement of age in such age proof.
Such nonstandard age proofs are (1) Horoscope, (2) service records of employers other than
those mentioned above (3) ESI card, (4) Marriage Certificate in case of a Muslim proposer., 5)
Elders Declaration, 6) Self Declaration, 7) Driving Licence, 8) Certificate issued by village
panchayat, 9) Electoral role, 10) Ration card.
Age proof is insisted upon for completion of propsoal if the declared age of the proposer is less
than 20 or more than 50 or if the sum proposed is quite high, say above one lakh.

2.2.4 Proof of income

This document may become necessary whenever the sum proposed is very high. Normally a sum
proposed which is seven to eight times of the declared income is acceptable for insurance. But
proposals do come to the insurer when the known source of income of the proposer is much less
compared to the amount of insurance desired. A service holder normally does not face this
problem as his sources of income are verifiable.
In case of business people, the assessed income is at times much less compared to what is a
desirable income for the amount of insurance desired. In such cases the insurer at times calls for
assessed income tax returns, or Chartered Accountants certificate etc. Such precautions are
necessary to eliminate the possibility of moral hazard.
2.3 DOCUMENTS NEEDED DURING THE CONTINUANCE OF THE POLICY:
2.3.1 First Premium Receipts and Renewal Premium Receipts
The First Premium Receipt (FPR) is the confirmation of insurance. This document is important
as it gives the date of assumption of the risk but its value is nil once the policy document has
been issued.
2.3.2 Policy Contract

Policy document is a detailed document and it is the Evidence of the insurance contract which
mentions all the terms and conditions of the insurance. The insured buys not the policy contract,
but the right to the sum of money and its future delivery. The insurer on its part promises to pay
a sum of money, provided of course the insured keeps its part of promise of paying the
installments of premium as scheduled. The pre-amble to the insurance contract makes the above
statement clear and states that this policy is issued subject to the conditions and privileges
printed on the back of the policy. The endorsements placed on the policy shall also be part of
the policy and it also makes a reference to the proposal form saying that that the statements given
in the proposal form are the basis of the contract.
The schedule which is printed on the policy document identifies the office which has issued the
policy. It states the name of the policyholder, the date of commencement of the policy, an
identification number of the policy called policy number. This number is extremely useful for
making any reference to the insurer relating to this policy. This shall avoid needless delay.

Beneficiarys name is also mentioned along with address. It is necessary to check that it is
correct and any mistake should be immediately pointed out for correction. A mistake in the
address may misdirect the premium notices and any other future correspondence. It also states
the name of the nominee and the date up to which premium has to be paid.
The schedule goes on to mention, the type of policy, on the happening of which, the sum assured
is payable and to whom it is payable. It of course also mentions when and how long the premium
is to be paid. The policy document is signed by an official of the insurer and dated and stamped
as per the provision of the Stamp Act to make it a completely legally enforceable document.
2.3.3 Renewal Premium Receipts
Though it is the duty of the insured to pay the renewal premium on the due date the insurer sends
a renewal premium notice to the insured out of courtesy and on receiving the premium issues a
renewal premium receipt (RPR) which is an important document and has to be preserved as it is
the only documentary proof that the due payment has been made.
2.3.4 Endorsements
Life insurance policy being a long term contract, it is quite likely that the conditions may so
change over the time that an alteration or change in the policy conditions may be required.
The insurers normally permit such changes which are in the interest of the policyholders and also
simultaneously do not adversely affect the insurers interest.
It has to be noted however, that the insurer is not authorized to make any change in the
conditions of the policy during its continuance except such which has been agreed to in the
beginning of the policy. An insurance policy, in this sense is called an unilateral contract.
All such alterations as are discussed hereafter are effected by endorsements on the policy
document.
The following alterations are not permitted.
(1) Alterations during the first year,
(2) Alteration from one class of assurance to another where the premium scale is reduced.
(3) Alteration to another plan which is more risk oriented.
(4) Increase in sum assured in the same policy.
The following alterations are allowed
1) Limiting the premium paying period, but date of maturity remaining unaltered;

2) Change in the mode of payment of premium e.g. Halfyearly to yearly or half-yearly to

quarterly;
3) Alteration due to age admission, if required, has to be compulsorily done;
4) Alteration or correction in the name of the assured/ nominee;
5) Bringing the policy under salary savings scheme;
6) Replacing a limiting clause by an extra premium. For example the first pregnancy clause can
be replaced by an one time extra premium of Rs.5/- per thousand; 7) An extra premium imposed
for specific impairment or occupational reasons can be removed or reduced. For example, an
extra premium imposed for hernia or hydrocele can be removed after surgical operation.
Similarly, an occupational extra premium can be removed, if there is change in occupation to a
less hazardous one. However an occupational extra premium cannot be imposed, after the policy
has been issued, even if the policyholder takes up a more hazardous job.
All such alterations are effected by an endorsement on the back of the policy or by a separate
memo which becomes a part of the policy.
Or
Documents
Life Claims
o We request you to submit the following documents to register a death claim:
o Mandatory documents required
o Original policy documents
o Original / Attested copy of Death Certificate Issued by local municipal authority.
o Death Claim Application Form (Form A)
o NEFT Mandate form attested by bank authorities alongwith cancelled cheque or bank
account passbook.
o Nominee's photo identity proof like copy of passport, PAN card, Voter identity card,
Aadhar (UID) card etc.
Additional documents (as per the cause of death)
o Medical / Natural death:
o Attending Physician's Statement (Form 'C').
o Medical records (Admission notes, Discharge/ Death Summary, Test reports etc.)

o Accidental/ Unnatural Death:

o Copy of the First Information Report (FIR) or Panchanama/Police Complaint.
o Copy of Post Mortem Report (PMR) / Autopsy and Viscera report.
o Copy of the Final Police Investigation Report (FPIR)/Charge sheet.
Insurance Premium Calculations

Life insurance is expressed as a rate per $1,000 of insurance. To calculate Life Insurance
premium you take the benefit volume per $1,000 of coverage multiplied by the monthly rate.
For example, to calculate the monthly premium based on a 2x annual earnings (assume $40,000)
schedule and a rate of $0.12 per $1,000 of coverage per month, the calculation is: Benefit
Volume * Rate / $1,000 = Monthly premium $80,000 * 0.12 / $1,000 = $9.60
Classification of life insurance policy

1. Whole life insurance policy:
Whole life insurance policy is defined as an insurance in which the insured person pays the
premium in the installment basis for full duration of his/her life. After the death of insured,
his/her nominee receives the insured amount. There are 3 types of whole life insurance
policy
2. Ordinary whole life insurance policy. In this policy, insured person has to pay the
premium to his/her concerned insurance company till his/her death. The insured person
cant utilize the insured amount because this amount will be returned after his/her
nominee
3. limited premium whole life insurance policy: Under this policy, the insured person has
to pay the premium for limited time and the insured amount will be returned after the
death of insured person to his/her nominee
4. Convertible whole life insurance policy: It is that type of policy which can be converted
to endowment life insurance policy after a certain time. It is suitable for those people who
have lower income at present and they hope for increment in income in the near future.
5. Endowment life insurance policy:
It is defined as that type of insurance in which the insured person pays the premium for a
certain time and after certain time they receive insured amount. If she/he dies before the
insured period his/her nominee receives the insured amount. Generally endowment life

insurance policy is done for 10, 15 20 years and more. The insured has to pay the premium
either till the end of insured period or till the death of insured which ever is earlier.
1. Ordinary endowment life insurance policy: Under this policy, time will be
fixed foe a certain period and insured person have to pay either till the end of insured
period or till his/her death. If he/she dies earlier before insured period, his/her nominee
receive the amount. And if she/he is alive then himself/herself go and receive the
amount.
2. Joint endowment life insurance policy: In this policy, two or more persons are
involves s the insured person .the premium amount should be paid till the insured
persons death like in ordinary endowment life insurance policy.
3. Double endowment life insurance policy: Under this policy, the insured person
receives double of the insured amount is she/he is alive till the end of the maturity time.
If she/he dies before the insured person his/her nominee receive only single insured
amount.
4. Pure endowment life insurance policy: Under this policy, insured person
receive the insured amount after the certain time when he/she us alive. If the insured
person dies before the end of maturity time the insurer becomes free from its liability.
2. Term life insurance policy
Straight term life insurance policy: Under this policy premium is paid as lump sum money.
The insured time maturity period is not more than 2 year. Therefore it is known as temporary
term life insurance policy. If the insured person dies before the insured period his/her
nominee receives the insured amount. But if he/she is alive then he/she doesnt receive
anything.
1. Straight term life insurance policy: Under this policy premium is paid as lump
sum money. The insured time maturity period is not more than 2 year. Therefore it is
known as temporary term life insurance policy. If the insured person dies before the
insured period his/her nominee receives the insured amount. But if he/she is alive then
he/she doesnt receive anything.
2. Renewal term life insurance policy: Under this period the insurance can be
renewed after the maturity of the insured period. Second rate of premium may be higher

than the first rate of premium. Because the age of the person also increases with renew of
insurance. It doesnt need a new health report or any sort of gent report for renewal.
3. Convertible term life insurance policy: It is generally done for 5, 6 or 7 years
like term life insurance policy. If the insured person want to convert this insurance policy
in whole life insurance policy and endowment life insurance policy it can easily be
converted.
3. On the basis of profit distribution
1. With profit policy: Under this policy the insured person receive the insured
amount with the profit of insurance company. In other words if the insured person dies
before the term of insured period his/her nominee receive only insured amount not the
profit o the company. But if he/she is alive then with the amount of premium the portion
of profit of the insurance company is also received by the insurer.
2. Without profit policy: Under this policy the insured person doesnt receive the
insured amount with the profit of insurance company .in other words if the insured
person dies before the term of insured period or remains alive till the end his/her nominee
r himself/herself receive only insured amount not the profit o the company.
4. On the basis of number of insured:
1. Single life insurance policy: Under this policy there is only one individual as a
insured person. In other words, the life of a single person is done insurance. Single life
insurance policy is applied in whole life insurance policy, endowment life insurance
policy and term life insurance policy.
2. Joint/ multiple life insurance policy : Under this policy two or more than 2
person are involved as husband and wife, partners of partnership firm and other people
may conduct the joint life insurance policy. It may be applied in whole life insurance
policy and endowment life insurance policy.
5. On the basis premium payment:
1. Single premium life insurance policy: Under this policy, insured person pay the
premium to the insurance company at the beginning in the lump sum amount. There is no
tension to pay the premium timely later on. It is mostly used in that case when a person
wins a lottery.

2. Regular premium life insurance policy: under this policy the insured person pay
the premium up to his/her death for a certain time. In other words, the insured person
pays the premium to insurance company regularly or timely.
3. Limited payment premium life insurance policy: under this policy the insured
person pay the premium up to his/her death for a certain time. The time is however less
than the insured period.
6. On the basis of payment of insured mount :
1. Lump sum payment policy: under this policy the insured person receives the
total insured amount. Even all premiums have not been paid total insured amount is
received by the nominee of the insured person and if the total amount has been paid
she/he receives the total insured amount himself or herself.
2. Installment payment policy: under this policy, the insured person and nominee
receive the insured amount in the installment basis. It is useful to those individual who
are old and lump sum mount may be misused.
Number of Persons Assured:
Number of Persons Assured in life insurance is minimum one and maximum depends on the
policy and company norms as per the IRDA regulations
Payment of Policy Amount

Online Payment Gateway is LICs initiative to provide you with on demand service within a few
clicks! You can now have many of the functionalities that were available only at a branch office,
online at your fingertips.
The payment gateway (PG) initiative is an important component of the offer. It provides for real-
time payment of renewal premium-dues through the portal. This functionality is available only to
registered customers who have enrolled their policies.
The money-back policy from Life Insurance Corporation in India is a popular insurance policy.
It provides life coverage during the term of thepolicy and the maturity benefits are paid in
installments by way of survival benefits in every 5 years. The plan is available with 20 years and
25 years term.

ULIP
Unit plans are investment plans for those who realise the worth of hard-earned money. These
plans help you see your savings yield rich benefits and help you save tax even if you don't have
consistent income.
Annuity
An annuity is a type of policy issued by an insurance company that allows you to save money for
retirement. The money you pay in can be either a lump sum or a number of payments. These
contributions then earn interest, generally tax-deferred, and after a period of time, provide you
with a stream of income.
Need for annuity contract: This is a straight-life annuity that pays a fixed amount for as long as
you live. Another option is to get guaranteed payments for a certain number of years, for
example, life or 10 years certain, and if you die sooner, your beneficiary receives the
payments.
Annuity Vs Life Insurance
At first glance, permanent life insurance policies and annuity contracts have almost polar
opposite goals. Life insurance is there to help your family if you die unexpectedly or
prematurely. Meanwhile, annuities act as a safety net, usually for those who in their senior years,
by providing a guaranteed stream of income for life.
However, the companies that market these products try to convince customers that both are
prudent investment alternatives to the stock and bond markets. And in both cases, the tax-
deferred growth on any underlying assets is a key selling point.
As it happens, insurance and annuity contracts also have a similar drawback: Steep costs that
have the tendency to weigh down returns.
To be clear, there are certain cases when virtually any financial product can make sense for a
particular purpose. But those instances are less common that some salespeople are inclined to let
on. Let's look at the pros and cons of both instruments as investments.

Insurance: The Pros
The primary reason to take out life insurance is to safeguard your dependents in the event of your
passing. But unlike simple term life policies, which just pay a death benefit, permanent life
policies (also known as cash-value policies) add a savings component. For that reason,
their premiums tend to be quite a bit higher than they would be with a term policy of the same
face value.
In the case of whole life products one of the more popular forms of permanent life insurance
the company credits your cash account based on the performance of a relatively conservative
investment portfolio. Other types, such as variable life insurance, increase your potential growth
(as well as your risk) by allowing you the choice of investing in a basket of stock, bond
and money market funds.
The money in your cash/investment account grows on a tax-deferred basis. So unlike ordinary
investment or savings accounts, you dont have to pay any tax on investment gains until the
funds are actually withdrawn. As a result, you dont have that drag on your earnings that taxable
accounts bring with them.
These policies also offer a certain degree of flexibility. For example, if your cash balance is high
enough, you can take out tax-free loans to pay for unexpected needs. As long as you pay yourself
back including interest your full death benefit remains intact.
Insurance: The Cons
But life-insurance-as-investment strategy has its downsides, too. Not least of them are the hefty
fees that often accompany such policies. With many plans, roughly half of the premiums you
pony up in year one pay the commission for the sales rep. As a result, it takes a while for the
savings component of your policy, also known as its cash-surrender value, to start gaining
traction.

