INSURANCE INDUSTRY: PRODUCT CLASSIFICATION

INSURANCE

LIFE INSURANCE

GENERAL INSURANCE

REINSURANCE

HOME INSURANCE

TRAVEL INSURANCE

AUTO INSURANCE

FIRE INSURANCE

Life products before and after deregulation In the past, the LIC had three commonly sold policies in the market for life insurance: whole life, endowment and money-back policies. The number of new policies sold each year went from about 0.95 million a year in 1957 to 26.97 million in 2003. The total number of in-force policies went from 5.42 million in 1957 to 141 million by March 2003. There are presently several dozen life products offered by the LIC. However, they are small variations on the three products mentioned above. In addition, even though term life policies were available, they were not actively promoted. LIC also has several pension products. Following the entry of the private insurers, there was a proliferation of products. According to the Annual Report of the IRDA, 116 life products were offered by life insurance companies in India as of 31 March 2002. Of course, they were not all distinct products. Many products across different companies were very similar, if not identical. Some of the more popular products launched recently include creditor protection products like mortgage life, and unit-linked products.

Non-life products before and after deregulation Before deregulation in 1999, non-life products that were available in the market were rather limited and similar across the four GIC subsidiaries. They could also be classified by whether they were regulated by tariffs: fire insurance, motor vehicle insurance, engineering insurance and workers compensation etc that came under tariff; and burglary insurance, Mediclaim, personal accident insurance etc that did not. In addition, most specialized insurance (e.g. racehorse insurance) did not fall under tariff regulations. After the opening of the sector to private players, more new products were introduced. To take an example, one joint-venture non-life insurer introduced 29 different products during the year, according to the IRDA. They included products liability, corporate cover, professional indemnity policies, burglary cover, individual and group health policies, weather insurance, credit insurance, travel insurance and so on. Some of these products were completely new (e.g. weather insurance) while others were already available through the public insurance companies.

GENERAL INSURANCE PRODUCTS:

1) Home Insurance Every man has a dream to own a house one day. For an ordinary person it takes a whole lifetime of savings to build a house. And one cannot predict a natural calamity Hence home insurance is very important. Home insurance policy available in the market covers broadly two things:

Building structure Contents inside the home

Insurance Covers for a Building Structure 1. The Fire and Special Perils Cover This is a comprehensive packaged cover that covers damages to the structure of home due to

Fire Storm, tempest, flood & inundation Riot, strike & malicious damage Lightning Explosion & implosion Aircraft damage Damage due to impact by vehicles Subsidence, landslides and rockslides Bursting and/or overflowing of water tanks, apparatus and pipes Missile testing operation Leakage from automatic Sprinkler installations Bush fire

2. Earthquake Cover: Covers damages to the structure of your house due to earthquake 3. Terrorism Cover: Covers damages to the structure of your house due to acts of terrorism. A home insurance does not cover the market value of the home. The price of the home includes the cost of the land and the cost of constructing the building structure on this land and the land cannot be insured. The insurance cover is only for the cost of constructing the building. The sum insured is calculated by multiplying your home area by the construction rate per sq. feet.

Insurance Cover for Contents inside the Home This cover is only for damages or loss of the contents inside the home electronic and electrical goods, furniture and fixtures, clothing, jewelry and any other contents inside the home.

The covers that can be taken for the contents are as follows:

The Fire and Specials Perils Cover Earthquake Cover Burglary Loss / damage to contents due to burglary or an attempted burglary Loss of jewelry, gold ornaments, silver articles and precious stones kept under lock & key

All the contents are covered on the market value of the items. This means that if there is a loss, the claim would be paid on the value of purchasing a similar new item, minus depreciation. Householder's Insurance policy: Householder's Insurance policy is designed to cover risks and contingencies faced by householders under a single package policy. It provides protection for property and interests as well as legal liability of the insured and his/her family members who permanently reside with the insured. The premium rate for the Householder's Insurance policy is calculated at 0.65 per thousand rupees value of the Capital Sum Insured. The Capital Sum Insured is derived at the time of commencement of the policy from the Market Value of the property. Electronic items, computers and their peripherals, dish antennae are not covered under the Householder's Insurance policy. A separate Electronic Equipment policy must be implemented to provide cover for them. Exceptions against cover within the preview of the Householder's Insurance Policy: The householder's Insurance policy, any loss or damage suffered to the following is treated as an exception and cannot be claimed.

