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Practice of Life Insurance

Compiled By:

Manoj Verma
Astt. Professor (Sr.Scale) Maharaja Agrasen Institute of Management Studies
E.mail: manojverma@maims.ac.in

Notes by Manoj Verma

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Syllabi
Unit I Life Insurance: Conceptual framework, Importance of Life Insurance; Insurance Products , A hedge against personal risk (s), Insurance Products, alternative to Investment Products, Pension Plans, investment Plans, Insurance Products, collateral security in the rising hire-purchase market scenario. LIC Act 1956, Insurance Ombudsman Insurance Products Unit II Group Insurance and special purpose schemes. Group Insurance Characteristic; Difference Between Individual and Group Insurance; GI schemes in India. Unit III Actuarial considerations ( demographic, investment of funds and managerial expenses) in costing Insurance products; Theory and Practice of Underwriting: Selection, Loading, Exclusion clauses and declining of proposals Policy Document. Unit IV Servicing (alterations and surrender), Claim Settlement, Retention Vs. Reinsurance, Catastrophic Bonds, Sources of surplus and distribution of Profits, Investments and Revenues.

Unit-1
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Life Insurance Conceptual Framework


____________________________________________________________________

Life insurance is the device of providing for life after death and retired, disabled or who live longer. Life has always been an uncertain thing. To be secure against

unpleasant possibilities, always requires the utmost resourcefulness and foresight on the art of man. To pray or to pay for protection is the spirit of the humanity. Man has been accustomed to pray God for protection and security from time immemorial. In modern days Insurance Companies want him to pay for protection and security. The insurance man says God helps those who help themselves; probably he is correct. Self-help and thrift are the basis of modern civilization since all other features of modern life can be traced to these basic principles. In the twentieth century Welfare State on the one hand and Socialist State on the other tried to take care of the individual from cradle to grave and look after him to enjoy a worthwhile life. But unfortunately both have failed or at best only partially successful since they proved either too costly has taken birth in those days when the entrepreneurial spirit of middle class was at its highest and people were inclined to take risks and accept challenges for a better future. The advent of industrial revolution gave impetus to develop this branch of insurance.
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Life insurance concerns people's lives. Life insurance is founded basing on different experiences and realities of human life. It provides men and women with an institution through which they can systematically create financial security for their families and businesses. It also serves the economy as an important channel through which capital is made available to business and industry. It is a business that affects everyone directly or indirectly.
CONCEPT OF LIFE INSURANCE

Life insurance is a contract under which the insurer (Insurance Company) in consideration of a premium paid undertakes to pay a fixed sum of money on the death of the insured or on the expiry of a specified period of time whichever is earlier. In case of life insurance, the payment for life insurance policy is certain. The event insured against is sure to happen only the time of its happening is not known. So life insurance is known as 'Life Assurance'. The subject matter of insurance is life of human being. Life insurance provides risk coverage to the life of a person. On death of the person insurance offers protection against loss of income and compensate the titleholders of the policy. Significance of Life Insurance
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1. Life insurance makes the family financially secure after the untimely death of the breadwinner. 2. Life insurance is also a savings instrument. 3. Life insurance helps in meeting responsibilities of people even after death like higher education of children, their marriages, etc. 4. Helps in repaying the mortgage loans by acting as a collateral security. 5. Life insurance also provides old age benefits, which can be had in the form of annuities or a lump sum after retirement. 6. Creditors can also use it in case the debtor dies without repaying the loan amount by getting the lives of the debtors insured, where the policy money or the sum assured will belong to the creditor in case of non-repayment. 7. Partners of a partnership firm can get the lives of the partners insured in order to repay the share of the dead partner to the heirs. 8. A firm can get the life of its key man insured as the death of the key man may cause the firm to suffer huge financial losses, and this money so got can be used to recruit a new person in place of the deceased employee and also meet the losses during the transitional period (i.e. from the time of death of the key person till the recruitment and training of a new employee).

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9. Group insurance policies can also be taken as a welfare measure on the lives of the employees as a whole, improving and boosting the morale of the employees resulting in improved productivity.
Insurance a Hedge against Personal Risk

Before discussing in details lets first understand the concept of Insurance; its basically a device that reduces the risk of an individual. People which are exposed to the same kid of risk come together and join hand to face the risk of a particular type. There are a variety of definitions of insurance. In fact different researchers have defined it in their own words. One of the very popular definitions is as follows: Insurance is a cooperative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to ensure themselves against that risk .Its a method of risk transfer. Many times people get confused with Insurance and Hedging. They consider it as one and the same thing but both are conceptually different. Hedging is a technique for transferring the risk of unfavorable price fluctuations to a speculator by purchasing and selling future contracts on