On top of the upfront costs, you face yearly charges for administrative and management fees,
which can counteract the benefits of your funds' tax-sheltered growth. Often, its not even clear
what the exact fees are, making it hard to compare providers.
Its also worth pointing out that many policies lapse within the first few years because the sizable
premium payments become just too steep for policyholders to maintain. As a result, these
individuals may see little, if any, return on their investment.
Insurance: The Best Strategy
Quoting the adage, "Buy term and invest the rest," many fee-based financial planners
recommend that investors purchase a lower-cost term policy for insurance coverage and use "the
rest" that is, the additional amount that a permanent life premium would've cost to fund a tax-
advantaged plan such as a 401(k) or IRA. Most of the time, youll face dramatically lower
investment fees this way, while still enjoying tax-deferred growth in your accounts.
However, if youve already maximized your contribution to these tax-advantaged accounts, cash-
value policies might start to make sense. Even then, youll be better if you select a low-fee
provider and have a long timeframe to let your cash balance grow.
In addition, high net worth individuals sometimes put a cash-value policy inside an irrevocable
life insurance trust in order to reduce estate taxes. Technically, the trust pays the premiums not
you so the policy isnt considered part of your estate when you die. Considering that the top
federal estate tax rate in 2015 is 40%, beneficiaries usually end up with a much bigger
inheritance this way. For more, see 7 Reasons To Own Life Insurance in an Irrevocable Trust.
Annuities: The Pros
Most of us hope to live until a ripe old age, but longevity can have perils. Among them is the risk
of outliving your money.
Annuities were developed to help mitigate that concern. Basically, an annuity is a contract with
an insurer whereby you agree to pay the company a certain amount, either in a lump sum or
through installments. In turn, it makes a series of payments to you now or at some future date.

Sometimes those payments last for a specific time period say, 10 years. But many annuities
offer lifetime disbursements. As a result, the fear of exhausting your assets starts to subside.
As with permanent life insurance policies, the number of annuity products has exploded over the
years. Now, you can choose between fixed contracts that credit your account at a guaranteed
rate and variable annuities, in which returns are pegged to a basket of stock and bond funds.
Theres even an indexed annuity, where the performance of your account is tied to a specific
benchmark, like the S&P 500. For more details, see Variable Annuities with Guaranteed Income
Options.
Annuities: The Cons
Unfortunately, the same problems that often come with permanent life insurance policies also
hold true for annuities. For instance, if you sign a contract with a traditional insurance company,
you can expect to pay a big upfront commission fee thatll cut into your long-term gains.
Perhaps even more troubling are the surrender fees that can tie up your funds for as long as 10
years. The numbers vary from one provider to the next, but its not unusual to take a 7% hit on
any excess distributions you take during the first couple years of the contract.
Another concern is the tax treatment. Sure, your earnings grow on a tax-deferred basis. But once
you start withdrawing funds you can do so penalty-free when you are age 59 any gains are
subject to ordinary income tax rates. If you had bought stocks and bonds instead, youd be taxed
at a more favorable capital gains rate.
Deferred: This is an investment product that accumulates money until a future payment. Most
annuity articles and advertisements seem to be talking about deferred annuities. There are several
types, including:
ypes of Annuity
Fixed based on interest rate that is initially fixed and then may vary.
Equity-indexed based on the stock market, with a guaranteed minimum rate.
Variable based on accounts invested in stocks and bonds.

You may decide that the best way is to use a combination of both of these by managing your
own retirement fund until the time seems right to convert some of your fund into an annuity.
Here are some general guidelines to help you understand how people decide if they need them.
Immediate Annuities: They May be Right for You If:
You have retirement expenses not covered by monthly pension and Social Security benefits. An
annuity can guarantee a regular monthly payment for the rest of your life. If you have a large
income to pay all your expenses, you may not need an annuity.
You have every expectation of living a long life. Most of us dont know and can only make our
plans based on reasonable expectations. If you know (not think) that you wont live for many
years, you may want to spend the lump sum instead.
You want the certainty of knowing you wont outlive your means. An annuity is the best way to
be certain you will get payments for the rest of your life, no matter how long you live. Some
people worry they will die early. An alternative is to get an annuity that is guaranteed to pay
benefits for at least 5 or 10 years, even if you die before then. You may be able to make more
money in the stock market, but you may not. If you can live with the uncertainty, you can just
time the withdrawals from your investments.
The money you would use to buy an annuity is for retirement, not for your heirs. The more
money you leave in the pension plan or use to buy an annuity, the less you have to pass on to
your children. Annuities generally dont pay death benefits. However, if you kept your money in
a lump sum and made periodic withdrawals, and then live for a very long time, your heirs
wouldnt get anything anyhow.
You have money set aside or figured in your annual expenses for other items. Long-term care
insurance, Medigap insurance, prescription drugs or other unexpected costs. Some people worry
about having a lot of money tied up in an annuity.
As you get older, you want to take fewer risks with your money. Some financial advisors and
insurance agents may say they can do better for you than an immediate annuity. Make sure you
understand the risks involved and how they are paid. A financial advisor should provide you with
a plan, and you should be comfortable with the risks and the costs.
When Should I Buy an Annuity? Some people suggest that you wait until you are between ages
70 and 80 to buy your annuity, because you get a better deal from the insurance company. Just

make sure you dont take out too much money before then. Financial advisors suggest if you are
in your 60's, you can withdraw around 5% of your assets, and in your 70's, about 6%.
What Should I Consider When Choosing an Annuity? The two main criteria for comparing the
companies are price and safety. You will want the best price among the safest companies. To
find out which companies are safe, ask them for their credit rating. You will probably only want
to use companies with the top rating. Check the Annuity Shopper, available for free on their web
site www.annuityshopper.com. If an insurance company goes under, state insurance guarantee
funds may continue to pay your annuity up to the states maximum amount. Second, ask them
how much the annuity you need will cost and choose the cheapest annuity price.
How Much Annuity do I Need?

1. Estimate your annual expenses in retirement. Remember that some of your expenses will go
down. You wont have to pay Social Security taxes, you wont need to pay work-related
expenses and you probably wont need to save. However, be prepared for some expenses to go
up especially your health care expenses.
2. Subtract your annual Social Security benefit from your estimated annual expenses.
3. Subtract your pension benefits.
4. If you decide to buy an annuity, it should cover your expenses NOT covered by Social
Security and pension benefits.

Module 6: (10 Hours)

General Insurance-Laws Related to General Insurance-General Insurance Contract-General
Insurance Corporation(GIC)-Performance Private and Public General insurance companies.
Health Insurance-Individual Medical Expense Insurance Long Term Care Coverage
Disability Income Insurance Medi-claim Policy Group Medi-claim Policy Personal
Accident Policy Child Welfare Policy-Employee Group Insurance Features of Group Health
Insurance Group Availability Plan. Fire Insurance-Essentials of Fire Insurance Contracts,
Types of Fire Insurance Policies, Fire Insurance Coverage.
Marine Insurance-Types of Marine Insurance Marine Insurance principles Important Clauses
in Marine Insurance Marine Insurance Policies Marine Risks-Clauses in Marine Policy. Motor
Vehicles Insurance-Need for Motor Insurance, Types of Motor Insurance, Factors to be
considered for Premium Fixing.
General insurance is typically defined as any insurance that is not determined to be

life insurance. It is called property and casualtyinsurance in the U.S. and Canada and Non-
Life Insurance in Continental Europe.
Various legislations and acts influencing transaction of general insurance business in India
and also loss minimization and risk management :
The Aircraft Act, 1934 : To make better provision for the control of the manufacture,
possession, use, operation, sale, import and export of aircraft.
Aircraft Rules, 1937 : The Rules extend to the whole of India and apply to (i) aircrafts
(including persons on board) registered in India, wherever they may be, and to (ii) all
aircrafts (including person on board) for the time being in or over India. However, the
regulations relating to registration, licensing of personnel, airworthiness and log-books
provided in the Rules do not apply to foreign aircrafts which are governed by the relev-
ant regulations of the respective countries in which the aircraft are registered.
The Bill of Lading Act, 1855 : This Act defines the character of the bill of lading as an
evidence of the contract of carriage of goods between the shipowner and the shipper, as
an acknowledgement of the receipt of the goods on board the vessel and, as a

document of title. The bill of lading is one of the various documents required in
connection with settlement of marine cargo claims.
Carriage by Air Act, 1972 : The Act gives effect to the provisions of the Warsaw
Convention, 1929 and the Hague Protocol, 1955 relating to international carriage of
passengers and goods by air. The Act defines the liability of the air carrier for death of or
injury to passengers and for loss of or damage to registered luggage and cargo. The
provisions of the Act also apply, with some changes, to domestic carriage, i.e, carriage
within India.
Carriage of Goods by Sea Act, 1925 : This act defines the minimum rights, liabilities
and immunities of a shipping Co. in respect of loss or damage to cargo carried.
The Carriers Act, 1865 : This Act defines the rights and liabilities of truck-owners or
operators who carry goods on public hire, in respect of loss or damage to goods carried
by them. The Act also prescribes the time limit within which notice of loss or damage
must be filed with the road carriers.
Employees State Insurance Act, 1948 (ESI) : This is an Act to provide for certain
benefits to employees in cases of sickness, maternity and employment injury and to
make provision for certain other matters in relation thereof. Under the Act, the
Employees State Insurance Corporation has been set up to administer the insurance
Scheme. The scheme is applicable to industrial employees as defined.
Foreign Exchange Regulation Act, 1973 (FERA) : Exchange control regulations
governing general insurance business written in India are set out in a Memorandum
which is issued by the Reserve Bank of India under Sec. 73(3) of the Foreign Exchange
Regulation Act.
General Insurance Business (Nationalization) Act, 1972 : This Act came into force on
1st January, 1973 with the following objectives :
To provide for the acquisition and transfer of shares of Indian Insurance companies and
undertakings of other existing insurers.
To serve better the needs of the economy by securing the development of general
insurance business in the best interest of the community.
To ensure that the and activities of the economic system does not result in concentration
of wealth to the detriment of common interest.

For the regulation and control of such business and for matters connected therewith or
incidental thereto.
Note: The transactions of general insurance business in India is governed by and is
subject to this Act.
Indian Arbitration Act, 1940 : Disputes regarding insurance claims relating to the
amounts payable under the policy are settled through the process of arbitration provided
in this Arbitration Act.
Indian Boiler Act, 1923: The manufacturing, supply, operation, registration of Boilers
in India are governed by this Act.
Indian Contract Act, 1872: To codify laws of contract.
Indian Factories Act, 1948: This Act defines Factory and provides for regulations for
governing factories. This Act also provides for various provisions of safety for various
types of machinery, plant etc. in factories.
Indian Mines Act, 1952 : Similar to Factories Act, defines mines and provides for
regulations to ensure safety and security in mines.
Indian Ports (Major Ports) Act, 1963 : This Act defines the liability of Port Trust
authorities for loss of or damage to goods whilst in their custody and prescribes time
limits for filing monetary claim on, or suit against the Port Trust authorities.
Indian Post Office Act, 1898 : This Act defines the liability of the Government for loss,
misdelivery, delay of or damage to any postal article in course of transit by post.
Indian Railways Act, 1890 : The Act deals with various aspects of Railways
administration also relevant to Marine Insurance practice as it deals with the
responsibility of Railways administration as carriers.
Indian Stamp Act, 1899 : The Act provides that a policy of Insurance be stamped in
accordance with the schedule of rates prescribed.
Inland Steam-Vessels Act, 1917 : The Inland Steam-Vessels Act, 1917 as amended in
1977, provides for the application of the provisions of Chapter VIII of the Motor
Vehicles Act, 1939 in relation to insurance of mechanically propelled vessels against
third party risks. The Act makes it compulsory for owners or operators of inland vessels
to insure against legal liability for death or bodily injury of third parties or of passengers

carried for hire or reward and for damage to property of third parties. The limits of
liability are also prescribed.
Insurance Act, 1938: The Act applies to the General Insurance Corporation of India
and the four Subsidiary companies subject to exceptions, restrictions and limitations as
specified by the Central Government under powers conferred by Section 35 of the
General Insurance Business (Nationalization) Act. The important provisions of the Act
relate, among other things, to registrations, accounts and returns, investments, limitations
in expenses of Management, prohibition of rebates, powers of investigation, licensing
of agents, licensing of surveyors, advance payment of premium and Tariff Advisory
Committee etc.
Marine Insurance Act, 1963: This Act codifies the law relating to Marine Insurance.
With a few exceptions this Act closely follows the UK Marine Insurance Act, 1906.
Motor Vehicles Act, 1939: Chapter VIII provides for compulsory insurance of motor
vehicles. According to this Act, no motor vehicle can be used in public places unless
there is, in force, in relation to that vehicle, a policy of insurance issued by an authorized
insurer.
Motor Vehicles Act, 1988: The Motor Vehicles (Amendment) Act, 1988 has introduced
changes which have far-reaching consequences. The changes also affect Third Party
Liability arising out of the use of the Motor Vehicles in a public place.
General Insurance Contract

Man has always been in search of security and protection from the beginning of civilization. The
urge in him lead to the concept of insurance. The basis of insurance was the sharing of the losses
of a few amongst many. Insurance provides financial stability and strength to the individuals and
organization by the distribution of loss of a few among many by building up a fund over a period
of time.
Definition of Insurance
The term insurance has been defined by different experts on the subject. The views expressed by
them through various definitions can be classified in to the following three categories for the
convenience of the study.

A. General Definitions
B. Functional Definitions
C. Contractual Definitions
Regrettably, the Indian insurance industry has lagged behind even amongst the developing
countries of the world. Although general insurance services started in India about 150 years ago,
their growth has been dilatory, as reflected by low insurance penetration and density. Several
factors are responsible for this state of affairs, the chief being the monopoly status of the industry
till recently. The life insurance business was nationalized in 1956 and the general insurance
industry in 1973. The lack of competition has impeded the development of insurance industry in
India, resulting in low productivity and poor quality of customer services.
The process of liberalization and globalization of the Indian economy started in right earnest in
mid-1980s. The market mechanism was the motivating factor underlying the new economic
policy. In consonance with the new economic policy, insurance sector was opened up for the
private sector in 1999. The new competitive environment is expected to benefit the consumers,
industry and the economy at large. The consumer will have a greater choice in terms of number
and quality of products, low premium rates, efficient after sales services while the economy will
benefit in terms of larger flow of savings, increased availability of investible funds for longterm
projects, enhanced productivity and growth of multiple debt instruments.
NATURE AND CHARACTRISTIC OF INSURANCE

Insurance follows important characteristics These are follows
1) SHARING OF RISK
Insurance is a co-operative device to share the burden of risk, which may fall on happening of
some unforeseen events, such as the death of head of family or on happening of marine perils or
loss of by fire.
2) CO-OPERATIVE DEVICE
Insurance is a co-operative form of distributing a certain risk over a group of persons who are
exposed to it (Ghosh & Agarwal). A large number of persons share the losses arising from a
particular risk.
3) LARGE NUMBER OF INSURED PERSONS

The success of insurance business depends on the large number of persons insured against
similar risk. This will enable the insurer to spread the losses of risk among large number of
persons, thus keeping the premium rate at the minimum.
4) EVALUATION OF RISK
For the purpose of ascertaining the insurance premium, the volume of risk is evaluated, which
forms the basis of insurance contract.
5) AMOUNT OF PAYMENT
The amount of payment in indemnity insurance depends on the nature of losses occurred, subject
to a maximum of the sum insured. In life insurance, however, a fixed amount is paid on the
appening of some uncertain event or on the maturity of the policy.
6) PAYMENT OF HAPPENING OF SPECIFIED EVENT
On happening of specified event, the insurance company is bound to make payment to the
insured. Happening of specified event is certain in life insurance, but in the case of fire, marine
of accidental insurance, it is not necessary. In such cases, the insurer is not liable for payment of
indemnity.
7) TRANSFER OF RISK
Insurance is a plan in which the insured transfers his risk on the insurer. This may be the reason
that may erson observes, that insurance is a device to transfer some economic losses would have
been borne by the insured themselves.
8) SPEADING OF RISK
Insurance is a plan which spread the risk & losses of few people among a large number of
people. John Magee writes, Insurance is a plan by which large number of people associates
themselves and transfers to the shoulders of all, risk attached to individuals.
9) PROTECTION AGAINST RISKS
Insurance provides protection against risk involved in life, materials and property. It is a device
to avoid or reduce risks.
10) INSURANCE IS NOT CHARITY
Charity pays without consideration but in the case of insurance, premium is paid by the insured
to the insurer in consideration of future payment.
11) INSURANCE IS NOT A GAMBLING

Insurance is not a gambling. Gambling is illegal, which gives gain to one party and loss to other.
Insurance is a valid contact to indemnity against losses. Moreover, insurable interest is present in
insurance contracts it has the element of investment also.
12) A CONTRACT
Insurance is a legal contract between the insurer and insured under which the insurer promises to
compensate the insured financially within the scope of insurance policy, the insured promises to
pay a fixed rate of premium to the insurer.
13) SOCIAL DEVICE
Insurance is a plan of social welfare and protection of interest of the people. Rieged and Miller
observe Insurance is of social nature.
14) BASED UPON CERTAIN PRINCIPLE
Insurance is a contract based upon certain fundamental principles of insurance, which includes
utmost good faith, insurable interest, contribution, indemnity, cause proxima, subrogation etc,
which are operating in the various fields of insurance.
15) REGULATION UNDER THE LAW
The government of every country enacts the law governing insurance business so as to regulate,
and control its activities for the interest of the people. In India General Insurance Act 1972 and
the Life Insurance Act 1956 are the major enactment in this direction.
16) WIDE SCOPE
The scope insurance is much wider and extensive various types of policies have been developed
in the country against risk of fire, marine, accident, theft, burglary, life, etc.
17) INSTITUTIONAL SETUP
After nationalisation, the insurance business in the country is operation under statutory
organization setup. In India, the General Insurance Companies and the Life Insurance
Corporation and subsidiary companies of General Insurance Corporation are operating the
various fields of insurance.
18) INSURANCE FOR PURE RISK ONLY
Pure risks give only losses to the insured, and no profits. Examples of pure risks are accident,
misfortune, death, fire, injury, etc., which are all the sided risks and the ultimate results in loss.
Insurance Companies issue policies against pure risk only, not against speculative risks.
Speculative risk have chances of profit of losses.