Consumable articles Money Securities Stamps Stamp collection Bullion Livestock Motor vehicles

Pedal cycle Deeds Bonds Bills of exchange Promissory notes Shares Books Manuscripts Loose precious stones Jewellery and valuables

2) Travel Insurance Policy covers financial risks that may occur due to:

Trip Cancellation/Interruption Medical emergency Hijack Personal accident Events like delay or missed departure Delayed arrival or Loss of baggage Passport loss and legal expenses Loss of cash, or valuables

Main Features of Travel Insurance Policies Available in India

Policy is available for all ages between 1 70 years and senior citizens between 71 and 85 years. They cover trips from as short as 7 days to 180 days. Offer various coverage options ranging from US $ 50,000 to US $ 500,000. Premium is generally payable on a pay per day basis and not on slab rates. Pre-existing ailments and maternity usually are excluded Generally, no health-check up is required up to 70 years of age. Additional coverages that can be included in the basic travel policy are: dental treatment, medical evacuation, repatriation, baggage loss/delay, trip cancellation and interruption, etc

For frequent international travelers, Multi-Trip Plan is available. The policy is valid for 1 year and one can choose between 2 options of 30 or 45 days as the maximum duration per trip. Baggage Insurance is insurance that covers the loss or damages to personal baggage of the policyholder or his family members due to fire, theft or accident during the course of journey anywhere in India including stoppage enroute. Executive Travel Policy: Any Indian National over the age of 18 years residing in India is entitled for Executive Travel Policy against risks during their travel overseas and within India on the following basis:

Travel Overseas - All 24 hours during the covered trip up to 60 days only Travel Within India - Travels by commercial plane as a ticketed passenger by train / licensed coach / taxi including private taxi, outstation use of company car and while as a pedestrian but excluding two wheelers or the public road transport system.

Maximum indemnity available under the Executive Travel Policy In case of personal accident, the maximum limit of indemnity is Rs.30 lakhs. In case of loss of checked baggage outside India, the maximum limit of indemnity is Rs.75, 000/- and within India it is Rs.40, 000/Suhana Safar Policy: All domestic travelers can opt for this policy. It covers the risk of accident to the policyholder, spouse and dependent children and loss of baggage during the period of his outstation travel within India. Maximum liability available for personal accident is Rs.1, 00,000 per person and liability for loss of baggage is limited to Rs.15, 000/- where the number of people covered is 4. Period of insurance coverage available under this package is for a single round trip to all the declared places (including places enroute) up to the scheduled date of return. The policy cover is available for trips up to 60 days only. However the policy can be extended to cover further 60 days on payment of additional premium.

Suhana Safar Policy This policy is specially designed to cover domestic traveler including baggage. Period of insurance is 60 days. It can be extended to further 60 days on payment of additional premium.

Executive Travel Policy This policy is designed to cover Indian Nationals traveling abroad. Period of insurance is 60 days.

Overseas Mediclaim Policy This policy is devised to cover people travelling abroad for business, pleasure, study and for employment. Period of insurance is 180 days for business and pleasure travel and for employment and study purpose, the policy is issued on annual basis.

3) Auto Insurance Auto insurance Is mandatory for all new vehicles, be it for commercial or personal use. Insurance Companies are coming out with comprehensive policies for its customers. They are also tying up with leading automobile manufacturers for a swift insurance process. An automobile may be insured against loss or damage by accident, fire, burglary, while in transit; third party accident etc. Auto insurance companies come out with unique plans for four wheelers, two wheelers, commercial vehicles. Types of Auto Insurance Available: Two Wheeler Insurance Car Insurance Commercial Vehicle Insurance

Calculation of Auto Insurance Amount/Premium: Insurance companies are providing value- added service to its client by offering them instant auto quotes. Auto premium is determined by a number of factors like, make of the vehicle, year of manufacture, place of registration, current showroom price of the vehicle and model of the vehicle. It also depends whether the client is individual or corporate etc. The amount of premium increases with the increase in the price of the vehicle. Companies renew policies after expiry. A discount on premium is sometimes provided to existing clients. Auto Insurance Coverage There are two types of car insurance - comprehensive and third party. Third-party insurance covers only damage caused by the vehicle to other people or property. These policies are valid for a year. Your car insurance company should notify you by mail when it's time to renew the policy.

Risks covered by the Third Party policy: The Third Party car insurance policy covers a vehicle owner's legal liability for any compensation to be paid arising from any accident caused by the use of the vehicle. These include: Death or bodily injury to a third party person Damage to third party property The liability is covered for an unlimited amount in case of death or injury. Damage to third party property is covered by the insurance policy as follows up to Rs. 1 lakh for private vehicles, scooters, and motorcycles and up to Rs.7.5 lakhs for commercial vehicles. Comprehensive insurance covers risk arising out of theft or damage to the vehicle, death of the driver and/or passengers in the vehicle, and damage caused by the vehicle to other people or property.