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an organized exchange. It can be considered as another method of risk transfer Insurance Vs. Hedging Although both the techniques are similar in that risk is transferred by a contract; but there are some important differences between them such as: Risk Insurability: While insurance deals with only pure risk such as risk of physical damage to a motor-vehicle, the hedging deals with a risk whichb is highly speculative in nature. For example forward trading in foodgrains. Insurance aims at transferring the risk which do not any possibility of profits or gain and which are an essential part of our day to day life. But in case of hedging the objective is to reduce the business risk. One aims at the gain but do not want to retain the loss. So as a result hedging is applied to transfer the risk to other party. Reduction of risk by law of large number. In case of Insurance the risk can be highly reduced with introduction of large numbers. In case a large number of persons are ready to purchase
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the life insurance policy then it would be a much comfortable position for the insurer.But in case of Hedging the law of large nimber cannot be applied. It would hardly make any difference on the risk assumption of the other party if more and more people opt for hedging contract. Insurance - a hedge against personal risk Though Insurance and hedging are fundamentally different concepts but both are helping us in the similar way. Insurance proves to be much better than the Hedging. The following could be valid explanations to the above statement:
Insurance provides Security and Safety insurance reduces the

risk of an individual. So the person can expect greater security as well as safety for future.
Insurance affords Peace of Mind al the financial burdens are

now reduced to the payment of premium which very much nominal in comparison to amount of probable loss. So one can have greater peace of mind after buying an insurance policy.
Insurance eliminates Dependency the insurance eliminates the

dependency element from the family. The person who is sole


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earner can get his dependents assured of for their future needs just by purchasing a life insurance policy and paying the premium. The family members are no longer dependent on the main earner of the family.
Insurance encourages Savings the insurance policy encourages

savings. By purchasing the policy, every person after getting the policy, every person will have to pay the premium and the savings would be channelized.
Insurance provides Profitable Investment if we compare

insurance with other traditional investment tools then definitely it proves to be a better option. It is highly cost effective with greater certainty.
Insurance fulfills various needs of a person Insurance can

fulfill all the future needs of an individual. The only thing that is required is proper planning at right time. One can arrange funds for all his future needs such as - the marriage of his daughter; for education of children.

To Business
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Uncertainty of business loss is reduced by getting a policy

against a particular risk the uncertainty related with future transactions can now be reduced. It definitely improves the decision making of the management.
Business efficiency is increased with insurance insurance

improves the efficiency of the business. The management can take better decisions if all its efforts and ventures are backed by insurance policy.
Key Man Indemnification In case of business the existence of

the keyman is no longer a basic requirement, the business is guaranteed by way of insurance policies at the time of availing heavy loan facilities.

Enhancement of Credit the insurance policy can act as a

collateral security in the debt market. So the credit facility is definitely enhanced because of the existence of insurance coverage.

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Business Continuation insurance policy can ensure the

continuation of business as the business is well covered against major perils of loss. So the business may continue for a longer period of time.

Welfare of Employees insurance policy can act as a welfare

incentive offered to the employees. They are well covered against major perils of the business. To Society
Wealth of the society is protected the society is also protected

against unforeseen future events. The investment can be made with greater certainty and hence the entire wealth of the society can be well protected.
Economic growth of the Country is encouraged with the

procurement of the insurance coverage the society is benefited in long run as insurance contributes towards the economic development of the country. More funds are available for business ventures as well as infrastructure development.

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Reduction in Inflation one major benefit of insurance is that it

assists in reduction of inflation. The money supply is increased and the inflationary pressures are reduced by way of insurance. Insurance an alternative to Investment Products Investment Investment means engagement of funds for the sake of future return. In normal circumstances the purpose of investment is either to have sufficient return or to have significant arrangement of funds so as to meet the future obligations. In India, Insurance is mostly perceived as an investment of funds; but the mechanism is entirely different. Investment: Basic mechanism 1) Expected rate of Return 2) Involvement of Risk 3) More Risk More Profit 4) Conditional engagement of funds 5) Time element plays its role 6) Very much speculative Insurance: Basic mechanism
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Social device Pure Risk coverage Pooling of Funds Law of Large numbers Risk Coverage Assurance of indemnification against a specific peril Insurance an alternative to Investment Products:
Purpose The purpose of making an investment is to earn a

specific return i.e. in order to have the availability of a particular amount the funds are to be invested for a particular period. In case of insurance the basic purpose is to cover a particular risk; it provides a protection against a particular risk.
Risk Coverage/ Protection in case of insurance the risk against

a specific peril is well protected but in case of investment there is no element of protection or risk coverage.
Certainty/ Better assurance Insurance proves to be a better

tool than normal investment as it generates better assurance. In case of investment the specific amount can be generated only if the funds are blocked for that specific period of time.

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No speculation in case of insurance there is no chances of

speculation element, but the insurance can be highly speculative. If the things are up to the expectations than there could be a profitable situation but in case your anticipations are not correct than there could be a loss. But in case of Insurance the risk covered is highly pure in nature.
No more Risk more profit In case of normal investment there

is a fundamental principle of the market i.e. more risk more profit. It says if you are ready to undertake more risk only than you can have more profit. But insurance is free from this assumption. Irrespective of individual risk, everyone gets the same risk coverage in consideration of premium payment.
Comparatively better return If we compare the two aspects of

insurance and investment than insurance gives a better rate of return than normal investment as the entire loss is shared by the group.
Sharing of Losses insurance is based on a fundamental principle

of sharing of losses i.e. all the persons which are facing the same kind of risk are grouped together and every body in the group shares their respective share of loss of entire group.
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Third party assurance the insurance also covers the risk of

third party i.e. a person other than the insurer and the insured, which is truly a wonderful advantage of insurance; but this kind of advantage could not be achieved in case of normal investment.
Solution for all family needs in case of investment, the targeted

amount of funds could be generated only if the funds are invested for that much of time and in required quantity, but in case of insurance one can plan for all his future requirements of funds such as Child education or for their marriage. The only thing required is to select the appropriate policy for this purpose.
Lesser knowledge of investment process may work If you

want to get better return from your investment than you have to be well versed with all the aspects of investment process. In fact you have to scientifically plan you investment process. But in case of Insurance you do not need to be so scientific. The insurance company has in fact plan the investment of funds, you have to purchase the policy and have to pay the premium.