19) BASED ON MUTUAL GOODWILL

Insurance is a contract based on good faith between the parties. Therefore, both the parties are
bound to disclose the important facts affecting to the contract before each other. Utmost good
faith is on of the important principles of insurance.
1.8 IMPORTANCE OF INSURANCE
As the industrial revolution comes with cutthroat competition, the chances of uncertainty are also
increasing day by day. Insurance plays significant role for not only an individual or for not only
an individual or for a family but it has spread over the entire nervous system of the nation.
According to the famous philosopher J. Royce, Insurance Principles comes to be more and more
used and useful in modern affairs. Not only does is serve the ends of individuals, it tends more
and more both to pervade and transform our modern social order. It brings into now sythesis, not
merely pure and applied sciences, but private and public interests, individual prudence and a
large regard for. The general welfare theft and charity.
One famous author named Dinsdale also explains the importance of insurance as under.
No one in modern world can afford to be without insurance. Insurance provides various
advantages to various fields. One can classify the importance as under.
GENERAL INSURANCE PUBLIC SECTOR ASSOCIATION OF INDIA (GIPSA).
GIPSA was formed on May 2002. Four units of General Insurance Co. Ltd.
a. New India Insurance Co. Ltd.
b. National Insurance Co. Ltd.
c. United Insurance Co. Ltd.
d. Oriental Insurance Co. Ltd.
e. Above four companies are followers of general insurance public sector association of India in
terms of administration and the matter they are concerning to wages decided by GIPSA.
Otherwise all four units have their own board of directors and also they are corporate units. All
the above insurance companies have their individual corporate body.
1.17.1 FUNCTIONS OF GIPSA -
a. The carrying of any part of the general insurance business if it thinks it desirable to do so.
b. Aliding, assisting and advising the companies in the matter of setting up standards of conduct
and sound practice in general insurance business and in rendering efficent service to policy
holder.

c. Advising the companies in the matter of controlling their expences and investment of funds.
d. Issuing direction to companies in relation to the conduct general insurance business.
Performance Private and Public General insurance companies
It can be said that the insurance industry as a whole has recorded profound growth after
liberalization and privatization of the sector, though the reforms have adversely affected the
underwriting results of all the public sector general insurance companies, thanks to their increase
in expense ratio and claim ratio in the post-reform period. In the post-reform period, the
comparative profitability analysis of the public and private sectors reveals that the public sector
general insurance companies have exhibited higher underwriting losses than the private sector
companies but the higher investment income of the public sector has compensated their higher
underwriting losses which resulted into their higher profitability than the private sector general
insurance companies. The liberalization process and the competitive environment acted as a
catalyst in the general insurance sector and inculcated efficiency in most of the public insurers
and made them more efficient as compared to their private competitors, though private players
are reducing the gap very fast by providing better service quality to their customers. The latest
market share figures indicate that in such a short span of time, private players have captured
market share to the extent of forty-one per cent, which is an eye opener. It is high time for the
public insurers to completely reorganize their business model and service delivery to survive in
the market.
Health Insurance
FEATURES/COVERAGES OF HEALTH INSURANCE POLICY
Any health insurance policy should cover the following the expenses:
1) The policy should provide for reimbursement of hospitalisation / domiciliary hospitalisation
expenses for illness/disease suffered or accidental injury sustained during the policy period.
Hospital/Nursing Home: It means any institution in India established for indoor care and
treatment of sickness and injuries, which
Has been registered either as a hospital or nursing home with the local authorities and is under
the supervision of a registered and qualified medical practitioner.
Should comply with the minimum criteria as under:
a) It should be equipped with atleast 15 in-patient beds.

b) Fully equipped operation theatre of its own where the surgical operations are carried out.
c) Availbility of fully qualified nursing staff round the clock. Fully qualified doctor(s) should be
in charge round the clock.
The term Hospital / Nursing Home shall not include an establishment which is a place of rest, a
place for the aged, a place for drug addicts or place for alcoholics, a hotel or a similar place.
Domiciliary Hospitalisation Benefit means medical treatment for a period exceeding three days
for such illness / injury which in the normal course would require treatment at the hospital /
nursing home but actually taken whilst confined at home in India under any of the following
circumstances namely:-
(i) The condition of the patient is such that he / she cannot be removed to the hospital
/ nursing home or
(ii) (ii) The patient cannot be removed to hospital / nursing home due to lack of
accommodation therein.
2) The policy should pay during the period of insurance maximum up to the sum insured for
expenses incurred under the following heads:
(a) Room, Boarding Expenses in the Hospital / Nursing Home
(b) Nursing Expenses
(c) Surgeon, Anesthetist, Medical Practitioner, Consultants. Specialist fees
(d) Anesthesia, Blood, Oxygen, Operation Theatre
Charges, Surgical Appliances, Medicines and Drugs, Diagnostic Materials, and X-Ray, Dialysis,
Chemotherapy, Radiotherapy, Cost of Pacemaker, Artificial Limbs and Cost of organs and
similar expenses
3) Reimbursement is allowed only when treatment is taken in a hospital or nursing home which
satisfies the criteria specified in the policy.
4) Expenses on hospitalisation for minimum period of 24 hours are admissible. However, this
time limit is not applied to specific treatment i.e. Dialysis, Chemotherapy, Radiotherapy, Eye
Surgery, Dental Surgery, Lithography (Kidney stone removal), D&C, Tonsillectomy taken in the
hospital / nursing home and the insured is discharged on the same day ; the treatment will be
considered to be taken under hospitalisation benefit.
5) Relevant medical expenses incurred prior to up to certain period, say 30 days and after
hospitalization up to certain period, say 60 days, are treated as part of the claim.

6) Any one illness means continuous period of illness and it includes relapse within 105 days
from the day of last consultation with the Hospital/Nursing Home where treatment may have
been taken. Occurrence of same illness after a lapse of 105 days will be considered as fresh
illness for the purpose of this policy.
7) The policy does not cover some disease i.e Asthma, Bronchitis,Chronic Nephritis Diarrhea
and all type of Dysenteries including Gastroenteritis, Diabetes Mellitus and Insipid us, Epilepsy,
Hypertension, Influenza, Cough and cold, All psychiatric or Psychosomatic Disorders Pyrexia of
unknown origin for less than 10 days, Tonsillitis and upper respiratory Tract infection including
Laryngitis and Pharyngitis, Arthritis, Gout and Rheumatism
5.3 EXCLUSIONS THAT THE HEALTH INSURANCE POLICY DOES NOT COVER
a) All diseases / injuries which are pre-existing when the cover incepts for the first time.
b) Any disease other than those stated in clause (c) below contracted by the insured person
during the first 30 days from the commencement date of the policy. This exclusion shall not,
however, apply if in the opinion of Panel of Medical Practitioners constituted by the company for
the purpose, the insured person could not have known of the existence of the disease or any
symptoms or complaints thereof at the time of making the proposal for insurance to the
company. This condition shall not however apply in case of the insured person have been
covered under this scheme or group insurance scheme with any of the Indian Insurance
Companies for a continuous period of preceding 12 months without any break.
c) During the first or more years of the operation of the policy the expenses on treatment of
diseases such as Cataract, Benign Prostates Hypertrophy, Hysterectomy for Menorrhagia or
Fibromyoma, Hernia, Hydrocele, Congenital Internal Disease, Fistula in anus. Piles,Sinusitis and
related disorders. If these diseases are preexisting at the time of proposal they will not be covered
even during subsequent period of renewal.
d) Circumcision unless necessary for treatment of a disease not excluded hereunder or as may be
necessitated due to an accident, vaccination or inoculation or change of life or cosmetic or
aesthetic treatment of any description, plastic surgery other than as may be necessitated due to
an accident or as a part of any illness.
e) Cost of spectacles and contact lenses, hearing aids. (These may be termed as normal
maintenance expenses.)
f) Dental treatment or surgery of any kind unless requiring hospitalisation.

g) Convalescence, general debility, run down condition or rest cure, congenital external disease,
or defects or anomalies, sterility, venereal disease, intentional self injury and use of intoxicating
drugs / alcohol.
h) Various conditions commonly referred to as AIDS.
i) Charges incurred at hospital or nursing home primarily for diagnostic. X-Ray or laboratory
examinations or other diagnostic studies not consistent with the positive existence or presence of
any ailment, sickness or injury for which confinement is required at a Hospital / Nursing Home
or at Home under Domiciliary Hospitalisation as defined.
j) Expenses on vitamins and tonics unless forming part of treatment.
k) Treatment arising from childbirth including Caesarean section (can be deleted, if maternity
benefit is covered).
l) Voluntary medical termination of pregnancy (abortion) during the first 12 weeks from the date
of conception.
m) Naturopathy treatment.
5.4 PROCEDURE TO BE FOLLOWED FOR BUYING HEALTH INSURANCE
POLICY:
1) Filling of proposal form: The proposal form will contain the personal information of the
person like name, address, age, occupation, sum insured etc. and two photographs of an
individual is to be enclosed.
2) Declaration of good health/medical questionnaire: A person should give a declaration of
his good health. In case of adverse health then he should submit the certificate from the doctor.
3) Medical examination report: It is required from the doctor, who is having the qualification
of MD, if the age of person is more than 45 years. It is must even if the person is possessing
good health.
4) Payment: The premium is paid through cheque to get the tax benefit under Income Tax Act,
1961.
5) Issue of Policy documents: The policy document is issued once above mentioned
information/documents submitted.
6) Issue of Photo Card by Third Party Administrator (TPA):
After issuing the policy documents, the TPA will issue the photo identity card for each person
which will help to get the treatment in the hospital on cashless basis. TPA are licensed by the

IRDA who will settle the health insurance claims on behalf of the insurance companies. TPAs
have empanelled various hospitals on all India basis who will provide the health treatment on
cashless basis meaning thereby, that the policyholder will not pay any amount to the hospital and
the hospital will get the payment directly from the TPA up to the sum insured of a person. If
some insured is not sufficient to meet the bill of the hospital then the excess amount will be paid
by the policyholder.
5.5 MISCELLANEOUS CONDITIONS/BENEFITS
a) Age Limit: This insurance is available to persons between the age of 5 years to 80 years.
Children between the age of 3 months to 5 years can be covered provided one or both parents are
covered concurrently.
b) Family Discount: This discount of 10% in the total premium is allowed to a family
comprising the insured and any one or more of the following:
i) Spouse
ii) Dependent children (i.e. legitimate or legally adopted)
iii) Dependent parents
c) Cumulative Bonus: The sum insured is increased by certain percentage, say 5% for each
claim from the year of insurance subject to a maximum accumulation of 10 years. In the event of
a claim, the increased percentage will be reduced to a certain percentage, say the double of
the bonus rate by 10% of the sum insured at the next renewal but the basic sum insured will
remain the same. Some companies do not allow this cumulative bonus but instead of this allow a
discount in the premium on the next renewal if no claim is reported during the currency of the
previous policy.
d) Cost of Health Checkup: The insured shall be entitled to reimbursement of medical check
up, generally once in every four underwriting years, subject to no claim preferred during this
period. The cost shall not exceed 1% of the average sum insured during the block of four years.
e) Extension of Cover: The health cover is available for Indian Territories but it can be extended
to Nepal and Bhutan with prior permission.
5.6 CLAIM SETTLEMENT PROCEDURE
If any claim arises in health insurance policy, the same can be settled in any of the following
ways:
1. Reimbursement of expenses.

2. Cashless facility for planned hospitalization

3. Cashless facility for emergency hospitalization
1. Reimbursement of expenses: If a policyholder falls sick and hospitalized in non-empanelled
hospital then he should follow the following procedure:
Intimation to the insurer/ Third Party Administrator (TPA) along with the name of the person
who has fallen sick
Policy number
Name of the hospital
Name of the doctor
The above information should be sent within 7 days of the hospitalization. Within 30 days final
claim form should be furnished along with the following documents:
Hospital receipts/ original bills.
Cash memos.
Various reports and tests.
Hospital admission and discharge slip.
Case history.
Any other documents desired by TPA or hospital.
Note: Kindly ensure that insured person has been amitted to a hospital/nursing home as defined
in the policy.
2. Cashless facility for planned hospitalization:
The expected expenses to be incurred should be sent to TPA through the agreed list of
network hospital
Policy no. & card number should be shown to the hospital
On confirmation from the TPA the treatment can be taken in that hospital.
If expenses increase during the treatment then the hospital will sent revised estimate to the
TPA for their approval.
For any pos t hospitalization treatment the originalbills/cash memos can be sent to the TPA
after completing the treatment for the reimbursement.
3. Cashless facility for emergent hospitalization
A card issued by the insurer should be shown to the hospital.
The expected expenses may sent to the TPA for their approval.