Risks covered by the Comprehensive policy: In addition to the cover provided by the Third Party car insurance plan, the Comprehensive insurance policy protects you against any loss or damage caused to the vehicle and its insured accessories due to natural and man-made calamities. These include: Natural calamities, such as fire, explosion, self ignition or lightning, flood, typhoon, hurricane, storm, tempest, inundation, cyclone, hailstorm, frost, landslide, rockslide, and fire and shock damage due to earthquake Man-made calamities, such as burglary, housebreaking or theft, riot or strike, accident by external means, malicious act, terrorist activity and damage during travel by road, rail, inland-waterway, air, or elevator This policy also includes personal accident cover, which provides compulsory accident cover for the owner of the vehicle while driving. The owner can also avail personal accident cover for passengers in the vehicle. Another mandatory feature is the third party legal liability cover - it protects the owner against legal liability arising from an accident causing any permanent injury or death as well as any property damage. This insurance policy also pays for towing charges from the place of accident to the workshop, subject to a maximum of Rs.300/- for scooters and motorcycles and Rs.1,500/- for private cars and commercial vehicles. Also available is a restricted cover for fire and theft - only for vehicles that are laid up in a garage and not in active use. Apart from the optional covers available in the Comprehensive car insurance policy, there are some extension covers on the insurance that can be purchased. These include: Loss or damage of accessories fitted in the vehicle such as stereo, fan, airconditioner, etc. Personal accident cover under private car policies for passengers and drivers Legal liability to be paid to employees or non-fare paying passengers in commercial vehicles

Different types of Personal Accident Covers available for drivers and passengers: An owner-driver of a private car is provided car insurance with personal accident cover of up to Rs. 2 lakhs while the owner-driver of a two-wheeler is covered for Rs. 1 lakh. A personal accident insurance cover can also be purchased at an additional cost to cover employed drivers and persons traveling in the vehicle, on a named as well as unnamed basis. Duration of Insurance: Your vehicle has to be insured at all times. This is required by law. All car insurance plans are annual policies issued for a period of twelve months. Therefore, you need to know when your insurance renewal is coming up. However, an extension for less than 12 months or a policy for a short period can be provided with special approval from a competent authority in the car insurance company. A car insurance policy has to be renewed before the expiry of the ongoing term of insurance. Delay in renewing a policy and thereby driving a vehicle without valid motor insurance is illegal and there are substantial penalties. Here are some scenarios where you will lose out: In case the uninsured vehicle has an accident, the insurance company is not liable and you would have to bear the liabilities alone, if any. If the policy is not renewed within 90 days of the expiry date of the previous policy, the No Claim Bonus cannot be claimed. If the policy expires and is not renewed on time, the insurance company will insist on a physical inspection of the vehicle before granting renewal. Private cars that are over 15 years old are normally not considered for comprehensive cover. For vehicles between 10 and 15 years old, car insurance insurers insist on an inspection report from a surveyor certifying the condition of the vehicle. Motorcycles and commercial vehicles over 10 years old are normally not granted comprehensive insurance cover. However, remember that no age limit exists for purchasing the Third Party cover, which is a mandatory requirement for all vehicles.

4) Fire Insurance A fire insurance policy involves an insurance company agreeing to pay a certain amount equivalent to the estimated loss caused by fire to the insured, within the time specified in the contract. The indemnity is subject to change depending upon the policy. One should confirm with the insurer about the types of risks covered, since one cannot insure the property against all types of risks of fire. Extent of coverage under a Fire Insurance Policy: Fire insurance provides protection for the estimated value of the physical house. However, there are a number of exclusions to the same, for example medical bills, loss of human life and pets, loss of personal belongings, structures outside the property (including garages and gazebos), damage to the landscape and expenses for accommodation for the time being. These things can be covered under a package of extended property insurance. Main types of Fire Insurance policies: Specific Policy: The insurer is liable to pay a set amount lesser than the propertys real value. In this policy, the propertys actual value is not considered to determine the indemnity. The average clause, which requires the insured to bear the loss to some extent, does not play a role in this policy. In case the insurer inserts the clause, the policy will be known as an average policy. Comprehensive policy: This all-in-one policy indemnifies for loss arising out of fire, burglary, theft and third party risks. The policyholder may also get paid for the loss of profits incurred due to fire till the time the business remains shut. Valued policy: This policy is a departure from the standard contract of indemnity. The amount of indemnity is fixed and the actual loss is not taken into consideration. Floating policy: This policy is subject to the average clause. The extent of coverage expands to different properties belonging to the policyholder under the same contract and one premium. The policy may also provide protection to goods kept at two different stores. Replacement or Re-instatement policy: This policy is subject to the re-instatement clause, which requires the insurance company to pay for replacing the damaged property. So, instead of giving out cash, the insurer can re-instate the property as an alternative option.

Why does one need Fire Insurance? Fire insurance is important because a disaster can occur at any time. There could be many factors behind a fire, for example arson, natural elements, faulty wiring, etc. Some facts that stress the importance of fire insurance include: Fire contributes to the maximum number of deaths occurring in America due to natural disasters. Eight out of ten fire deaths take place at home. A residential fire takes place after every 77 seconds. The major reason for a residential fire is unattended cooking.