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Insurance Products - collateral security in rising hire purchase market Concept of Hire Purchase Hire purchase is the legal term for a contract, in this persons usually agree to pay for goods in parts or a percentage at a time. In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner Hire purchase differs from a mortgage and similar forms of liensecured credit in that the so-called buyer who has the use of the goods is not the legal owner during the term of the hire-purchase contract. If the buyer defaults in paying the installments, the owner may repossess the goods, a vendor protection not available with unsecured-consumer-credit systems. HP is frequently advantageous to consumers because it spreads the cost of expensive items over an extended time period.

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Concept of Collateral In lending collateral agreements, collateral is serves as that protection is, any for a borrowers a lender failing pledge of against to a pay

specific property to a lender, to secure repayment of a loan. The borrower's default borrower

the principal and interest under the terms of a loan obligation. 1) If a borrower does default on a loan (due to insolvency or other event), that borrower forfeits (gives up) the property pledged as collateral - and the lender then becomes the owner of the collateral. In a typical mortgage loan transaction.
2) Collateral, especially within banking, may traditionally refer

to secured lending (also known as asset based lending)


3) More recently, complex collateralization arrangements are used to

secure

trade

transactions

(also

known

as capital

market

collateralization). Insurance Products - Collateral Security in rising hire purchase market

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Easy availability of loan Insurance policy can be well utilized

as a collateral security in the hire purchase market. The lender can get an assurance from the borrowers side that in case the borrower is not able to pay the amount than the lender can use the insurance policy to recover the amount.
Greater assurance to lender - the lender get a significant

assurance from the lender as the amount of policy is a guarantee of paying back the borrowed money.
Interest can be better negotiated if the borrower has an

insurance policy than the borrower is also in a position to negotiate the interest rate as the borrower can also have more options to avail the loan facility.
Risk coverage + credit enhancement through the insurance

policy the borrower can avail the dual benefit as the future risk can be well covered as well as the credit can also be enhanced
Reduction of Uncertainty the existence of a significant amount

of insurance policy can reduce the uncertainty. The payment of the interest as well as the principal amount can be well protected through insurance policy.
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Elimination of Dependency the insurance policy can eliminate

the dependency element from hire purchase agreement as the lender can get this risk, well covered through insurance policy. For example majority of banks gets their loan amount through the insurance policy of the borrower.
Encourages savings the existence of insurance policy promotes

the loan facility. The borrower can negotiate the rate of interest and the terms and conditions of the contract in a better way. So the borrower get a saving in terms of the cost of the loan. As well as many other people also go for better savings, so as to earn a return by lending the money to those people who actually need it and which have a lesser degree of risk in lending them the money
Better Decision Making the insurance policy improves the

decision making process. Both the parties i.e. the borrower as well as the lender can take their respective decisions in a better way. LIC Act 1956 An Act to provide for the nationalization of life insurance business in India by transferring all such business to a Corporation established for the purpose and to provide for the regulation and control of the business
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of the Corporation and for matters connected there with or incidental thereto. Some of the important provisions are as follows: 1. Short title and commencement. This Act maybe called the Life Insurance Corporation Act, 1956 It shall come into force on such date as the Central Government may, by Notifications in the Official Gazette, appoint. Definitions: In this Act, unless the context otherwise requires, (1) "Appointed day, means the date on which the Corporation is established under Section 3; (2) "Composite insurer "means an insurer carrying on in addition to controlled business any other kind of insurance business; (3) "Controlled business" means (i) In the case of any insurer specified in sub-clause (a) or sub-clause (b) of clause (9) of section 2 of the Insurance Act and carrying on life insurance business (a) all his business, if he carries on no other class of insurance business; (b) all the business appertaining to his life insurance business, if he carries on any other class of insurance business also; (c) all his business if his certificate of registration under the Insurance Act in respect of general insurance business stands wholly cancelled for a period of more than six months on the 19th day of January, 1956.
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(ii) in the case of any other insurer specified in clause (9) ofsection2 of the Insurance Act and carrying on life insurance business (a) all his business in India, if he carries on no other class of insurance business in India; (b) all the business appertaining to his life insurance business in India, if he carries on any other class of insurance business also in India; (c) all his business in India if he certificate of registration under the Insurance Act in respect of general insurance business in India stands wholly cancelled for a period of more than six months on the 19th day of January, 1956. Explanation. An insurer is said to carry on no class of insurance business other than life insurance business ,if in addition to life insurance business, he carries on only capital redemption business or annuity certain business or both ;and the expression" business appertaining to his life insurance business" in sub-clause (i) and (ii) shall be construed accordingly; (iii) in the case of a provident society, as defined in section 65 of the Insurance; Act, all its business; (iv) in the case of the Central Government or a State Government, all life insurance business carried on by it, subject to the exceptions specified in section44; (4) "Corporation" means the Life Insurance Corporation of India established under section 3;
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(5) "Insurance Act means the Insurance Act, 1938(4of1938); (6) "Insurer" means an insurer as defined in the Insurance Act who carries on life insurance business in India and includes the Government and a provident society as defined in section65 of the Insurance Act; (7) "Member" means a member of the Corporation; (8) "Prescribed" means prescribed by rules made under this Act; (9) "Tribunal" means a Tribunal constituted under section17 and having jurisdiction in respect of any matter under the rules made under this Act; (10) All other words and expressions used herein but not defined and defined in the Insurance Act shall have the meanings respectively assigned to them in that Act. Establishment and incorporation of Life Insurance Corporation of India. (1) With effect from such date as the Central Government may, by notification in the Official Gazette, appoint, there shall be established a Corporation called the Life Insurance Corporation of India. (2) The Corporation shall be a body corporate having perpetual succession and a common seal with power subject to the provisions of this Act, to acquire, hold and dispose of property, and may by its name sue and be sued.