For any post hospitalization treatment the original bills/cash memo can be sent to the TPA
after completing the treatment for the reimbursement.
TYPES OF HEALTH INSURANCE POLICY

a) Floater Health Insurance Policy: It means that a single sum insured will be available for all
family members. For example, a family consists of self, spouse and two children purchases
health insurance of Rs 1.00 lakh. Under the floater policy, any family member can avail the
medical claim of Rs 1.00 lakh. The coverage and other terms & conditions are the same as are
explained above in para 5.1 to 5.3. The premium will be applicable to the highest aged member
of the family.
b) Critical Illness Insurance Policy: Critical illness insurance or critical illness cover is an
insurance product, where the insurer is contracted to typically make a lump sum cash payment if
the policyholder is diagnosed with one of the critical illnesses listed in the insurance policy.
The policy may also be structured to pay out regular income and the payment may also be on the
policyholder undergoing a surgical procedure, for example, having a heart bypass operation.
The contract terms contain specific rules that define when a diagnosis of a critical illness is
considered valid. It may state that the diagnosis need be made by a physician who specializes in
that illness or condition, or it may name specific tests, e.g. EKG changes of a myocardial
infarction, that confirm the diagnosis.
c) Group Health Insurance Policy: The Group Health Insurance Policy is available to any
Group / Association / Institution / Corporate body of more provided it has a central
administration point and subject to a minimum number of persons to be covered. The group
policy is issued in the name of the Group / Association / Institution / Corporate Body (called
insured) with a schedule of names of the members including his/her eligible family members
(called insured persons) forming part of the policy. The details of insured person is required to
furnish a complete list of Insured Persons in the prescribed format according to sum insured.
Any additions and deletions during the currency of the policy should be intimated to the
company in the same format. However, such additions and deletions will be incorporated in the
policy from the first day of the following month subject to pro-rata premium adjustment. No
change of sum insured for any insured person will be permitted during the currency of the policy.

No refund of premium is allowed for deletion of insured person if he or she has recovered a
claim under the policy. The coverage under the policy is the same as under Individual Mediclaim
Policy with the following differences:-
a) Cumulative bonus and Health Check up expense are not payable.
b) Group discount in the premium is available
c) Renewal premium is subject to claims made during the previous policy.
d) Maternity benefit extension is available at extra premium. Option for maternity benefits has to
be exercised at the inception of the policy period and no refund is allowable in case of insured
cancellation of this option during currency of the policy. A waiting period of 9 months is
applicable for payment of any claim relating to normal delivery or caesarean section or
abdominal operation for extra uterine pregnancy.
The waiting period may be relaxed only in case of delivery , miscarriage, or abortion induced by
accidentor other medical emergency. Claim in respect of delivery for only first two children will
be considered in respect of any one insured person. Those insured persons who already have two
or more living children will not be eligible for this benefit. Expenses incurred in connection with
voluntary medical termination of pregnancy during the first 12 weeks from the date of
conception are not covered.
d) Overseas Medical Policy:
This policy was originally introduced in 1984 to provide for payment of medical expenses in
respect of illness suffered or accident sustained by Indian residents during their overseas trips for
official or holiday purpose. The insurance scheme, since 1984 has been modified from time to
time to provide for additional benefits such as in-flight personal accident, loss of passport etc. In
1991,
Employment and Study Policy was introduced. This policy is meant for Indian citizens
temporarily working or studying abroad.
Eligibility:
(a) Indian Residents undertaking bonafide trips abroad for:
(i) Business and official purposes.
(ii) Holiday purpose
(iii) Accompanying spouse and children of the person who is going abroad will be treated as
going under holiday travel.

(iv) Foreign Nationals working in India for Indian employers of Multi-National Organisation
getting their salary in Indian Rupees, covering their official visits abroad provided they are
undertaken on behalf of their employers.
Age Limit:
(a) For adults upto 70 years
(b) Cover beyond 70 years is permissible at extra premium.
(c) Children between the age of 6 months to 5 years are covered by excluding certain specific
children diseases.
Period of Insurance
The Insurance is valid from the first day of insurance and expires on the last day of the number
of days specified in the policy schedule or on return to India whichever is earlier.
Extension of the period of insurance is automatic for the period not exceeding 7 days, and
without extra charge, if necessitated by delay of public transport services beyond the control of
the insured person.
COVERAGE Section A - Personal Accident
This insurance will pay upto the limit as shown in the Schedule if the insured person sustains
accidental bodily injury and such bodily injury within 12 months of the date of the injury
is the sole and direct cause of death or loss of eye(s) or limb(s).
Not more than US $ 2,000 is payable in respect of death if the insured persons age is under 16.
Section B - Medical Expenses and Repatriation
This insurance will pay up to the limit shown in the Schedule in total for the insured person in
respect of covered medical related expenses, incurred outside the Republic of India by the
insured person suffering bodily injury, sickness, disease or death during the period of insurance.
Covered Expenses:
(a) Expenses for physician services, hospital and medical services and local emergency medical
transportation (b) Upto US $ 225 per occurrence, in case of dental services for the immediate
relief of dental pain only. However, dental care necessary as a result of a covered accident shall
be subject to the limit of cover and deductible.
(c) Expenses for physician ordered for emergency medical evacuation, including medically
appropriate transportation and necessary medical care enroute, to the nearest hospital when the
insured person is critically ill or injured and no suitable local care is available.

(d) Expenses for medical evacuation, including transportation and medical care enroute to a
hospital in India or the insured persons normal place of residence in India when deemed
medically advisable by the Medical Advisors and the attending physician.
(e) If the insured person dies outside India, the expenses for preparing the air transportation of
the remains for repatriation to India or up to an equivalent amount for a local burial or cremation
in the country where the death occurred.
Specific Conditions
a) No claim will be paid in respect of
(i) expenses for treatment which could reasonably be delayed until the Insured Persons return to
the Republic of India. The question of what can or what cannot be reasonably delayed will be
decided jointly by the treating physician and the Medical Advisors.
(ii) cosmetic surgery unless necessary as a result of a covered accident.
(iii) routine physical examination or any other examination where there is no objective indication
of impairment of normal health.
b) The insurance will not cover pregnancy of the Insured, Person including resulting childbirth,
miscarriage abortion or complication of any of these.
c) Restricted Cover: In the event that the proposer is unable to present himself or herself for
medical examination where called for by the Insurance Company, the limit of indemnity under
this insurance is reduced to US $ 10,000 in respect of and limited to the expenses for physician.
Employment and Study Policy

The policy is designed for Indian citizens temporarily posted abroad in a sedentary non-manual
work or students pursuing studies or engaging in research activities abroad.
The salient features of the Scheme are:
Age limit: 18 to 60 years
Limit of Liability : U.S. $ 75,000/- any one insured person and in all any one period of
insurance.
Premium : The premium for the policies issued to the executives of corporate clients for
employment purposes will be paid in foreign currency and the premium for students going
abroad for higher studies will be paid in Indian Rupees. The premium varies according to the age

group 18-40 and 41- 60 and the type of plan. The same rate applies to accompanying spouse but
a lower rate is charged for child under 18 years.
For students premium varies according to the type of plan.
The benefits are divided into 2 sections :
Section I:
SubSection A:
Medical Expenses incurred in respect of disease / injury contracted / sustained during the policy
period limited to maximum liability
(I) under the policy
(II) 52 weeks after the onset of injury / sickness
(III) 12 weeks after the expiration date of the insurance SubSection B :
If the insured person is evacuated to India the insurers will pay medical expenses in India, as
provided under Sub-section A above in addition but within the overall limit of US $ 75,000.
SubSection C:
Repatriation and Alternative Expenses ; In the event of the death of an insured person, the
insurers will pay the actual expenses for preparation and transportation to India of the remains of
the insured person or funeral expenses incurred in the country of posting, not exceeding US $
8,000 in total.
SubSection D:
Medical Emergency Reunion Expenses upto US $ 5,000/-in all when as a result of a covered
injury or covered sickness insured person is hospitalized and it is agreed by all parties that the
insured person shall be medically evacuated to India as soon as possible, insurer will pay upon
the recommendation and prior approval of the claims administrator the following expenses
incurred in respect of travel by the mother or father or guardian or spouse.
a) The cost of an Economy Air Ticket for one person from India to the airport serving the area
where the Insured Person is hospitalized and returned to India.
b) Reasonable travel and accommodation expenses incurred in relation to Emergency Reunion.
Section II
Contingency Insurance - (Applicable to sponsored students only)
In the event that it is mutually agreed that the insured person is unable to continue completion of
his studies in the country of study (the details of which are declared in the proposal form) due to

covered injury or covered sickness first occurring in the country of study resulting in (a) Death or
(b) Loss of entire sight of either or both eyes, or (c) Permanent total disablement and is medically
evacuated under section I (B) above or a valid claim is payable under section I(C), this insurance
will pay by way of recompense a benefit to the nominated sponsor who has provided financial
support to the insured person as regard the insured period of study overseas and is declared in the
proposal form at a rate of US $ 750 capital sum for each month of study completed during the
period of insurance. In case the insured cannot continue to complete his course of studies due to
mental, nervous or emotional disorder, this benefit is limited to 25% of the amount due. But if
the educationalist running the insured person course consider that because his performance on
and his attitude to the studies were unsatisfactory, he is unable to complete his course of study no
benefit would be payable.
Fire Insurance
In this module we will explain various insurance polices related to non-life /general insurance.
Non-life /general insurance means the insurance of various tangible or non-tangible assets other
than human life. Even loss of human life or damage to human body due to accidents are covered
by general Insurance.
Thus, human life relates to life insurance and the belongings i.e. properties of human beings fall
under this category.
Though there are various general insurance policies but we will discuss only the following
important policies:
1. Fire Insurance
2. Marine Insurance (Transit)
3. Vehicle Insurance
4. Personal Accident Insurance
5. Health Insurance
6. Rural Insurance Policies
The above said policies are being sold only by general insurance companies and cannot be sold
by life insurance companies. This restriction is imposed only in India but not in other parts of the
world.

In India also, prior to nationalization, general insurance business was conducted by life insurance
companies also but after nationalization in 1972, consequent upon passing of the General
Insurance Business Nationalisation Act (GIBNA) General Insurance Corporation of India was
formed and was conferred the exclusive power to regulate and conduct the business of General
Insurance in India.
Since 1973 the GIC and its four subsidiary companies namely New India Assurance Co. Ltd.,
National Insurance Co. Ltd., Oriental Insurance Co. Ltd., and United India Insurance Co. Ltd.
had been the sole players in the field until the passing of the IRDA Act 1999 which allowed the
entry of private players. Over the past few years a few private players have entered the arena.
The new players have entered the General Insurance field but are playing cautiously. These are
still early days but the field is wide open, the future is bright and the customer is the one who
will be benefited the most by the growing competition. We hope to see international level of
service and products in the country soon and a multiple choice to select from.
At the end of this lesson, you will be able to:
Explain the meaning of fire insurance
Buy the fire insurance
Settle the claim under fire insurance
Know the practice of fire insurance in India.
Know what is not covered under fire insurance
In the following pages, we shall be discussing the Fire Insurance.
1.1 HISTORY OF FIRE INSURANCE
The development of fire Insurance can be traced back to 1601 A.D. when the Poor Relief Act
was passed in England. Vide this act, letters called briefs were read from the church asking
for collections from the public to help those who suffered losses from fire. There was a great fire
in Londona historical disaster in which within span of three days from 2nd to 5th Sept.1666,
80% of the city was destroyed which sowed the seeds of fire Insurance as we know it now.
First, only buildings were insured and the first fire office was established by a builder Nicholas
Barbon in 1680. In 1708, Charles Povey founded the Traders Exchange for insuring movable
goods, merchandise and stocks against loss or damage and this was the first to insure both the
building and its contents.

MEANING OF FIRE INSURANCE

The term fire in a fire insurance is interpreted in the literal and popular sense. There is fire when
something burns. In other words fire means visible flames or actual ignition.
Simmering/ smoldering is not considered fire in Fire Insurance. Fire produces heat and light but
either of them alone is not fire. Lightening is not a fire but if it ignites something, the damage
may be due to fire. Under section 2(6A) Insurance Act 1938, the fire insurance business is
defined as follows: Fire insurance business means the business of effecting, otherwise than
independently to some other class of business, contracts of insurance against loss by or incidental
to fire or other occurrence customarily included among the risks insured against in fire insurance
policies. Example: The following are the items which can be burnt/ damaged through fire:
Buildings
Electrical installation in buildings
Contents of buildings such as machinery, plant and equipments, accessories, etc.
Goods (raw materials, inprocess, semifinished, finished, packing materials, etc.) in
factories, godowns etc..
Goods in the open
Furniture, fixture and fittings
Pipelines (including contents) located inside or outside the compound, etc.
The owner of abovementioned properties can insure against fire damage through fire insurance
policy which provides financial protection for property against loss or damage by fire.
FEATURES OF FIRE INSURANCE:

(Dear learner, most of the features to be discussed in the following paragraphs of Fire Insurance
you must have studied under Principles of General Insurance in other module)
1) Offer & Acceptance : It is a prerequisite to any contract. Similarly, the property will be
insured under fire insurance policy after the offer is accepted by the insurance company.
Example: A proposal submitted to the insurance company along with premium on 1/1/2011 but
the insurance company accepted the proposal on 15/1/2011. The risk is covered from 15/1/2011
and any loss prior to this date will not be covered under fire insurance.

2) Payment of Premium: An owner must ensure that the premium is paid well in advance so
that the risk can be covered. If the payment is made through cheque and it is dishonored then the
coverage of risk will not exist. It is as per section 64VB of Insurance Act 1938. (Details under
insurance legislation Module).
3) Contract of Indemnity: Fire insurance is a contract of indemnity and the insurance company
is liable only to the extent of actual loss suffered. If there is no loss, there is no liability even if
there is fire. Example: If the property is insured for Rs 20 lakhs under fire insurance and it is
damaged by fire to the extent of Rs. 10 lakhs, then the insurance company will not pay more than
Rs. 10 lakhs.
4) Utmost Good Faith: The property owner must disclose all the relevant information to the
insurance company while insuring their property. The fire policy shall be voidable in the event of
misrepresentation, mis-description or non-disclosure of any material information. Example:
The use of building must be disclosed i.e whether the building is used for residential use or
manufacturing use, as in both the cases the premium rate will vary.
5) Insurable Interest: The fire insurance will be valid only if the person who is insuring the
property is owner or having insurable interest in that property. Such interest must exist at the
time when loss occurs. It is well known that insurable interest exists not only with the ownership
but also as a tenant or bailee or financier. Banks can also have the insurable interest. Example:
Mr. A is the owner of the building. He insured that building and later on sold the building to Mr.
B and the fire took place in the building. Mr. B will not get the compensation from the insurance
company because he has not taken the insurance policy being a owner of the property. After
selling to Mr. B, Mr. A has no insurable interest in the property.
6) Contribution: If a person insured his property with two insurance companies, then in case of
fire loss both the insurance companies will pay the loss to the owner proportionately. Example:
A property worth Rs. 50 lakhs was insured with two Insurance companies A and B. In case of
loss, both insurance companies will contribute equally.
7) Period of fire Insurance: The period of insurance is to be defined in the policy. Generally the
period of fire insurance will not exceed by one year. The period can be less than one year but not
more than one year except for the residential houses which can be insured for the period
exceeding one year also.