Reinsurance: Creating Value & Risk Management

Introduction
The concept of Reinsurance, though known, is still a less popular one in Insurance Industry and even general policy-holders are not very familiar with this term. An insurance company uses this tool to transfer a portion to one or more insurance companies. In a general language, Reinsurance is a process in which an insurer transfers certain percentage of its business risk to another company, which will then reimburse the loss that insurer may face in his business. It makes the risk management process of insurance companies more effective and economical. Reinsurance is a transaction in which one insurer agrees for a premium, to indemnify another insurer against all or part of loss that insurer may sustain under its policy or policies of insurance. The company purchasing the reinsurance is known as the Ceding Insurer (or Primary Insurer) and the company selling reinsurance is known as the Assuming Insurer (or simply Reinsurer). The transaction is also described as "The Insurance of Insurance Companies". It is a risk management tool that spreads the risk so that no single entity has to bear the burden of paying back beyond the limit. Reinsurance companies indemnify a certain percentage of the losses which the primary insurer is unable to pay or the amount of loss is beyond the capacity of the primary insurer.

Reinsurance process can be presented diagrammatically as below: -

A reinsurer enters into a reinsurance agreement for a very specific reason either the nature of risk insured, or the business strategies of the insurers, or other possible reasons. Reinsurance is an important criterion to determine the success of insurance business. Reinsurance mainly covers catastrophic risks that are not predictable and cause the greatest exposure for the insurance companies. The September 11 attack was a similar situation. A single insurer will not be able to bear such damaging financial impact so the unbearable loss is broken down into bearable units by risk transfer. The amount of risk a company limits depends upon the contract terms as well as factors like worth of assets, trends of inflation in the economy, the price of the insurance products, and the type of risk. Principles of Reinsurance Reinsurance contract basically depends upon three principles: 1. Principle of Utmost Good Faith - Reinsurers maintain utmost faith in underwriters of their company. These underwriters, in turn, maintain utmost good faith in the underwriters of the primary insurance company. 2. Principle of Indemnity - The principle of indemnity of the insured risk applies automatically on reinsurance. A reinsurer automatically follows the legal and technical features of the reinsured in writing and underwriting a risk. 3. The Insurer Must Retain a Part of the Risk Before Reinsuring. Though there cannot be the reinsurance of the complete risk, there can be a complete retention of risk. Those risks that are within the retention capacity of an insurer must be retained completely.

How Reinsurance Creates Value to Primary Insurers? Reinsurance benefits primary insurers in following ways: Reduced volatility of underwriting results Capital relief and flexible financing Excess to reinsurer's expertise and services, especially in the fields of product development, pricing and underwriting and claim management. The above benefits vary in focus for Life and Non-Life Insurance Non-Life Insurance 1. Non-life insurance buys reinsurance to protect its capital base against large deviations from expected loses. This is most essential in case of catastrophic losses. 2. Reinsurance allows non-life insurers to accept more business with the same amount of capital. By buying reinsurance coverage, insurers transfer risk to reinsurers and do not allocate capital for these risks. Thus primary insurer can spread their overhead cost of distribution network, administration and claim handling over a broad base of business and thereby benefit from economies of scale. 3. Reinsurers play a key role in the assessment and underwriting of risk. They also ensure the continuous supply of insurance coverage to companies in the time of market distress. Reinsures operates in international environment and they have long term experience, which helps in effective claim settlement to the benefit of insurers and policyholders. Life Insurance Life insurers buy reinsurance to minimize the potentially negative impact of large risks. Life insurers want to limit their exposure to high sum assured for individual risks or to avoid an accumulation of mortality risk in case of group cover schemes. Moreover, long term reinsurance contracts protect insurers against claims variations, for instance, variations in mortality over time. One of the major reasons for entering into reinsurance contract is that reinsurers provide expertise in underwriting and claim management as well as on pricing and product development. Since reinsurers operate globally, they have broad and deep understanding of markets, products and also large data of insured populations. Thus, reinsurer assists primary insurers with high quality underwriting tools, training to

insurer's underwriter and other skills. They also help in claim management by providing guidelines on claims assessment and training of insurers and ultimately benefiting policy-holders also. Reinsurers' broad expertise also helps insurers in product development and pricing of new products. Insurers can refine risk into broader classes and can minimize their exposure with the help of innovative products. Since they mainly focus on savings and investment business, life reinsurer allows them to transfer some proportion of mortality and disability risk component. Reinsurance helps to reduce capital strains. By transferring risk, life insurers can reduce their capital requirements and can use the freed-up capital into new lines of business expansion or new geographical areas. As a protection business, they require huge capital and reinsurance helps to ease this strain.