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Constitution of the Corporation. (1) The Corporation shall consist of such number of persons not exceeding 2 as the Central Government may think fit to appoint thereto and one of them shall be appointed by the Central Government to be the Chairman there of. (2) Before appointing a person to be a member, the Central Government shall satisfy itself that person will have no such financial or other interest as is likely to affect prejudicially the exercise or performance by him of his functions as a member, and the Central Government shall also satisfy itself from time to time with respect to every member that he has no such interest; and any person who is, or whom the Central Government proposes to appoint and who has consented to be, a member shall, whenever required by the Central Government so to do, furnish to it such information as the Central Government considers necessary for the performance of its duties under this sub-section. (3) A member who is in anyway directly or indirectly interested in a contract made or proposed to be made by the Corporation shall as soon as possible after the relevant circumstances have come to his knowledge, disclose the nature of his interest to the Corporation and the member shall not take part in any deliberation or discussion of the Corporation with respect to that contact. Capital of the Corporation.
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(1) The original capital of the Corporation shall be five crores of rupees provided by the Central Government after due appropriation made by Parliament bylaw for the purpose, and the terms and conditions relating to the provision of such capital shall be such as maybe determined by the Central Government. (2) The Central Government may, on the recommendation of the Corporation, reduce the capital of the Corporation to such extent and in such manner as the Central Government may determine. Functions of the Corporation. 1) Subject, to the rules, if any, made by the Central Government in this behalf, it shall be the general duty of the Corporation to carry on life insurance business, whether in or outside India, and the Corporation shall so exercise its powers under this Act as to secure that life insurance business is developed to the best advantage of the community. 2) Without prejudice to the generality of the provisions contained in subsection (1) but subject to the other provisions contained in this Act, the Corporation shall have power (a) To carryon capital redemption business, annuity certain business or reinsurance business in so far as such re insurance business appertains to life insurance business; (b) Subject to the rules, if any, made by the Central Government in this behalf, to invest the funds of the Corporation in such manner as the
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Corporation may think fit and to take all such steps as may be necessary or expedient for the protection or realization of any investment; including the taking over of and administering any property offered as security for the investment until a suitable opportunity arises for its disposal; (c) To acquire, hold and dispose of any property for the purpose of its business; (d) To transfer the whole or any part of the life insurance business carried on outside India to any other person or persons, if in the interest of the Corporation it is expedient so to do; (e) To advance or lend money upon the security of any movable property or otherwise; (f) To borrow or raise any money in such manner and upon such security as the Corporation may think fit; (g) To carry on either by itself or through any subsidiary any other business in any case where such other business was being carried on by a subsidiary of an insurer whose controlled business has been transferred to and invested in the Corporation under this Act; (h) to carry on any other business which may seen to the Corporation to be capable of being conveniently carried on in connection with its business and calculated directly or indirectly to render profitable the business of the corporation;

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(i) to do all such things as maybe incidental or conducive to the proper exercise of any of the powers of the Corporation. In the discharge of any of its functions the Corporation shall act so far as maybe on business principles. Power to impose conditions, etc. (1) In entering into any arrangement, under section 6, with any concern, the Corporation may impose such conditions as it may think necessary or expedient for protecting the interest of the Corporation and for securing that the accommodation granted by it is put to the best use by the concern. (2) Where any arrangement entered into by the Corporation under section 6 with any concern provides for the appointment by the Corporation of one or more directors of such concern, such provision and any appointment of directors made in pursuance there of shall be valid and effective notwithstanding anything to the contrary contained in the Companies Act, 1956 (1 of1956),or in any other law for the time being in force or in the memorandum, articles of association or any other instrument relating to the concern, and any provision regarding share, qualification, age limit, number of directorships, removal from office of Directors and such like conditions contained in any such law or instrument aforesaid, shall not apply to any director appointed by the Corporation in pursuance of the arrangement as aforesaid.
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(3) Any director appointed as aforesaid shall(a) Hold office during the pleasure o f the Corporation any maybe removed or substituted by any person by order in writing by the Corporation; (b) Not incur any obligation or liability by reason only of his being a director or for anything done or omitted to be done in good faith in the discharge of his duties as a director or anything in relation thereto; (c) Not be liable to retirement by rotation and shall not be taken into account for computing the number of directors liable to such retirement. Offices, branches and agencies.-(1) The central office of the Corporation shall be at such place as the Central Government may, by notification in he Official Gazette, specify. (2) The Corporation shall establish a zonal office at each of the following places, namely, Bombay, Calcutta, Delhi, Kanpur and Madras, and, subject to the previous approval of the Central Government, may establish such other zonal offices as it thinks fit. (3)The territorial limits of each zone shall be such as may be specified by the Corporation. (4) There may be established as many divisional offices and branches in each zone as the Zonal Manager thinks fit. Committees of the Corporation.--

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(1) The Corporation may entrust the general superintendence and direction of its affairs and business to an Executive Committee consisting of not more than five of its members and the Executive Committee may exercise all powers and do all such acts and things as may be delegated to it by the Corporation. (2) The Corporation may also constitute an Investment Committee for the purpose of advising it in matters relating to the investment of its funds, and the Investment Committee shall consist of not more than eight members of whom not less than four shall be members of the Corporation and the remaining members shall be persons (whether members of the Corporation or not) who have special knowledge and experience in financial matters, particularly, matters relating to investment of funds. (3) The Corporation may constitute such other Committees as it may thin fit for the purpose of discharging such of its functions as maybe delegated to them. Funds of the Corporation.-The Corporation shall have its own fund and all receipts of the Corporation shall be credited thereto and all payments of the Corporation shall be made there from. Audit.
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(1) The accounts of the Corporation shall be audited by auditors duly qualified to act as auditors of companies under the law for the time being in force relating to companies, and the auditors shall be appointed by the Corporation with the previous approval of the Central Government and shall receive such remuneration from the Corporation as the Central Government may fix. (2) Every auditor in the performance of his duties shall have at all reasonable times access to the books, accounts and other documents of the Corporation. (3) The auditors shall submit their report to the Corporation and shall also forward a copy of their report to the Central Government. Annual report of activities of Corporation. The Corporation shall, as soon as may be, after the end of each financial year, prepare and submit to the Central Government in such form as maybe prescribed a report giving an account of its activities during the previous financial year, and the report shall also give an account of the activities, if any, which are likely to be undertaken by the Corporation in the next financial year.

Insurance Ombudsman The institution of Insurance Ombudsman was created by a Government of India Notification dated 11th November, 1998 with the purpose of
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quick disposal of the grievances of the insured customers and to mitigate their problems involved in redressal of those grievances. This institution is of great importance and relevance for the protection of interests of policy holders and also in building their confidence in the system. The institution has helped to generate and sustain the faith and confidence amongst the consumers and insurers. Appointment of Insurance Ombudsman The governing body of insurance council issues orders of appointment of the insurance Ombudsman on the recommendations of the committee comprising of Chairman, IRDA, Chairman, LIC, Chairman, GIC and a representative of the Central Government. Insurance council comprises of members of the Life Insurance council and general insurance council formed under Section 40 C of the Insurance Act, 1938. The governing body of insurance council consists of representatives of insurance companies. Eligibility Ombudsman are drawn from Insurance Industry, Civil Services and Judicial Services. Terms of office An insurance Ombudsman is appointed for a term of three years or till
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the incumbent attains the age of sixty five years, whichever is earlier. Re-appointment is not permitted.

Territorial jurisdiction of Ombudsman The governing body has appointed twelve Ombudsman across the country allotting them different geographical areas as their areas of jurisdiction. The Ombudsman may hold sitting at various places within their area of jurisdiction in order to expedite disposal of complaints. The offices of the twelve insurance Ombudsmans are located at (1) Bhopal, (2) Bhubaneswar, (3) Cochin, (4) Guwahati, (5) Chandigarh, (6) New Delhi, (7) Chennai, (8) Kolkata, (9) Ahmedabad, (10) Lucknow, (11) Mumbai, (12) Hyderabad. The areas of jurisdiction of each Ombudsman has been mentioned in the list of Ombudsman. Office Management The Ombudsman has a secretarial staff provided to him by the insurance council to assist him in discharging his duties. The total expenses on Ombudsman and his staff are incurred by the insurance companies who are members of the insurance council in such proportion as may be decided by the governing body.

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Removal from office An Ombudsman may be removed from service for gross misconduct committed by him during his term of office. The governing body may appoint such person as it thinks fit to conduct enquiry in relation to misconduct of the Ombudsman. All enquiries on misconduct will be sent to Insurance Regulatory and Development Authority which may take a decision as to the proposed action to be taken against the Ombudsman. On recommendations of the IRDA, the Governing Body may terminate his services, in case he is found guilty.

Power of Ombudsman Insurance Ombudsman has two types of functions to perform (1) conciliation, (2) Award making. The insurance Ombudsman is empowered to receive and consider complaints in respect of personal lines of insurance from any person who has any grievance against an insurer. The complaint may relate to any grievance against the insurer i.e. (a) any partial or total repudiation of claims by the insurance companies, (b) dispute with regard to premium paid or payable in terms of the policy, (c) dispute on the legal construction of the policy wordings in case such dispute relates to claims; (d) delay in settlement of claims and (e) non-issuance of any insurance document to customers
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after receipt of premium. Ombudsman's powers are restricted to insurance contracts of value not exceeding Rs. 20 lakhs. The insurance companies are required to honour the awards passed by an Insurance Ombudsman within three months. Manner of lodging complaint The complaint by an aggrieved person has to be in writing, and addressed to the insurance Ombudsman of the jurisdiction under which the office of the insurer falls. The complaint can also be lodged through the legal heirs of the insured. Before lodging a complaint: i) the complainant should have made a representation to the insurer named in the complaint and the insurer either should have rejected the complaint or the complainant have not received any reply within a period of one month after the concerned insurer has received his complaint or he is not satisfied with the reply of the insurer. ii) The complaint is not made later than one year after the insurer had replied. iii) The same complaint on the subject should not be pending with before any court, consumer forum or arbitrator.
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Notes by Manoj Verma

Recommendations of the Ombudsman When a complaint is settled through the mediation of the Ombudsman, he shall make the recommendations which he thinks fair in the circumstances of the case. Such a recommendation shall be made not later than one month and copies of the same sent to complainant and the insurance company concerned. If the complainant accepts recommendations, he will send a communication in writing within 15 days Award The ombudsman shall pass an award within a period of three months from the receipt of the complaint. The awards are binding upon the insurance companies. If the policy holder is not satisfied with the award of the Ombudsman he can approach other venues like Consumer Forums and Courts of law for redressal of his grievances. As per the policy-holder's protection regulations, every insurer shall inform the policy holder along with the policy document in respect of the insurance Ombudsman in whose jurisdiction his office falls for the purpose of grievances redressal arising if any subsequently.
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of

the

date

of

receipt

accepting

the

settlement.

Steady increase in number of complaints received by various Ombudsman shows that the policy-holders are reposing their confidence in the institution of Insurance Ombudsman.

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Group insurance
Meaning of group insurance Many employees were aware of the economic security provided by insurance-oriented service benefits. The employers on the other hand also appreciated group insurance as an easy method of providing life insurance to the employees. Group insurance developed in India in the early 1960s. It is the coverage of many persons under one policy. Under group insurance, the insurer drafts a single policy known as a master policy for the insured group. Under employee group insurance, the contract of insurance is between the insurer and employer. So it is the employer who pays the premium. Further it is the employer who can decide upon the members and the extent to which they shall be insured. The employer nominates employees for the pension scheme based on different criteria
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like their earnings potential, their seniority, age and post. Employees have no say in choosing the extent of their cover. However, the employer while introducing the group insurance scheme for the first time may give an employee the option to join or not to join the scheme. This is necessary, especially when the employees have to contribute for the plan or forego another benefit in order to be covered under a group insurance plan. Certain features of group insurance differentiate it from individual insurance. Let us now discuss the distinguishing features of group insurance. Features of group insurance Group policy: Under group insurance a single policy known as a master policy is issued to the group policyholder who may be the employer or the authorised person representing the group Certificates and summary evidence of insurance is given to the members of the group insured. The master policy is a detailed document that states the contractual relationship between the insurer and the group policyholder. A list of persons eligible for coverage with relevant information such as age, occupation etc is sent by the employer or nodal agency to the insurer. The insurer examines the list, quotes the premium payable and confirms coverage for the listed persons when the premium is paid.

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Underwriting group: This is the most important distinguishing feature of group insurance. In group insurance, the insurer underwrites the group as a whole. Therefore group characteristics are important rather than the individual characteristics of group members. This means the underwriter considers the size, age composition, occupation and stability of the group as a whole rather than health and other insurability aspects of the individuals. For the reasons stated above, insurers prefer to underwrite larger groups rather than smaller ones to avoid the possibility of adverse selection. Underwriters favour a regular flow of new employees, as the old ones will be replaced with the younger ones, so that the average age group remains more or less constant. Further, actively and efficiently working employees can be assumed to be in average health. Cost effective: Group insurance generally costs less than individual insurance. This is because the group insured generally needs no medical examination. Secondly, the acquisition cost for the insurer is also low. The insurer pays less commission to agents of group insurance than to the agents of individual insurance. Moreover, the employer offers administrative services such as collection of premiums, where the employees share the premiums. The cost of administrating the scheme for the employer is minimal. So the group coverage is provided to customers at prices lower than that of individual insurance.

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Experience rated premiums: The insurer charges experience rated premiums when the group is too large. In group insurance, the premium reflects the loss. In simple words, the group is charged higher premiums if the loss experienced in the previous year is higher than expected losses. Where the loss experience is considerably less than expected loss experience over a period of time the saving is passed on by the insurer to the master policyholder by way of reduction in premium. Advantages of group insurance Some of the advantages of group insurance are as follows:
1. With group insurance, persons with less or no life insurance are

also able to get some measure of insurance protection.


2. Coverage is also available to those employees who are otherwise

uninsurable. Life insurance companies can reach a vast number of clients at less cost within a short span of time.
3. It is a tax effective tool. The employer gets tax relief for the

premium paid by him on behalf of the employees. Employers are also entitled to tax relief for premiums paid by them if the scheme is partly contributory. Limitations of group insurance There are also some limitations to the group insurance schemes, which are discussed below:
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1. The nature of group insurance is temporary. It means once the

member is out of the group, the coverage ceases. The employee also loses insurance coverage in the event of termination of the group plan.
2. The master policy issued by the insurer is not very flexible. It does

not meet the individual needs for insurance. The insurer under group insurance cannot focus on the financial needs of the individual, which is possible in individual insurance. A few members who could have been charged fewer premiums if individual insurance had been taken, have to pay higher premiums because the premium is fixed for the group as a whole. Group eligibility A group to be insured under the group life insurance scheme has to fulfill the following conditions
1. The group, which should be homogenous, should have been

formed for purposes other than to seek insurance.


2. The group should allow new comers to enter into the group for the

continuity of the group.