8) Deliberate Act: If a property is damaged or loss occurs due to fire because of deliberate act of
the owner, then that damage or loss will not be covered under the policy.
9) Claims: To get the compensation under fire insurance the owner must inform the insurance
company immediately so that the insurance company can take necessary steps to determine the
loss.
PROCEDURE TO INSURE THE PROPERTY UNDER FIRE INSURANCE:
For insuring any property under the fire insurance policy, the following is the procedure:
1) Filling of proposal form
2) Inspection of the property
3) Payment of premium
4) Issue of Cover note/ Policy document in lieu of acceptance of the proposal.
I) Filling of Proposal Form
The fire proposal includes the following information : Description of the property. This would
include:
I) (i) Construction of external walls and roof, number of storeys.
(ii) Occupation of each portion of the building.
(iii) Presence of hazardous goods.
(iv) Process of manufacture.
(v) The sums proposed for insurance.
(vi) The period of insurance.
(vii) History of previous losses.
(viii)Insurance history - whether previously other insurers had declined the risk, etc.
II) Inspection of the property: In case of property of any business organization, whether
manufacturing or other type of organization, a risk inspection report is submitted by the insurers
engineers. The engineers submit in their report the nature of risk involved in the factory/
manufacturing unit.
III) Payment of Premium: Based on the proposal form and the inspection report of the
engineers, the insurance company will submit the premium rates to the property owner and if
these rates are acceptable to him then he should pay the amount to the insurance company. It is
also a legal requirement under section 64VB of Insurance Act 1938 that the premium is paid in
advance in full to the insurance company.

IV) Issue of Cover note/ Policy document: On receipt of a completed proposal form and / or
inspection report, the cover note is issued, pending preparation of the policy document. The
cover note is an unstamped document issued to provide evidence of cover till the time the policy
is issued. The cover note provides insurance against specified perils on the usual terms and
conditions of the companys policy. The printed policy form provides for a schedule in which the
individual details of the contract are typed. The items are similar to those in the Cover Note but
with more detailed information.
After issuing the policy document, it is likely that there may be some changes in the nature of
property or sum insured may increase or decrease. In this case, these changes can be
incorporated by way of endorsements which are issued to record changes such as alteration in
risk, increase or decrease of sum insured, etc.
PROCEDURE TO SETTLE THE FIRE INSURANCE CLAIM:

A) If there are any damage or loss arising due to fire then the policy holder should immediately
inform the insurance company in writing and with estimated amount of loss.
B) Survey Report: If the amount of loss is small (i.e. up to Rs. 20,000/-), the insurance company
may depute an officer to survey the loss and decide on the settlement of the loss on the basis of
the claim form and the officers report. However, in large losses, an independent surveyor duly
licensed by the Government is appointed to give a report on the loss. The survey report would
generally deal with the following matters:
(i) Cause of loss. (ii) Extent of loss.
(iii) Under-Insurance, if any.
(iv) Details and value of salvage, and how it has been disposed of or proposed to be disposed of.
(v) Details of expenses (e.g. fire brigade expenses).
(vi) Compliance with policy conditions and warranties.
(vii) Details of other insurance policies on the same property, and the apportionment of the loss
and expenses among co-insurers.
C) Claim form: The policy holder will submit the claim form with the following information :
(i) Name and address of the Insured.
(ii) Date of loss, time and place from where the fire started.
(iii) Cause of fire.

(iv) Details of the property damaged such as description, etc.

(v) Value at the time of fire, value of salvage and the amount of loss.
(vi) Details of other policies on the same property giving the name of the insurer, policy number
and sum insured.
(vii) Fire Brigade report details.
(viii)F.I.R. at the nearest police station regarding third party liability, if any.
D) Settlement of claim: On the basis of the claim form and the survey report, decision is taken
about the settlement or otherwise of the loss.
PRACTICE OF FIRE INSURANCE IN INDIA

In India, under fire insurance policy, in addition to fire, other perils are also included and the
policy is known as Standard Fire and Allied Perils Policy.
The perils specified in the fire policy are:
A. Fire: It has been explained as above.
B. Lightning: Any lightning due to cloud burst may damage the property and the same will be
covered under the fire policy.
C. Explosion / Implosion: Sudden change in the temperature in any plant & machinery or
exposure to atmospheric pressure may result into loss and the same will be covered under fire
policy.
D. Aircraft Damage: Any damage to the property due to any droppings by aircraft or by itself
will also be covered under the fire policy.
E. Riot, Strike and Malicious Damage (RSMD): Any damage to the property due to public or
strike by employees or malicious damage (intentional damage) by any person will be covered
under this policy.
F. Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and Inundation (STFI):
The property damage due to any of these storms and flood will also be covered under this policy.
The meaning of these perils lies in different intensity of the storms. Flood not only means the
leakage of water through river but also accumulation of water due to heavy rains in the premises.
G. Impact Damage: Damage to the property due to impact by any Rail / Road vehicle or animal
by direct contact, but not belonging to or owned by the Insured or any occupier of the premises
or their employees while acting in the course of their employment.

H. Subsidence and Landslide including Rock Slide

Destruction or damage caused by Subsidence of part of the site on which the property stands or
Land slide / Rock slide.
I. Bursting and/or overflowing of Water Tanks, Apparatus and Pipes: If due to bursting or
overflowing of water from the water tanks installed in the premises of the policyholder any
damage or loss to the property of the policyholder is caused, it will be covered under this policy.
J. Missile Testing Operations: Any loss or damage due to missile testing by the Govt. or
otherwise will be covered under this policy. K. Leakage from Automatic Sprinkler
Installations : In most of the organizations as a fire protection measure, automatic sprinkler
system is installed. If due to nonusage of the sprinkler system or otherwise it starts leaking and
damages the property, then it will be covered under the fire insurance policy.
L. Bush Fire: It means fire spread from the bushes (sm all fire) but will not include forest fire.
The Fire Insurance Does Not Cover The Following Risks Known As General Exclusions
(i) In every claim minimum deduction say Rs 5000/- or Rs 10000/- will be made while settling
the claim under this policy. It is to avoid small losses.
(ii) Loss, destruction or damage caused by war, and kindred perils.
(iii) Loss, destruction or damage directly or indirectly caused to the insured property by nuclear
peril.
(iv) Loss, destruction or damage caused to the insured property by pollution or contamination.
(v) Loss, destruction or damage to any electrical and / or electronic machine, apparatus, fixture
or fitting (excluding fans and electrical wiring in dwellings) arising from or occasioned by over-
running, excessive pressure, short circuiting, arcing, self-heating or leakage of electricity, from
whatever cause (lightning included).
(vi) Loss of earnings, loss by delay, loss of market or other consequential or indirect loss or
damage of any kind or disruption whatsoever.
(vii) Earthquake: It is not covered under the fire policy but by paying additional premium, the
earthquake can be covered.

SPECIAL POLICIES
a) Floater Policy
This policy is issued only for the stocks, not for plant & machineries. Sometime the stock is kept
at various locations and it is very difficult to provide the value of stock at each location.
Therefore to cover the risks of stocks at various locations under one sum insured an additional
premium can be paid. Example: A person is having two godowns at Delhi and the value of stock
is Rs 50 lakhs and he is not having the value at each location then he can insure the stock under
floating policy by paying an additional premium.
b) Declaration Policies
This type of policy is useful where there is frequent fluctuations in stocks / stock values and to
avoid the under insurance ( insurance of lower value) of the stock, Declaration Policy(ies) can be
granted subject to the following conditions:
(a) The minimum sum insured shall be Rs. l crore.
(b) Monthly declarations based on the average of the highest value at risk on each day or highest
value on any day of the month shall be submitted by the Insured latest by the last day of the
succeeding month. If declarations are not received within the specified period, the full sum
insured under the policy shall be deemed to have been declared.
(c) Reduction in sum insured shall not be allowed under any circumstances.
(d) Refund of premium on adjustment based on the declarations / cancellations shall not exceed
50% of the total premium.
(e) The basis of value for declaration shall be the Market Value unless otherwise agreed to
between insurer and insured.
(f) It is not permissible to issue declaration policy in respect of i) Insurance required for a short
period
ii) Stocks under going process
iii) Stocks at Railway sidings
Marine Insurance:
This is the oldest branch of Insurance and is closely linked to the practice of Bottomry which has
been referred to in the ancient records of Babylonians and the code of Hammurabi way back in
B.C.2250. Manufacturers of goods advanced their material to traders who gave them receipts for

the materials and a rate of interest was agreed upon. If the trader was robbed during the journey,
he would be freed from the debt but if he came back, he would pay both the value of the
materials and the interest.
The first known Marine Insurance agreement was executed in Genoa on 13/10/1347 and marine
Insurance was legally regulated in 1369 there. Marine Insurance Cargo Hull
OBJECTIVES
Know the meaning of Marine insurance
Buy the Marine insurance
Settle the claim under Marine Insurance
Know the inland transit/overseas transit.
Know what is not covered under Marine insurance
MEANING OF MARINE INSURANCE

A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the
insured, in the manner and to the extent thereby agreed, against transit losses, that is to say losses
incidental to transit. A contract of marine insurance may by its express terms or by usage of trade
be extended so as to protect the insured against losses on inland waters or any land risk which
may be incidental to any sea voyage.
In simple words the marine insurance includes
A. Cargo insurance which provides insurance cover in respect of loss of or damage to goods
during transit by rail, road, sea or air. Thus cargo insurance concerns the following :
(i) export and import shipments by ocean-going vessels of all types,
(ii) coastal shipments by steamers, sailing vessels, mechanized boats, etc.,
(iii)shipments by inland vessels or country craft, and
(iv) Consignments by rail, road, or air and articles sent by post.
B. Hull insurance which is concerned with the insurance of ships (hull, machinery, etc.). This is a
highly technical subject and is not dealt in this module.
FEATURES OF MARINE INSURANCE
1) Offer & Acceptance: It is a prerequisite to any contract. Similarly the goods under marine
(transit) insurance will be insured after the offer is accepted by the insurance company. Example:

A proposal submitted to the insurance company along with premium on 1/4/2011 but the
insurance company accepted the proposal on 15/4/2011. The risk is covered from 15/4/2011 and
any loss prior to this date will not be covered under marine insurance.
2) Payment of premium: An owner must ensure that the premium is paid well in advance so
that the risk can be covered. If the payment is made through cheque and it is dishonored then the
coverage of risk will not exist. It is as per section 64VB of Insurance Act 1938- Payment of
premium in advance.(Details under ins urance legislation Module).
3) Contract of Indemnity: Marine insurance is contract of indemnity and the insurance
company is liable only to the extent of actual loss suffered. If there is no loss there is no liability
even if there is operation of insured peril. Example: If the property under marine (transit)
insurance is insured for Rs 20 lakhs and during transit it is damaged to the extent of Rs 10 lakhs
then the insurance company will not pay more than Rs 10 lakhs.
4) Utmost good faith: The owner of goods to be transported must disclose all the relevant
information to the insurance company while insuring their goods. The marine policy shall be
voidable at the option of the insurer in the event of misrepresentation, mis-description or non-
disclosure of any material information. Example: The nature of goods must be disclosed i.e
whether the goods are hazardous in nature or not, as premium rate will be higher for hazardous
goods.
5) Insurable Interest: The marine insurance will be valid if the person is having insurable
interest at the time of loss. The insurable interest will depend upon the nature of sales contract.
Example: Mr A sends the goods to Mr B on FOB( Free on Board) basis which means the
insurance is to be arranged by Mr B. And if any loss arises during transit then Mr B is entitled to
get the compensation from the insurance company.
Example: Mr A sends the goods to Mr B on CIF (Cost, Insurance and Freight) basis which
means the insurance is to be arranged by Mr A. And if any loss arises during transit then Mr A is
entitled to get the compensation from the insurance company.
6) Contribution: If a person insures his goods with two insurance companies, then in case of
marine loss both the insurance companies will pay the loss to the owner proportionately.
Example; Goods worth Rs. 50 lakhs were insured for marine insurance with Insurance company
A and B. In case of loss, both the insurance companies will contribute equally. 7) Period of
marine Insurance: The period of insurance in the policy is for the normal time taken for a

particular transit. Generally the period of open marine insurance will not exceed one year. It can
also be issued for the single transit and for specific period but not for more than a year.
8) Deliberate Act: If goods are damaged or loss occurs during transit because of deliberate act
of an owner then that damage or loss will not be covered under the policy.
9) Claims: To get the compensation under marine insurance the owner must inform the
insurance company immediately so that the insurance company can take necessary steps to
determine the loss.
OPERATION OF MARINE INSURANCE
Marine insurance plays an important role in domestic trade as well as in international trade. Most
contracts of sale require that the goods must be covered, either by the seller or the
buyer, against loss or damage. Who is responsible for affecting insurance on the goods, which
are the subject of sale? It depends on the terms of the sale contract. A contract of sale involves
mainly a seller and a buyer, apart from other associated parties like carriers, banks, clearing
agents, etc. Sales Contract, Banks, Clearing Agents, Carriers etc.
Buyer Seller
The principal types of sale contracts, so far as Marine insurance is directly concerned, are as
follows:
PROCEDURE TO INSURE UNDER MARINE INSURANCE
A) Submission of form
B) Quotation from the Insurance Company
C) Payment of Premium
D) Issue of cover note/Policy
A) Submission of form
a) The form will have the following information:
a) Name of the shipper or consignor (the insured).
b) Full description of goods to be insured: The nature of the commodity to be insured is
important for rating and underwriting. Different types of commodities are susceptible for
different types of damage during transit- sugar, cement, etc are easily damaged by sea water;
cotton is liable to catch fire; liquid cargoes are susceptible to the risk of leakage and crockery,
glassware to breakage; electronic items are exposed to the risk of theft, and so on.

c) Method and type of packing: The possibility of loss or damage depends on this factor.
Generally, goods are packed in bales or bags, cases or bundles, crates, drums or barrels, loose
packing, paper or cardboard cartons, or in bulk etc.
d) Voyage and Mode of Transit: Information will be required on the following points :
i. the name of the place from where transit will commence and the name of the place where it is
to terminate.
ii. Mode of conveyance to be used in transporting goods, (i.e.) whether by rail, lorry, air, etc., or
a combination of two or more of these. The name of the vessel is to be given when an overseas
voyage is involved. In land transit by rail, lorry or air, the number of the consignment note and
the date thereof should be furnished. The postal receipt number and date thereof is required in
case of goods sent by registered post.
iii. If a voyage is likely to involve a trans-shipment it enhances the risk. This fact should be
informed while seeking insurance. Trans-shipment means the change of carrier during the
voyage.
e) Risk Cover required: The risks against which insurance cover is required should be stated.
The details of risks are discussed subsequently in this chapter.
B) Quotation by insurance company
Based on the information provided as above the insurance company will quote the premium rate.
In nutshell, the rates of premium depends upon :
(a) Nature of commodity.
(b) Method of packing.
(c) The Vessel.
(d) Type of insurance policy.
C) Payment of premium:
On accepting the premium rates, the concerned person will make the payment to the insurance
company. The payment can be made on the consignment basis.
D) Issue of cover note /Policy document:
i) Cover Note
A cover note is a document granting cover provisionally pending the issue of a regular policy. It
happens frequently that all the details required for the purpose of issuing a policy are not
available. For instance, the name of thesteamer, the number and date of the railway receipt, the

number of packages involved in transit, etc., may not be known.

ii) Marine Policy
This is a document which is an evidence of the contract of marine insurance. It contains the
individual details such as name of the insured, details of goods etc. These have been identified
earlier. The policy makes specific reference to the risks covered. A policy covering a single
shipment or consignment is known as specific policy.
iii) Open Policy
An open policy is also known as floating policy. It is worded in general terms and is issued to
take care of allshipments coming within its scope. It is issued for a substantial amount to cover
shipments or sending during a particular period of time. Declarations are made under the open
policy and these go to reduce the sum insured. Open policies are normally issued for a year. If
they are fully declared before that time, a fresh policy may be issued, or an endorsement placed
on the original policy for the additional amount. On the other hand, if the policy has run its
normal period and is cancelled, a proportionate premium on the unutilised balance is refunded to
the insured if full premium had been earlier collected. On receipt of each declaration, a separate
certificate of insurance is issued. An open policy is a stamped document, and, therefore,
certificates of insurance issued thereunder need not be stamped.
Open policies are generally issued to cover inland consignments.
There are certain advantages of an open policy compared to specific policies. These are:
(a) Automatic and continuous insurance protection.
(b) Clerical labour is considerably reduced.
(c) Some saving in stamp duty. This may be substantial, particularly in the case of inland
sendings.
iv) Open Cover
An open cover is particularly useful for large export and import firms-making numerous regular
shipments who would otherwise find it very inconvenient to obtain insurance cover separately
for each and every shipment. It is also possible that through an oversight on the part of the
insured a particular shipment may remain uncovered and should a loss arises in respect of such
shipment, it would fall on the insured themselves to be borne by them.
In order to overcome such a disadvantage, a permanent form of insurance protection by means of
an open cover is taken by big firms having regular shipments.

An open cover describes the cargo, voyage and cover in general terms and takes care
automatically of all shipments which fall within its scope. It is usually issued for a period of 12
months and is renewable annually. It is subject to cancellation on either side, i.e., the insurer or
the insured, by giving due notice.
Since no stamps are affixed to the open cover, specific policies or certificates of insurance are
issued against declaration and they are required to be stamped according to the Stamp Act.
There is no limit to the total number or value of shipments that can be declared under the open
cover. The following are the important features of an open policy/ open cover.
(a) Limit per bottom or per conveyance The limit per bottom means that the value of a single
shipment declared under the open cover should not exceed the stipulated amount.
(b) Basis of Valuation The Basis normally adopted is the prime cost of the goods, freight and
other charges incidental to shipment, cost of insurance, plus 10% to cover profits, (the
percentage to cover profits may be sometimes higher by prior agreement with the clients).
(c) Location Clause
While the limit per bottom mentioned under (a) above is helpful in restricting the commitment
of insurers on any one vessel, it may happen in actual practice that a number of different
shipments falling under the scope of the open cover may accumulate at the port of shipment. The
location clause limits the liability of the insurers at any one time or place before shipment.
Generally, this is the same limit as the limit per bottom or conveyance specified in the cover, but
sometimes it may be agreed at an amount, say, upto 200% thereof.
(d) Rate
A schedule of agreed rates is attached to each open cover.
(e) Terms
There may be different terms applying to different commodities covered under the open cover,
and they are clearly stipulated.
(f) Declaration Clause
The insured is made responsible to declare each and every shipment coming within the scope of
the open cover. An unscrupulous insured may omit a few declarations to save premium, specially
when he knows that shipment has arrived safely. Hence the clause.
(g) Cancellation Clause

This clause provides for cancellation of the contract with a certain period of notice, e.g., a
months notice on either side. In case of War & S.R.C.C. risks, the period of notice is much
shorter.
Distinction between Open policy and Open cover
The open policy differs from an open cover in certain important respects. They are : (a) The open
policy is a stamped document and is, therefore, legally enforceable in itself, whereas an open
cover is unstamped and has no legal validity unless backed by a stamped policy/certificate of
insurance.
(b) An open policy is issued for a fixed sum insured, whereas there is no such limit of amount
under any open cover. As and when shipments are made under the open policy, they have to be
declared to the insurers and the sum insured under the open policy reduces by the amount of such
declarations. When the total of the declarations amounts to the sum insured under the open
policy, the open policy stands exhausted and has to be replaced by a fresh one.
h) Certificate of Insurance
A certificate of insurance is issued to satisfy the requirements of the insured or the banks in
respect of each declaration made under an open cover and / or open policy. The certificate, which
is substituted for specific policy, is a simple document containing particulars of the shipment or
sending. The number of open contract under which it is issued is mentioned, and occasionally,
terms and conditions of the original cover are also mentioned. Certificates need not be stamped
when the original policy has been duly stamped.
Types of Marine Insurance
a) Special Declaration Policy This is a form of floating policy issued to clients whose
annual estimated dispatches (i.e. turnover) by rail / road / inland waterways exceed Rs 2 crores.
Declaration of dispatches shall be made at periodical intervals and premium is adjusted on expiry
of the policy based on the total declared amount. When the policy is issued sum insured should
be based on previous years turnover or in case of fresh proposals, on a fair estimate of annual
dispatches. A discount in the rates of premium based on turnover amount (e.g. exceeding Rs.5
crores etc.) on a slab basis and loss ratio is applicable.
b) Special Storage Risks Insurance
This insurance is granted in conjunction with an open policy or a special declaration policy.

The purpose of this policy is to cover goods lying at the Railway premises or carriers godowns
after termination of transit cover under open or special declaration policies but pending clearance
by the consignees. The cover terminates when delivery is taken by the consignee or payment is
received by the consignor, whichever is earlier.
c) Annual Policy
This policy, issued for 12 months, covers goods belonging to the insured, which are not under
contract of sale, and which are in transit by rail / road from specified depots / processing units to
other specified depots / processing units.
d) Duty Insurance
Cargo imported into India is subject to payment of Customs Duty, as per the Customs Act. This
duty can be included in the value of the cargo insured under a Marine Cargo Policy, or a separate
policy can be issued in which case the Duty Insurance Clause is incorporated in the policy.
Warranty provides that the claim under the Duty Policy would be payable only if the claim under
the cargo policy is payable.
e) Increased Value Insurance: Insurance may be goods at destination port on the date of
landing if it is higher than the CIF and Duty value of the cargo.
PROCEDURE OF CLAIM SETTLEMENT:

As the risk coverages are different for import/export and inland (with in India) consignments, the
procedure of claim settlement is explained separately.
2.6.1 For Import/Export consignments
Claims Documents
Claims under marine policies have to be supported by certain documents which vary according
to the type of loss as also the circumstances of the claim and the mode of carriage. The
documents required for any claim are as under:
a) Intimation to the Insurance company: As soon as the loss is discovered then it is the duty of
the policyholder to inform the Insurance company to enable it to assess the loss.
b) Policy: The original policy or certificate of insurance is to be submitted to the company. This
document establishes the claimants title and also serves as an evidence of the subject matter
being actually insured.

c) Bill of Lading : Bill of Lading is a document which serves as evidence that the goods were
actually shipped. It also gives the particulars of cargo.
d) Invoice: An invoice evidences the terms of sale. It also contains complete description of the
goods, prices, etc. The invoice enables the insurers to see that the insured value of the cargo is
not unreasonably in excess of its cost, and that there is no gross overvaluation. The original
invoice (or a copy thereof) is required in support of claim. e) Survey Report: Survey report
shows the cause and extent of loss, and is absolutely necessary for the settlement of
claim. The findings of the surveyors relate to the nature and extent of loss or damage, particulars
of the sound values and damaged values, etc. It is normally issued with the remarks without
prejudice, i.e. without prejudice to the question of liability under the policy.
f) Debit Note: The claimant is expected to send a debit note showing the amount claimed by him
in respect of the loss or damage. This is sometimes referred to as a claim bill.
g) Copy of Protest: If the loss or damage to cargo has been caused by a peril of the sea, the
master of the vessel usually makes a protest on arrival at destination before a Notary Public.
Through this protest, he informs that he is not responsible for the loss or damage. Insurers
sometimes require to see the copy of the protest to satisfy themselves about the actual cause of
the loss.
h) Letter of Subrogation : This is a legal document (supplied by insurers) which transfers the
rights of the claimant against a third party to the insurers. On payment of claim, the insurers may
wish to pursue recovery from a carrier or other third party who, in their opinion, is responsible
for the loss. The authority to do so is derived from this document. It is required to be duly
stamped. Some of the other documents required in support of particular average claims are Ship
survey report lost overboard certificate if cargo is lost during loading and
unloading operation, short landing certificate etc.
i) Bill of entry: The other important document is bill of entry issued by the customs authorities
showing therein the amount of duty paid, the date of arrival of the steamer, etc., account sales
showing the proceeds of the sale of the goods if they have been disposed of; repairs or
replacements bills in case of damages or breakage; and copies of correspondence exchanged
between the carriers and the claimants for compensation in case of liability resting on the
carriers.
2.6.2 Inland Transit Claims (Rail / Road)

In regard to claims relating to inland transit, the documents required to be submitted to the
insurers in support of the claim are:
(a) Original policy or certificate of insurance duly endorsed.
(b) Invoice, in original, or copy thereof.
(c) Certificate of loss or damage (original) issued by carriers.
(d) If goods are totally lost or not delivered, the original railway receipt and / or non-delivery
certificate / consignment note.
(e) Copy of the claim lodged against the railways / road carriers (By Regd. A.D.)
(f) Letter of Subrogation, duly stamped.
(g) Special Power of Attorney duly stamped. (Railway Claims).
(h) Letter of Authority addressed to the railway authorities signed by the consignors in favour of
consignees whenever loss is claimed by consignees.
(i) Letter of Authority addressed to the railway authorities signed by the consignors in favour of
the insurers
(j) Letter of Undertaking from the claimant in case of non delivery of consignment.
(k) Claim Bill, after adjusting salvage value proposed.
2.7 RISK COVERAGE
For export/import policies, the-Institute Cargo Clauses (I.C.C.) are used. These clauses are
drafted by the Institute of London Underwriters (ILU) and are used by insurance companies in a
majority of countries including India.
Exclusions
All three sets of clauses contain general exclusions. The important exclusions are:
i. Loss caused by willful misconduct of the insured. ii. Ordinary leakage, ordinary loss in weight
or volume or ordinary wear and tear. These are normal trade losses which are inevitable and
not accidental in nature. iii. Loss caused by inherent vice or nature of the subject matter. For
example, perishable commodities like fruits, vegetables, etc. may deteriorate without any
accidental cause. This is known as inherent vice.
iv. Loss caused by delay, even though the delay be caused by an insured risk.
v. Deliberate damage by the wrongful act of any person.
This is called malicious damage and can be covered at extra premium, under (B) and (C)
clauses. Under A clause, the risk is automatically covered.

Motor vehicle insurance

What Motor Insurance is:
Motor insurance gives protection to the vehicle owner against (I). damages to his/her vehicle and
(ii). pays for any Third Party Liability determined as per law against the owner of the vehicle.
Third Party Insurance is a statutory requirement. The owner of the vehicle is legally liable for
any injury or damage to third party life or property caused by or arising out of the use of the
vehicle in a public place. Driving a motor vehicle without insurance in a public place is a
punishable offence in terms of the Motor Vehicles Act, 1988.
Types of Motor Insurance cover:
Broadly there are two types of insurances policies that offer motor insurance cover: a. Liability
Only Policy (Statutory requirement) b. Package Policy (Liability Only Policy + Damage to
owners Vehicle usually called O.D Cover) Remember that if you take only a Liability Only
Policy, damage to your vehicle will not be covered. Hence, it would be prudent to take a Package
Policy which would give a wider cover, including cover for your vehicle.
What Motor Insurance covers:
The damages to the vehicle due to the following perils are usually covered under OD section of
the Motor Insurance policy:
a. Fire, Explosion, Self- Ignition, Lightning
b. Burglary/Housebreaking / Theft
c. Riot & Strike
d. Earthquake
e. Flood, Storm, Cyclone, Hurricane, tempest, inundation, hailstorm, frost
f. Accidental external means
g. Malicious Act
h. Terrorism acts
i. While in Transit by Rail/ Road, Inland waterways, Lift, Elevator or Air
j. Land slide / Rock slide
What Motor Insurance excludes:
The following contingencies are usually excluded under the Motor Insurance Policy:
Not having a valid Driving License

Under Influence of intoxicating liquor/ drugs

Accident taking place beyond Geographical limits
While Vehicle is used for unlawful purposes
Electrical/Mechanical Breakdowns.
Basis of Sum Insured:
For Own Damage:
The Sum Insured under a Motor Insurance policy reflects the value of the motor vehicle
determined based on the concept known as Insureds Declared Value. Insureds Declared Value
is the value arrived at based on the Manufacturers present value and depreciation based on the
Age of the Vehicle.
For Third Party:
Coverage is as per requirements of the Motor Vehicles Act, 1988 . Compulsory Personal
accident cover for owner-driver is also included. Policy can also be extended to cover various
other risks like Personal Accident to occupants of vehicle, Workmen's Compensation to Driver,
etc over and above the cover available to him under statute.

Module 7: (8 Hours)
Management of Insurance Companies
Functions and Organization of Insurers- Types of Insurance Organization, Organizational
Structure of Insurance Companies-Functions of Insurers.
Underwriting-Principles of Underwriting, Underwriting in Life Insurance, Underwriting in
nonlife Insurance.
Claims Management-Claim Settlement in General Insurance-Claim Settlement in Life
Insurance.
Insurance Pricing-Insurance Cost and Fair Premiums, Expected Claim Costs, Investment
Income and the timing of claims Payments, Administrative Costs, Profit Loading, Capital Shocks
and Underwriting Cycles, Price Regulation.
Insurance Marketing: Marketing of Insurance Products, Critical Success factors for Insurance
Players, Marketing Strategies in India.
Types of insurance organisations

(A) LIFE INSURANCE:
Term Life Insurance
Permanent Life Insurance
(B) GENERAL
INSURANCE
Fire Insurance
Marine Insurance
Accident Insurance

Functions of insurer
Three Functions of Insurance
Protect insured in case of loss
transfers risk from risk averse to
risk neutral or less risk averse
Risk Pooling or diversification
the whole risk is smaller than the
sum of its parts Law of Large
Numbers
Risk Allocation insurers set a
price that is proportional to the
degree of risk posed by each insured
Underwriting
Life Insurance Underwriting is the process of accepting the proposal of the customer based on
the guidelines formulated by the insurance company.
Principles of underwriting:
Underwriting is to develop and maintain a profitable book of business for the insurer. A book of
business is all of the policies that an insurer has in force or some subgroup of those policies. For
example, a book of business can include all of an insurer's commercial policies or all of its
commercial general liability policies. "Book of business" can also refer to business produced in a
specific geographic area or by a particular branch office or agency.
The insurance companies codify a set of procedures which must be followed before accepting
any new business. When a new proposal comes to the insurance company its underwriting
department scrutinizes the proposal whether or not it fulfills the criteria laid down by the
company. If they find any lacunae they ask the agent to
get it corrected. It is not that one can get whatever cover one wants. The issue of policy depends
on income of the insured and whether he has the capacity to pay the premium over the years.
Once the underwriters are satisfied that all the conditions have been fulfilled they go ahead to
accept the premium and issue the policy.