3. The method of determining the amount to be insured should

preclude individual selection.


4. Safeguards should be established to produce a normal distribution

of risk and to avoid the inclusion of undue proportion of the total


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insurance of the group upon unhealthy lives or on a few lives or on the lives of advanced ages.
5. A universal administrative organisation referred to as nodal

agency in our country, must be in existence that is able and willing to act on behalf of the insured. Besides the insured members there should be some party who can pay a proportion of the total cost. Eligible groups Earlier, group insurance was taken only for the employees of an organisation. Later on, other groups were also included like groups of professionals, co-operative societies, debtors of one creditor, etc. Let us now discuss some of the groups that are eligible for group insurance.
1. Individual employer groups: Employees may be working with a

single large company, a sole trader or in a partnership firm. The employees of any of the above are referred to as individual employer groups. So far, individual employer groups have been the most common groups insured. This was due to the favourable characteristics of such groups, which are mentioned below:
a. The employer can represent the employees as a single person

dealing with the insurance company.


b. Authentic employee data is readily available.

c. Payment of premiums is easy and regular.

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d. The employer has the required machinery to collect the claim

money from the insurance company and pay it to the beneficiaries.


e. The employer would have already screened the employees at the

time

of

employment

through

pre-recruitment

medical

examination. Besides, such employees also enjoy medical facilities offered by employers and therefore enjoy better health. So, it is convenient for the insurer to grant a cover without medical evidence.
2. Multiple employer groups: Employers may be financially or in

any other way, connected to each other as associated companies. Such employers can form a group and take a group policy covering the employees of each employer of the group. There is a principal company who is a policyholder and deals with the insurance company. It collects the required data and premium from other employers as per the agreement.
3. Labour union groups: Under labour union groups, the insurer

covers the members of a labour union by issuing a contract directly to the union. It is the union that pays the premium. The union may be meeting the premiums wholly out of the union funds or jointly with the members. It should be ensured in such cases that the coverage benefits individual members rather than the union or its office bearers.
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4. Creditor-debtor groups: In creditor debtor group insurance, lives

of the debtors are covered through a group policy issued to the creditor. The creditor, such as a bank or a finance company, insures its debtors as collateral security against the credit given to the debtors. In the event of the death of the borrower, the insurer pays the benefit to the creditor. The creditor sets off the outstanding loan and any balance of the policy proceeds is paid to the legal heirs of the debtor.
5. Miscellaneous groups: Different other groups can also be insured

under a group insurance scheme. Such groups include associations of public and private employees, associations of professionals such as lawyers, doctors, accountants, teachers, unit holders,veteran associations, religious groups, retail chains etc. Group Insurance Schemes The two main types of group insurance are group life insurance and group accident and sickness insurance. The group life insurance allows the members to name the beneficiaries of their choice. The employee/member has a special privilege to convert the policy on termination from the group. This can be highly beneficial, especially for an uninsurable person. Group accident and sickness policy have different

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components. And the technicalities differ from company to company. Let us now discuss the various schemes available to an employer. Group life insurance Three types of group life insurance are common in India the group term insurance scheme, group gratuity scheme and group superannuation scheme. Group life insurance is the most common group insurance provided to employees. Group life insurance is a simple and economic way of providing life insurance to employees. Under this policy, generally a fixed sum is paid to the dependants of a covered employee on his death. It is also possible to offer what is known as graded cover that offers different covers to different categories of employees within the same group. This scheme is renewable every year. As the premium rates are very low when compared to individual insurance, the employees and the weaker sections find it convenient and helpful. It helps their dependents in reducing debt burdens. Definition: Group life insurance is that form of life insurance covering not less than 25 employees with or without medical examination, underwritten under a policy issued to the employer, the premium on which is to be paid by the employer or by the employer and employees jointly and insuring all of his
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employees or all of any class or classes thereof determined by conditions pertaining to the employment for amounts of insurance based on some plan which will preclude individual selection. Where the group is small, say less than 100, the insurer may insist on 100% participation of employees in the scheme, if the scheme involves contribution from employees also. For very large groups however, the insurer generally accepts the scheme if 75% of the employees participate. Group gratuity scheme The group gratuity scheme is an insurance scheme covering the employers liability to pay gratuity under the Payment of Gratuity Act, 1972. The amount of gratuity to be paid is at the rate of 15 days wages based on the wages last drawn, for each completed year of service. However this is subject to a maximum limit. The Act requires that the gratuity be paid to those employees who have served the employer continuously for
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at least five years. Group superannuation scheme After retirement, employees need financial security. The provident fund and the gratuity provided by the employer may not be sufficient in an inflationary economy. Secondly such lump sum payments are often utilised by the employees to meet their current contingent liabilities. The employers observed that the employees actually also need a periodical payment over and above the normal terminal benefits. Such payment is made in the form of pensions by creating a superannuation fund. Superannuation scheme aims at providing old age pensions to employees after retirement. Group insurance scheme in lieu of EDLI Group insurance scheme in lieu of ELDI is also a type of group insurance scheme offered by life insurance. All employers who come under the Employees Provident
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Fund and Miscellaneous Provision Act 1952, have a statutory liability to subscribe to the Employees Deposit Linked Insurance Scheme, 1976, to provide for the benefit of life insurance to all their employees. Under the scheme in effect from 24th June, 2000, the insurance benefit is equal to the average balance to the credit of the deceased employee in the provident fund during the last 12 months, provided that where such balance exceeds Rs. 35,000, insurance cover would be equal to Rs.35,000 plus 25% of the amount in excess of Rs.35,000, subject to a maximum of Rs.60,000. Hence if the length of service is inadequate and /or the salary is low, the benefit to the family of the employee in the event of his death would be meagre. Where the employer provides for a better insurance benefit through an alternative insurance plan, he may be exempted from participating in this scheme. LICs group insurance scheme in lieu of EDLI has been recognised as one such scheme.
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Benefits to the employer 1. The premium payable by the employer in general is lesser than the total contribution, which has to be made under the EDLI scheme, especially when the salary level of the employees is high and the average age of the employee group is low. 2. Settlement of claim for this scheme is quicker; the insurer just asks for the death certificate and the claim form from the employer. 3. The premium paid by the employer is admissible as normal business expenses for income tax purposes. Benefits to the employee 1. The coverage offered by LIC scheme is higher than that offered under EDLI scheme by the Provident Fund authorities. Group savings linked insurance scheme Group savings linked insurance scheme is a group insurance scheme, which is very

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popular since it offers a survival benefit in addition to the death benefit available under a group term assurance policy. Where life insurance benefits are not linked to any statutory requirement, there is often a demand to link it with a survival benefit, particularly when the employees come forward to make contributions. The central government employees group insurance scheme is an example of such a combination. This scheme was introduced with the objective of providing, low cost insurance on a wholly contributory and self-financing basis, with a survival benefit to help the families of the government employees in the event of death of the employees while in service, and a lump sum payment to the employees on cessation of employment. Insurance companies now offer a similar scheme, which was originally formulated to suit the requirements of large public sector organisations like BHEL, HHAL, HMT, LIC, GIC, etc. The scheme has since been extended to reputed private companies
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and educational institutions. The group savings linked insurance scheme can be a contributory or noncontributory scheme. Part of the premium collected is the savings premium that is accumulated at the rate declared from time to time; a part is utilised to provide life cover in case of death. Main features: The employer acts as a facilitator and coordinator in maintaining the scheme and in making monthly deductions from salary. Contribution consists of risk premium and the savings portion. The savings portion earns interest at the declared rate, compounding yearly. As per regulations, the life cover premium and contribution for savings should be in the ratio 1:2 respectively. Employees are grouped into several agreed categories based on their salary and therefore the contribution and coverage depend on the category to which the employee belongs. Benefits
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1. In the event of death of the employee, the nominee gets an assured sum with accumulated savings and interest on the same. 2. On retirement/resignation/termination, only the accumulated savings portion with interest is payable. Monthly contribution of employees is exempted under Section 88, of IT Act, 1961. Requirements The number of members joining the scheme has to be atleast 75% of the total number of employees. The scheme has to be made compulsory for all the new employees. The premium payable is based on weighted mean of the ages of the members. Contribution is uniform for each category. Group Annuity Scheme Employers who have a privately administered Superannuation Fund, where moneys are invested by Trustees as per Income Tax Rules can purchase pensions for employees as and when due under Group Annuity policies from LIC.
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Group Leave Encashment Scheme According to Accounting Standard (AS-15) of January, 1995 and amended Section 209 (3) of the Companies Act, 1956, it has become necessary for employers to provide for the liability of leave encashment facility available to employees in the annual books of accounts. The Group Leave Encashment Scheme (GLES) is designed to fund such liabilities of employers. Group Mortgage Redemption Assurance Scheme This scheme covers the borrowers of Housing/Vehicle Loans from financial institutions where loans are recovered in EMI. Insurance cover allowed to borrower upto the outstanding loan excluding the EMI interest, subject to conditions applicable to the scheme. Group Social security schemes In many developed countries, insurance coverage either under individual plans or under group insurance is not available to persons belonging to the weaker sections
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of the community who are engaged in various occupations in the unorganized sector. For such people, social insurance is the only answer for providing a certain minimum of insurance cover. Therefore social security insurance is the growing concern of many nations. In most of the developed countries, insurers actively participate in social welfare measures. In our country also, insurance companies provide protection to weaker sections under group term insurance policy. The poorer section groups include handloom workers, rickshaw pullers, rural artisans, landless agricultural labourers, barbers, tailors co-operative milk producers etc. In the event of death of the member, a fixed sum is paid to the dependents. In case of an accident, the dependents can get double the sum.

Group Disability Income Insurance

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Workers compensation provided to employees in the event of workrelated disability is often inadequate. These benefits also fail to cover disability due to accidents that are not work- related. The group disability income insurance available in most of the foreign countries (but not in India) provides economic security to the employees in the event of disability. Group disability income insurance is of two types - short term plans and long-term plans.

Case study Annapoorna oils was a fast growing company started three years ago, engaged in the manufacture of edible oils. Although a relatively new company, it already had a market share of 10% in its home state, Andhra Pradesh. The wage agreement with the employees union, which was for three years had ended, and the union had submitted
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a charter of demands. The union, taking note of the high profits the company had been generating in the last two years, wanted a 25% wage increase across the board for all employees. The management was more or less inclined to agree. However there were no demands for any employee welfare insurance schemes from the union. At this point of time the group insurance manager, LIC, was making a routine business call for introducing group schemes in the company. Question: If you were the group insurance manager what suggestions would you give to the company management at this point of time?

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