Underwriting can be defined as the decision making process during which the company
decides whether to insure or not and if yes at what rate.
CLASSIFICATION OF RISKS
The Life Insurance underwriting involves classification of risks affecting the policyholders. The
factors that affect risk on the life of an individual is known as hazard. The hazard may be
classified as
1) Physical
2) Occupational
3) Moral
3.2.1 Physical hazard
The physical hazard that affects a human life are as follows:-
a) Age - The probability of death increases as the age increases. So the premium also increases
with the age.
b) Sex - The female lives have different underwriting consideration due to various factors such
as employment, child birth etc.
c) Built - The bu ilt of person indicates whether a person ishealthy or not. The height, weight and
chest measurements helps to find out whether the person is suffering from any ailment or not.
Height and weight must be given after taking actual measurement. This gives an idea of the body
built. In fact, most insurers publish a chart of desirable height and weight which even medical
practitioners follow. This is a product of medico-actuarial study. While writing the height and
weight, do not quote from the build-chart. Write the actual measurement only.
d) Physical Condition - The Physical condition of the person helps to decide about the premium.
e) Physical Impairments - Blindness, deafness and other conditions which are not illness or
degenerative are hazards affecting the probabilities of death.
f) Personal History - Personal history of illness affects the prognosis. Some diseases leave their
mark and may relapse or weaken the resistance. Hence a detailed information regarding present
and past illness relating to different body systems is called for. Let it be noted that any
affirmative answer regarding any past or present disease does not mean decline of a life cover or

extra premium. Most of the common diseases are either ignored or the insurers may advise for a
waiting period of 3 to 6 months.
But correct answer must be given so that the insurance cover remains indisputable and security,
which is the object of insurance, is guaranteed. Mention the exact disease and the duration if the
answer is in the affirmative. Give details of the treatment received. Bodily deformity or previous
accident are also important information.
Alcohol, drugs are bad for health and habit forming. This is a risk which an insurer would like to
avoid unless it is of casual nature. Some insurers treat non-smokers as better than standard lives.
g) Insurance history - The next question relates to the insurance history of the proposer. If at
any time earlier, any proposal for revival has been declined or considered with certain conditions
like extra premium, the underwriters would like to know the reason thereof in order to eliminate
the possibility of concealment of any material fact relating to personal history.
h) Family History - Family history is another important source of information for the insurer to
have a prognosis about the prospects life. Prognosis as opposed to diagnosis, is a long term
estimation about the longevity of the prospect. The children of parents who live to a very ripe old
age are supposed to live long.
Diabetes, blood pressure, insanity etc are some of the problems which run in a family. Family
members sometimes get infected if some close relatives suffer from infective diseases like
tuberculosis. Aids of course are a dread which all insurers would like to avoid. A correct
information as far as possible about the family history should be given. Of course, what is not
known cannot be declared.
3.2.2 Occupational hazard
We have already explained else where that the nature of occupation has an impact on the life
style of the insured. A hazardous occupation calls for special treatment by the insurer either by
charging an extra premium or excluding the risk of death due to such hazard. The insurer
normally lists out occupations on the basis of the hazard and mentions the special treatment
expected.
There is a social angle to this problem of occupational hazard. People working in mines, on
electricity poles, or insanitary condition like stone crushers or road cleaning are normally the
socially disadvantaged people doing a great service to society. While facing the hazard of their
occupation, should they be penalised by paying a higher premium or exclusion of the risk? Name

and address of the present employer is useful for contact and also to appreciate his social
standing. Similarly information regarding education, annual income, sources of income and
whether the prospect is an income tax payee indicate his social and financial status.
Whenever the proposer is employed in armed forces, his physical health is assured to be
excellent. There is a provision for regular medical examination and the army people are
categorised on grounds of health. The army personnel can insure without any medical
examination for a very high sum assured, a benefit which is not available to the general public.
As we have said earlier too much insurance may lead to moral hazard. Insurer, therefore, would
like to know how much insurance he is having or going to have. Therefore insurance policies
taken through separate proposals or revival of a lapsed policy are important information for
undertaking life risk.
3.2.4 Previous Insurance policies
A detailed list of all previous policies has to be provided along with their present status so that
the underwriter is able to know the total life cover that this proposer has taken and proposes to
take. No insurer would like that anybody should take a fresh insurance immediately after
surrendering the previous policy.
As we have explained elsewhere this is bad for all concerned. IRDA has also provided in the
agents regulation that no agent shall advise a prospect to take a fresh insurance, if the previous
policy has been terminated within a period of six months. Concealment of this fact may affect
the validity of the insurance policy.
GENERAL INSURANCE BUSINESS UNDERWRITING: underwriting business is the

basic core activity. All other activities, in fact, emanate from this core activity only. Not much
attention was being paid to this core activity in the nationalized set-up under tariff era.
Underwriting was reduced to referring to the pages of tariff. There was no application of mind.
Any innovation was out of question. The customer has to tailor his needs according to the
available products rather than it being other way. In an environment like this the underwriting
skill and expertise development saw a decline. Then came the liberalization of insurance sector
and gradual withdrawal of tariff with the ultimate aim of ushering in a fully tariff free regime.
Suddenly underwriting became all important. The environment became very competitive. Profit
and solvency concern forced insurance companies to relook at there underwriting operation.

Then came IRDA regulation on File & Use system. This meant amongst other, all insurance
company must have - An underwriting policy duly approved by the board - The pricing has to be
actuarially evaluated and if it is subsidized, this has to be spelt out. - The concept of appointed
actuary in general insurance company has come. - Nominated underwriters & issues connected
with that. - Marketing & underwriting delinked. Then there are regulations to protect
policyholders interests and certification of outstanding claims provisioning by Appointed
Actuary. These regulations have their own bearing on underwriting and pricing, which cannot be
ignored now. There is now talk of risk perception based effective underwriting. Risk
management and related issues are increasingly becoming crucial and important which is the
way it should always be. Persuit of premium for obvious reasons is the goal of all general
insurance companies. But this premium underwritten must be quality premium and must 2
generate profit. The excellence and the quality of underwriting will determine the long term
survival of general insurance companies. This realization is now coming. Then there are whole
lot of other issues (e.g. marketing, claims settlement, investment operation, etc.) which are
dependent upon the underwriting operation of the company. The underwriting issues therefore
can not be seen in isolation and there is a need to relook at things in the present day context.
Lets now examine what does underwriting entail, how is the underwriting philosophy /policy of
a company is formulated and how this policy is monitored for effective implementation. But
before that let us discuss the corporate goal of a general insurance company because policies in
other areas of operation must fit in and help achieve the corporate goal. In todays world most of
the organizations have vision and mission statements. Insurance companies are no exception.
These statements provide the broad frame work within which the corporate goals / objectives of
the insurance companies are set. The corporate objectives provide the business direction for
medium and long term goals. This involves understanding as to where the organization stands
now, its core capabilities, strength and weakness and the environment (business, social and
economic, regulatory / legal etc,) in which it operates. Bases on these understandings, the road
map to achieve the goal is set. Corporate objectives covers whole range of the organizations
activities including the underwriting goal. The underwriting policy of the company must
therefore be capable of delivering the required results and accordingly must be subject to
continues review for its effectiveness. Underwriting basically refers to the process of evaluating
a proposal that comes for insurance. Based on the evaluation done a decision is to be taken as to

the acceptance of proposal or otherwise. If its is to be accepted, at what price and on what terms,
conditions and coverages. This process ends with the issue of policy documents. For a routine
kind of simple proposal, the entire procedure is very simple. Generally insurance companies
have internal guide rates and standard policy documents, for 3 these routine risks which a re
typically High frequency, low severity risk and do not require much of an underwriting
expertise & skill. But the aggregate of simple risk across the company, and the likely financial
consequences needs monitoring. However, typically for low frequency high severity risk e.g.
liability, aviation, etc. or unusual risk, or risk with every high sum insured, etc. the underwriting
process becomes more complex and whole lot of other issues having bearing on acceptance of
such risk come in the picture.
Underwriting in nonlife Insurance
Underwriting capacity and retention on own account and solvency concern - Reinsurance
arrangement and cost associated with that - Availability of technical expertise for underwriting
big and complex risk in the company. - The authority to accept such risks and the underwriting
policy of the company. For simple risk, the evaluation is done through the information contained
in the proposal form. For big and complex, industrial risk, the evaluation is done through risk
inspection carried out by specialist trained engineers of the insurance company. Individual risk
peculiarities will vary and the report of the risk engineer comprehensively examine the physical
hazard aspects in relation to the perils covered. Depending upon the class of business, additional
questions may be asked through a questionnaire. For medical insurance, medical check up and
diagnostic test may be insisted upon. Moral hazard aspects are difficult to assess. But for big
corporate clients, it is worthwhile to examine their corporate governance, risk management
philosophy, safety and investigation mechanism and above all the quality, skill and experience of
manpower in handling and minimizing loss. All said, insurance companies are always exposed to
adverse selection. Whether it is proposal form, questionnaire or risk inspective, the idea is to
get all relevant information for an informed underwriting. Insurance companies have to be on
their guard for adverse selection and moral hazard aspect. 4 After having decided to accept the
proposal after due evaluation, the next step is to decide about the pricing and this involves
matching of risk to price (via experience and modeling) as also limiting of potential loss
exposure through some mechanism. Insurance is an intangible product and pricing intangible
product is difficult for it cannot be based on deterministic model traditionally used for tangible

goods / products. The uncertainty about frequency and severity of claims makes the pricing task
of insurance product very difficult. We have to make use of stochastic models which are based
on theory of probability. Based on the past data (experience), these model help us in making
prediction about the likely number of claims that are expected to be reported as also about the
average claims size. The expected claims cost is worked out by multiplying the two. The claims
cost must also take into account the provision for IBNR & IBNER claims. Inflation must also be
factored in pricing. For any policy issued today, the claims if it arises will be on some future
date. Claims cost is the most dominant cost and most difficult to determine. The other costs are
the management cost and cost of business acquisition which are to be factored in the pricing
alongwith a reasonable margin of profit.
The pricing will also depend on the terms, conditions, special warranties, scope of coverage, etc.
Higher deductible, reduced coverage, etc. would obviously attract lesser premium. Pricing
should also be sensitive to the business, regulatory, economic and social environment. Balancing
has to be done to make the price competitive on the one hand and actuarially adequate
(alignment of risk with price) i.e. economic price on the other hand. Reducing claim cost and
other costs of operation is therefore such a big issue. Price adequacy is a regulatory concern also.
Modern day computers have enabled storage and analysis of huge volume of data. Since
actuarial modeling is based on past claim data and simulation, the insurance company, must have
a system of capturing good quality relevant data. Repetitive underwriting decision can then
become a rule in the underwriting manual or better still the system supported e-risk analysis and
pricing There is no other way except leveraging IT. 5 Yet another pricing aspect is, the pricing
philosophy should be based on system of loading and discount depending upon how the policy
performs. It must encourage loss control. The price must also factor margin for adverse
deviation. The pricing philosophy must address the regulatory concern of rating adequacy,
nondiscriminatory and non-excessive pricing. The price should be stable over a period of time.
While talking about pricing, it should be appreciated that rates are ultimately quoted by
companies based on the competitive environment, the reality of risk / loss exposures are same for
all. After having fixed the price, the next issue is to examine the acceptance in relation to the
underwriting capacity and also if so warranted how to increase this capacity and the cost of the
some. Underwriting capacity refers to the maximum premium that an insurance company can go
for against the specified level of capital because of regulatory requirements and also dictated by

prudence Therefore, generating volume of business is linked to underwriting capacity of the

company which in turn is linked to the capital and free reserve of the company.
This means that if you want to increase the underwriting capacity you have to bring more of
capital and more of free reserve. The other option is to hire the capital through reinsurance
arrangement. Depending upon the underwriting capacity, business plan, size and volatility of
portfolio, etc, a decision is to be taken as to how much exposure to retain on a big single risk or
on an aggregate exposure from a group of risk. This retention is kept on companies own account
and the balance is reinsured through a well thought out comprehensive reinsurance programme.
Reinsurance incidentally narrows down the range of variability of the insurers result. The
capacity of underwriting being limited, profit has to be generated from this limited volume of
business.
The skill and judgment of underwriter therefore becomes very important to make use of the
available capacity to maximize profit. Lets now examine the underwriting policy formulation of
an insurance company. What is the underwriting objective of the insurance company? This is the
question which the underwriting policy must address first. The underwriting objective must 6 be
in line with overall corporate objective. It should be appreciated that long term basic objective of
any underwriting policy is penetration and profit. Volume and profit are necessary for
survival of the company as also to protect the interest of shareholders and policyholders. The
other underwriting objective could be - leadership of a selective business class e.g. health
insurance - Underwriting profitability - Brand leader - Company of choice for businessman /
common man - Aggressive underwriting for volume - Developing balanced portfolio by
spreading the risk geographically and classwise. There is therefore a need to have an
underwriting policy which should define the underwriting objective of the company, the
underwriting structure and authority approach to key underwriting issues, portfolio goals (
volume and mix), marketing strategy, R & D, response time for proposal acceptance, etc. This
involves a proper understanding of organizational strengths and weakness, the challenges ahead,
the changing business and regulatory environment, etc. The strategy to overcome the weakness
and the preparedness to meet the future challenges should form part of the underwriting policy.
The underwriting capacity and reinsurance support arranged should be factored while
formulating underwriting policy. The training of underwriting people is also an area which is to
be addressed through this policy. As part of this policy underwriting manuals and guide rates

should be developed to provide underwriting direction and decision. The underwriting authority
should be clearly defined. The underwriting goal and the road map to achieve the same should be
clear to one and all in the organization.
The underwriting policy helps in translating goals into strategies which in turn will be reflected
in the business that the underwriter accepts. The operationalization of the underwriting
philosophy is the next step and then there is need to continuously monitor it for evaluation and
course correction. There are performance parameters to judge the effectiveness of underwriting
e.g. incurred claim ratio, combined ratio, return on equity ratio, etc. It should be appreciated that
underwriting excellence would ensure better claims settlement, better generation of fund for
investment and would be supportive of the company is marketing effort. Insurance company can
ignore it on its own peril. In todays context, an underwriter has to be a specialist, a professional
having knowledge of the product and market, a good conflict manager with right skills and
attitude. He has to deal with not only the clients but the brokers also. The underwriting
challenges that the insurance company will face in near future may include - Terrorism cover -
Environmental and pollution issues - High tech/ high value project - Coverages for intellectual
property right - Cyber security / liability - Insurance as a comprehensive solution under one
umbrella. - Credit risk - Performance guarantee - Contingent business interruption - Long term
insurance cover e.g. latent defect insurance (high rise building) Insurers have to make use of the
advances being made in science and technology to better analyze the risk and have better pricing
capability. For example in health sector the advances made in genetics and the ability to make
prediction about disease based on genetic testing can be a powerful tool for life and health
insurance underwriting. 8 The company which will first develop the underwriting capability of
future generation risk will be the company that will rule. R & D, innovation and futuristic view
of things are important. Insurance companies should understand and realize, if they are not able
to meet the new demands of market, some non-insurance player may step in. Globalization and
its impact on insurance, liberalization of insurance sector, the proposed changes in Insurance Act
of 1938, intensified competition, electronic commerce, emergence of new risk, local factors
affecting the insurance market, the financial meltdown and recession, etc. are the factors which
will deeply affect the insurance business and will bring challenges of new kind before the
underwriting community. Are we prepared to face the new challenges? The insurance companies
must gear themselves to be the true underwriter of the future risk.

How insurance is priced (risk pricing)

Insurance is designed to reimburse your financial costs if you are affected by an unexpected
event such as damage to or loss to your property.
Examples of events that can be insured against include:
your home being flooded
your car being stolen
you being unable to work due to ill health
When you buy a policy to cover you against a risk, insurers use risk pricing to work out how
likely it is that you will make a claim and the likely size of that claim to calculate your premiums
(payments).
When insurers use risk pricing to set your premium, they consider the different risk
characteristics that might affect your policy. These characteristics help insurers charge a fair
price that reflects the risk of each customer making a claim, to make sure you pay a premium
that is in the interests of the fair treatment of all customers.
Insurers can use risk pricing characteristics including:
your age
your health
whether you smoke
how safely you drive
the likelihood of property flooding
where you live
Insurers cannot use risk pricing characteristics on:
gender
race
religion or belief
sexual orientation
There are also certain risk pricing characteristics that insurers do not use, such as results from a
predictive genetic test, other than the predictive genetic test result for Huntington's disease if you
want life insurance cover of more than 500,000.

Insurance Marketing of products

Following are some Marketing Strategies adopted by the players in the market 1) Shift in product
portfolio 2) Value for money 3) Tapping the niche markets 4) Thrust to the rural markets 5)
Access to rural areas through RRBs 6) Tapping unconventional distribution channels 7) Cause
related marketing 8) De- tariffing in general insurance
In todays economy, the financial services industry is exposed to increasing performance
pressures and competitive forces (Goergen, 2001). Modern media, such as the internet, have
created new challenges for this industry (Fuchs, 2001).New business concepts, a change in client
sophistication (Davis, 2006), and an increasing number of new competitors entering into the
market, such as independent financial consultants, have changed the business models and the
competitive forces that established financial services organizations are facing today worldwide.
Critical Key Success Factors in Insurance
In order to succeed in any of the business it is very necessary to make and follow the
strategies. Strategies are very important for any of the business. Following are the general
strategies, which are recommending to the insurance sector. One approach is to focus upon
product quality, which will instill confidence in minds of the customers that they would be
offered best product from out of the several available products.
The other approach, is to focus on the customers need, would involve a heavy investment
in developing relationships with policyholders. Under this approach, one can expect a range of
products and services designed to give the customer what he specially desires.
The third approach is of greater market segmentation under which the population should
be divided into several homogeneous groups and product, and services would be targeted
towards such selected markets. The effort would be to tie clients to their company- by
customized combination of coverage, easy payment plan, risk management advice, and
convenient quick claim handling.
Porter Generic Strategies:

One of the expert Michel porters has identified three internally consistent generic
strategies, which can be used singly or in combination: overall cost leadership is clearly under
stable. In a differentiation strategy, a company seeks to be unique in its industry along some
dimensions that are widely valuable by the customer. May be the lowest cycle time for settling a
claim under say, a med claim policy could be differentiating factor. In a cost focus, a company
seeks a cost advantage in its target segment, while in differentiation focus; a company seeks a
differentiation target.
Marginal Different Product:
Another strategy would be for the companies to design products that will make
comparison-shopping difficult. They could offer a wide variety of covers with marginal
differences and varying prices, whose terms and conditions are difficult to compare for
consumers who may not have sufficient experience in purchasing insurance and who would find
it difficult to make a clear choice. If the consumer is offered a unique policy, he will have no
alternative coverage with which can be compared. Given the combination policy, which can
offer protection against a number of losses, the consumer will find comparison even more
difficult.
Designing New Strategies:
The existing insurance companies cannot be satisfied with concentrating on the consolidation of
their existing markets, but have to achieve further growth and penetration. They must, therefore,
concentrating on strengthening existing points of service, designing new channel of distribution,
direct contact with their ultimate customers, and front line employee empowerment. They also
need to refresh their marketing set up. The new comers, on the other hand give priority to
tapping the market, left unexploited by the public sector companies.
Move towards Rural Market:
It is one of the most important suggestions; data says that rural market is still uncovered by this
sector. We believe that the sector should move towards tie rural market. Insurance penetration
can be achieved by tapping the neglected Rural Markets. There is vast potential for insurance
growth in the rural sector. A recent survey by foundation for research, training and Education in

insurance (FORTE) suggests that insurance can be sold profitably to rural communities in India.
The survey reveals that
There is distinct hierarchy of needs in rural areas.
Rural people find security in groups the saving habit is very strong in rural areas.
Average saving across the most important socio-economic strata comes to 30-35% of
annual income or Rs.13,500 annually, which is significant.
There is high level of awareness about life insurance and fairly high-level about 36%
already own life insurance.
51% of these who own life insurance would like to buy more.
Amongst the savers, a significant percentage does not save through formal financial
modes or institutions.
Rural buyers of insurance prefer a half yearly mode of premium payment to coincide with
the time of the harvest. Thus there are very much chances for any of the companies to
work over this scenario. So we believe and suggest all the players to move towards the
rural areas.
Motivation of sales force:
A life insurance company should constantly be involved in the process of motivating the
sales force in the turbulent times. The following strategies are recommending;
Building relationship is real perk. One should be sure to build in networking times for
agents during the program-in addition to entertainment and education.
Web should be frequently used for creating gift ideas.
Hold sales contests in the forth quarter. It is the best times ti motivates agents who wants
to qualify for a trip.
Consider a contrast within the contest for- top-tier producers; additional rewards for
additional milestones that are met, such as air and guest room upgrades.
Use of Internet:

The present scenario is such that the products sold with the help of Internet. The
technological advancement is such that force the companies to take such steps. Still the full-
fledged use of Internet is not done in our country. As suggestion earlier the Internet based life
insurance will help the companies to reduce the transaction cost and time. At the time it can
improve the quality of service to its customers, which is the mission of the company.
Marketing strategies in India

A marketing strategy serves as the foundation of a marketing plan. A marketing plan contains a
list of specific actions required to successfully implement a specific marketing strategy. A
strategy is different than a tactic. While it is possible to write a tactical marketing plan without a
sound, well-considered strategy, it is not recommended. Without a sound marketing strategy, a
marketing plan has no foundation. Marketing strategies serve as the fundamental underpinning
of marketing plans designed to reach marketing objectives. It is important that these objectives
have measurable results.A good marketing strategy should integrate an organization's marketing
goals, policies, and action sequences (tactics) into a cohesive whole. The objective of a
marketing strategy is to provide a foundation from which a tactical plan is developed. This
allows the organization to carry out its mission effectively and efficiently. The following
techniques are implemented to device the Marketing Strategy for the product/service:
Market segmentation is the process in marketing of grouping a market (i.e. customers) into
smaller subgroups. This is not something that is arbitrarily imposed on society: it is derived from
the recognition that the total market is often made up of submarkets (called 'segments'). These
segments are homogeneous within (i.e. people in the segment are similar to each other in their
attitudes about certain variables). Because of this intra-group similarity, they are likely to
respond somewhat similarly to a given marketing strategy. That is, they are likely to have similar
feeling and ideas about a marketing mix comprised of a given product or service, sold at a given
price, distributed in a certain way, and promoted in a certain way. Segmentation: Market
segmentation is widely defined as being a complex process consisting in two main phases:

s and
develop marketing mixes accordingly.
Positioning: Simply, positioning is how your target market defines you in relation to your
competitors. A good position is: 1. What makes you unique? 2. This is considered a benefit by
your target market Positioning is important because you are competing with all the noise out
there competing for your potential fans attention. If you can stand out with a unique benefit, you
have a chance at getting their attention. It is important to understand your product from the
customers point of view relative to the competition. Targeting: Targeting involves breaking a
market into segments and then concentrating your marketing efforts on one or a few key
segments. Target marketing can be the key to a small businesss success. The beauty of target
marketing is that it makes the promotion, pricing and distribution of your products and/or
services easier and more cost-effective. Target marketing provides a focus to all of your
marketing activities. Marketing Mix: Marketing professionals and specialist use many tactics to
attract and retain their customers. These activities comprise of different concepts, the most
important one being the marketing mix. There are two concepts for marketing mix: 4P and 7P. It
is essential to balance the 4Ps or the 7Ps of the marketing mix. The concept of 4Ps has been long
used for the product industry while the latter has emerged as a successful proposition for the
services industry. The 7Ps of the marketing mix that are used to frame marketing strategies of
life insurance companies can be discussed as: Product - It must provide value to a customer but
does not have to be tangible at the same time. Basically, it involves introducing new products or
improvising the existing products. A product means what we produce. If we produce goods, it
means tangible product & when we produce & generate services, it means intangible service
product. A product is both what a seller has to sell & buyer has to buy. So, insurance companies
sell services &services are their products. Apart from life insurance as product, customer not
only buys product but also services in the form of assistance & advice of agent. It is natural that
customers expect reasonable returns for their investments & insurance companies want to
maximize their profitability. Hence while deciding the product mix services or schemes should
be motivational. Price - Pricing must be competitive and must entail profit. The pricing strategy
can comprise discounts, offers and the like. The pricing of insurance products not only affects
the sales volume and profitability but also influences the perceived quality in the minds of the

consumers. There are several different methods for pricing insurance, based on the insurance
marketers corporate objectives. They are the survival approach, the sales maximization
approach, and the profit maximization approach. To determine the insurance premium, marketers
consider various factors such as mortality rate, investment earnings, and expenses, in addition to
the individual risk profile based on age, health, etc., and the time period/ frequency of payment.
In insurance business the pricing decisions are concerned with: -The premium charged against
policies -The interest charged for defaulting the payment of premium & credit facility. -
Commission charged for underwriting & consultancy activities. The pricing decisions may be
high or low keeping in view the level or standard of customers or the policyholders. Mainly,
pricing of insurance is in the form of premium rates. The three main factors used for determining
the premium rates under a life insurance plan are mortality, expense & interest. The pricing of
insurance is in form of premium rates. The three main factors for determining the premium rates
under life insurance plan are: Mortality: Average death rates in a particular area. Expenses: The
cost of processing, commission to agents, registration is all incorporated into the cost of
installments & premium sum & forms the integral part of pricing strategy. Interest: The rate of
interest is one of the major factors which determine peoples willingness to invest in insurance.
People would not be willing to put their funds to invest in insurance business if the interest rates
provided by other financial instruments are higher than the perceived returns from the insurance
premiums. Place - It refers to the place where the customers can buy the product and how the
product reaches out to that place. This is done through different channels, like Internet,
wholesalers and retailers. This component of marketing mix is related to two important facets- -
Managing the insurance personnel -Locating a branch The management of insurance personal
should be done in such a way that gap between the services promises-services offered is bridged
over. In a majority of service generating organizations, such a gap is found existent which has
been instrumental in making down the image problem .The insurance personnel if not managed
properly would make all efforts insensitive. They are required to be given adequate incentives to
show their excellence. They should be provided intensive trainings to focus mainly on behavioral
management. Another important dimension to the place mix is related to the location of
insurance branches. While locating branches, branch manager needs to consider the number of
factors such as smooth accessibility, availability of infrastructural facilities and management of
branch offices and premises. Thus place management of insurance premises needs a new vision,

distinct approach & an innovative style. The branch managers need professional excellence to
make place decisions productive.
Promotion - It includes the various ways of communicating to the customers of what the
company has to offer. It is about communicating about the benefits of using a particular product
or service rather than just talking about its features. The insurance services depend on effective
promotional measures, so as to create impulsive buying. Promotion comprises of advertising &
other publicity tactics. The promotion is a fight not only for market share, but also for mind
share. The insurance services depend on effective promotional measures, so as to create
impulsive buying. Promotion comprises of advertising & other publicity tactics. Due attention
should be given in selecting the promotional tools. Personnel should be given adequate training
for creating impulsive buying. People - People refer to the customers, employees, management
and everybody else involved in it. It is essential for everyone to realize that the reputation of the
brand that you are involved with is in the people's hands. Understanding the customer better
allows to design appropriate products. Being a service industry which involves a high level of
people interaction, it is very important to use this resource efficiently in order to satisfy
customers. Training, development &strong relationships with intermediaries are the key areas to
be kept under consideration.
Process - It refers to the methods and process of providing a service and is hence essential to
have a thorough knowledge on whether the services are helpful to the customers, if they are
provided in time, if the customers are informed in hand about the services and many such things.
The process should be customer friendly in insurance industry. The speed & accuracy of
payment is of immense importance. The processing method should be easy to& convenient to the
customers. Installment schemes should be streamlined to cater to the ever growing demands of
the customers. IT & Data warehousing will smoothen the process flow. IT will help in servicing
the large no. of customers efficiently and bring down overheads. Technology can either
complement or supplement the channels of distribution cost effectively. It also helps to improve
customer service levels & helps to find out profitability & potential of various customers product
segments.
Physical (evidence) - It refers to the experience of using a product or service. When a service
goes out to the customer, it is essential that you help him see what he is buying or not. For
example- brochures, pamphlets etc serve this purpose. Evidence is a key element of success for

all insurance companies. Physical evidence can be provided to insurance customers in the form
of policy certificate and premium payment receipts. The office building, the ambience, the
service personnel etc. of the insurance company and their logo and brand name in advertisements
also add to the physical evidence. To reach a profitable mass of customers, then new distribution
avenues & alliances will be necessary.Initally insurance was looked upon as a complex product
with a high advice & service component. Buyers prefer a face to face interaction & they place a
high premium on brand names & reliability.

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RISK MANAGEMENT AND INSURANCE 14MBAFM408

RISK MANAGEMENT AND INSURANCE

Dept. of MBA/SJBIT Page 1

Risk and Insurance- Definition and Basic Characteristics of Insurance-Requirements of an

Module 6: (10 Hours)

Dept. of MBA/SJBIT Page 2

Dept. of MBA/SJBIT Page 3

Module No. Particulars Page No.

1 Introduction to Risk Management 5 31

Introduction to Insurance 63 110

Life Insurance 111 128

6 General Insurance 129 168

Management of Insurance Companies 169 - 187

Dept. of MBA/SJBIT Page 4

Dept. of MBA/SJBIT Page 5

Dept. of MBA/SJBIT Page 6

This can include:

Dept. of MBA/SJBIT Page 7

Methods to Handle Business Risks

Dept. of MBA/SJBIT Page 8

Dept. of MBA/SJBIT Page 9

(e) Segregation of Exposures

Dept. of MBA/SJBIT Page 10

The Risk Management Process

Dept. of MBA/SJBIT Page 11

Dept. of MBA/SJBIT Page 12

Identify and Analyze Loss Exposures

Dept. of MBA/SJBIT Page 13

Dept. of MBA/SJBIT Page 14

premiums due to claims experience, etc.

Dept. of MBA/SJBIT Page 15

Objectives of Risk Management

Dept. of MBA/SJBIT Page 16

Select Appropriate Risk Management Technique/Strategies

High Risk Avoidance Risk Transfer (Contractual)

Medium risk Avoidance (if unacceptable risks)

Dept. of MBA/SJBIT Page 17

Low Risk Self Retention

Risk Management Techniques: Noninsurance Methods

Dept. of MBA/SJBIT Page 18

Personal fault, which is the failure of individuals to respond appropriately in a given

Types of Loss Control

Dept. of MBA/SJBIT Page 19

Concurrent loss control

Potential Benefits of Loss Control

Dept. of MBA/SJBIT Page 20

Planned Versus Unplanned Retention

Dept. of MBA/SJBIT Page 21

Known as unfunded retention

Dept. of MBA/SJBIT Page 22

In part because of the large firms greater financial resources

Dept. of MBA/SJBIT Page 23

Intent of these contractual clauses

Dept. of MBA/SJBIT Page 24

Dept. of MBA/SJBIT Page 25

The comparative advantage of insurers in providing services related to risks can be an

Dept. of MBA/SJBIT Page 26

Risk Management for Individuals and corporations:

Dept. of MBA/SJBIT Page 27

Dept. of MBA/SJBIT Page 28

Rationale and Application:

Dept. of MBA/SJBIT Page 29

This process is in two parts: