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CHAPTER 1- WHAT IS INSURANCE?

1.1 INTRODUCTION Definition Insurance is a contract between two parties whereby one party agrees to undertake the risk of another in exchange for consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period in case of life insurance or to indemnify the other party on happening of an uncertain event in case of general insurance. The party bearing the risk is known as the 'insurer' or 'assurer' and the party whose risk is covered is known as the 'insured' or 'assured'. In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the insurance; an insured, or policyholder, is the person or entity buying the insurance policy. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called

the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. Insurance is bought in order to hedge the possible risks of the future which may or may not take place. This is a mode of financially insuring that if such a incident happens then the loss does not affect the present wellbeing of the person or the property insured. Thus, through insurance, a person buys security and protection. A simple example will make the meaning of insurance easy to understand. A biker is always subjected to the risk of head injury. But it is not certain that the accident causing him the head injury would definitely occur. Still, people riding bikes cover their heads with helmets. This helmet in such cases acts as insurance by protecting him/her from any possible danger. The price paid was the possible inconvenience or act of wearing the helmet; this i.e. equivalent to the insurance premiums paid. Insurance facilitates reimbursement during crisis situations, insurance means promise of compensation for any potential future losses. There are different insurance companies that offer wide range of insurance options and an insurance purchaser can select as per own convenience and preference. Several insurances provide comprehensive coverage with affordable premiums. Premiums are periodical payment and different insurers offer diverse premium options. The periodical insurance premiums are calculated according to the total insurance amount.

1.2 TYPES OF INSURANCE Major types of insurances are as mentioned below:

Life insurance: Descendants family receives financial benefits. Life insurances also offer paid proceeds to the beneficiary.

Automobile insurance: Usually automobile insurances cover damages and legal financial expenditures of the automobile driver.

Health insurance: Health insurance cover the expenditures associated to treatment and medical expenditures.

Credit insurance: Borrowers often fail to repay debts, loans and mortgages due to certain unavoidable circumstances, credit insurances can be of great help during such crisis.

Property

insurance:

Property

protection

insurance

provides

protection from risks associated to theft, fire, floods etc. This type of insurance can be further classified into specialized forms as follows:

Fire insurance Earthquake insurance Flood insurance Home insurance Boiler insurance Group insurance

Type of insurance companies can be categorized into two main divisions:

General insurance companies Life insurance companies: The companies, dealing with life insurance ,pension products and annuities are life insurance companies. Insurance companies are usually identified as stock companies. Insurance is a device for indemnifying an individual against loss and in the recent past due to natural calamities, few insurance companies have suffered financial setback. Premiums of little insurance have suddenly gone uphill as plenty of insurance providers have become insolvent. While selecting an insurance company, financial strength of the company must be considered as viability of the insurance provider is extremely crucial. Insurance provides financial protection against a loss arising out of happening of an uncertain event. A person can avail this protection by paying premium to an insurance company. A pool is created through contributions made by persons seeking to protect themselves from common risk. Premium is collected by insurance companies which also act as trustee to the pool. Any loss to the insured in case of happening of an uncertain event is paid out of this pool.

Concept of Insurance / How Insurance Works The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums.

1.3 PRINCIPLES Insurance is one of the rapidly expanding sectors in modern world and most people will have to rely on their Insurance policy at the occurrence of uncertain event. But many of them are not aware of the fundamental features of a valid insurance contract. In life we all concern about the risks we will have to face in future point of time. Every person live in society should have minimum of safeguard to face the occurrence of uncertain future event. Therefore we all need to create a contract with an Insurance company to transfer the risk and get the proper protection against losses, on the occurrence of uncertain future event. However, there must be a proper contract between two parties named insurer and insured to be enforced the insurance contract, in the insured claim on the insurance policy. Therefore certain fundamental features should be reflected from every insurance contract in order to honor the insurance policy. Utmost good faith Utmost good faith simply means, the both parties should enter in to the contract good faith. In Latin its called uberrimae fidei. That is a duty of both parties to enter in to an insurance contract with the full disclosure of material facts related to subject matter. The duty to disclose of important facts usually referred to as material facts is often rest on the insured as he knows more about the subject matter insured. Non disclosure of material facts by the policy holder would affect

the insurer in deciding whether he enters in to the contract or on which premium rate, it should be considered. Indemnity Indemnity is the second principle of insurance contract. It is simply meant, that the insured will only be re-instated to the previous position after the loss, resulted from occurrence of uncertain event. Its clear any insured is not allowed to make profit from the insurance contract and could recover the actual amount of loss not exceeding the amount of policy. Insurable Interest Insurable interest is another fundamental principle of an insurance contract and it means that the insured should have particular relationship with the subject matter insured. If a person is said to have an insurable interest in the subject matter insured, he must benefit from its existence and suffer a monetary loss from its destruction. For an example, in the life insurance policy wife has an insurable interest in the life of her husband. Causa proxima Causa proxima is also a principle of insurance. It speaks about the proximate cause of the loss. When you claim from insurer for the loss resulted from the occurrence of uncertain event, the loss should be caused by the peril insured in order to make the insurer liable. Suppose X insured his house against loss or damage by fire. X quarreled with his neighbor and ultimately neighbor set fire to the Xs house and damaged the house. X could claim from the insurer under the insurance
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policy as the damage was caused by fire that is the peril insured against the loss. Doctrine of subrogation This principle applies to the contract of indemnity only i.e. marine and fire. It lays down a principle which is quite equitable. According to this doctrine, where a loss occurs and the insurer pays as for a total loss, he is entitled to all the rights and remedies which the insured has against a third party in respect of loss so paid for. It prevents the insured being indemnified from two sources in respect of the same loss. Suppose A has damaged B is motor car negligently. If he pays B is loss in full. B cannot collect the same from the insurance company. On the other hand if B applied to his insurance company for indemnity under his policy, he will not be permitted to collect the damages from A. Cancellation Both parties have right to cancel the policy before its expiry date. The period of .the policy comes to an end on the cancellation of policy. So the protection provided by the insurer to the insured stops from the date of such cancellation. The premium received by the insurance company is also returnable to the insured. Attachment of risk Without the attachment of definite risk to the policy, the contract of insurance cannot be in force. So in this case the consideration fails and the premium received by the insurance company must be returned.
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Mitigation of loss When the event insured against takes place, the policy holder must do everything to minimize the loss and to save what is left. This principle makes the insured more careful in respect of this insured property. Arbitration Most fire and accident insurance policies contain an arbitration clause which provides for referring' to differences to an arbitration. The arbitrator is to be appointed in writing by the parties in difference. The object of this clause is to reduce litigation.

1.4 NEED OF INSURANCE

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The need for insurance arises out of the risks in the course of living our daily lives. Our lives are constantly in danger through accident or illness; our property may be subject to loss or damage, while losses incurred by others may affect us in some way or another. We also run the risk of causing injury or damage to other people or their property at a subsequent heavy cost to ourselves should we be sued for damages? There is thus a constant striving for security, for some means of eliminating a risk, reducing it or transferring it to someone or something better able to bear it and deal with the financial consequences. This becomes a matter of growing importance to any individual or Nation as economic life develops because of the increasingly onerous burden of risk. In ancient times, individual possessions were meager, trade was by simple barter, and life, being nasty, brutish and short-lived, was not held to be of any great value. The growth of commerce and industry, plus the introduction of money as a means of exchange, led over the centuries to a more complicated society in which losses not only were more severe in their impact but also became measurable and capable of evaluation. The early merchants could attempt to protect their property by arming themselves and guarding it against robbers, while ships could hug the coastline to avoid the greater perils of the sea, but it was impossible to provide complete protection and so some method and remedy of replacing lost goods at least in financial terms was sought. Many merchant traders and business owners could build up reserve funds for that purpose, but that would tie up capital which could be used more productively in the business itself, while the sums required might be enormous in the case of a major catastrophe. Again, it would be essential to have several years of successful and trouble-free trading to build up
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sufficient reserves, so that new entrants to business would be at a disadvantage and the entrepreneurial initiative would be stifled. The answer to these problems was for merchants to pool their resources to provide central funds out of which losses could be met without disastrous effects upon any on contributor. In time some merchants became particularly interested and skilled in this new area of business and dropped their other occupations to become professional acceptors of risks. Gradually they acquired an understanding of classes of trade and the hazards involved so that they were able to assess the risks inherent in a particular venture and decide what contributions it should make on an equitable basis to the central fund. From this it will be clearly seen that the introduction of insurance was absolutely vital in the development of trade as a means of transferring risk. Over the years the insurance industry has also played its part in risk reduction and elimination. By increasing premium rates, imposing excesses or asking an insured to carry a part of a risk himself, it has encouraged the improvement of poor risks. The use of trained surveyors to inspect properties proposed for insurance has also resulted in many

recommendations for increased security provisions and better fire protection systems. Although the development of insurance was furthered mainly by the desire to cover property lost at sea, in time fire insurance, life assurance and a whole range of other classes were introduced to meet the needs of the day. In recent times, much greater insurance capacity has had to be found owing to the introduction of huge values for such symbols of modern technology as the jet airliner and the super tanker, the phenomenal growth in liability risks through, for instance, nuclear power stations or pharmaceutical manufacture,
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and the effects of natural disasters such as earthquakes and typhoons on developed communities. This has greatly accelerated the development of the reinsurance market as a back-up to direct insurers as has the increasing nationalism of countries which see insurance funds as a prime national asset and restrict their exportation by foreign insurers. It has also led to a need for highly qualified brokers to deal between clients and insurers, and insurers and re-insurers.

The modern worldwide insurance market is thus an immense and complex industry, without which modern life would hardly be possible. The reason why we need Insurance today and its value to the community can be summed up as follows. It spreads the cost of losses over all those exposed to risk, rather than those who actually suffer loss, thus providing security for a minimal cost. Insurance reduces the need for individual reserve funds, thus freeing up capital for productive use elsewhere. From its own accumulated funds Insurance provides investment capital for governments and industry. Current Government borrowing is substantially underwritten by Insurance Companies who have bought the Gilts. Insurance encourages loss-prevention activities, thus helping to create a safer society for us all.

CHAPTER 2-GROUP INSURANCE

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2.1 INTRODUCTION Group insurance is a health care coverage plan in which individual employees or members are included under one 'master policy' owned by their employers. Because the group insurance plan has so many contributors, the policy often provides coverage for more services at a much lower cost per participant. Group insurance may be provided by other organizations besides for-profit companies. Labor unions, churches and other service groups can also obtain group insurance for recognized members and possibly their dependents. Employee Benefits typically refers to retirement plans, health insurance, life insurance, accident & disability insurance as far as the contribution of insurance is concerned. There are several more Employee Benefits that companies offer ranging from vacations, company cars, stock options, education loans support, and so on. However, while such perquisites are manageable by Human Resources and Management in small and medium companies fairly easily, one of the key challenges is in providing Employee Benefits to cover Insurance schemes to employee groups which are small in size. The reason for this is typically as a result of the type of products that are offered to employer groups by Insurance companies in India and much the world over.

Group Insurance Schemes provided by Insurers are what employers in India buy to cover their employee base. In insuring groups, employers get favorable rates bundled with unique services and features which are by and
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large not available to small groups. The catch is that most of these schemes can only cover groups exceeding 20-25 persons. As a result small employers end up not covering their employees as they are unable to get covered under traditional group plans,. While the cost variance is marginal for small groups in going for group schemes versus individual plans to cover their employees, typically small employers do not have the bandwidth to keep track and keep seeking insurance covers on a one on one basis for their recruits. Bottom line, the lack of benefits can end up becoming a serious deterrent for hiring and retaining good employees, especially those who come from larger corporate where they have enjoyed great benefits. Till such time as a strong online solution is presented, the small employer group will always find it a challenge to provide competitive benefits to their employees. While the cost to the company will remain a negligible component to overall costs, the value it can bring in the event of adversity will go a long way in creating a positive image of the company and its promoters and securing the well being of their employees.

2.2 POPULAR SCHEMES

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1. Group Medical Insurance - covers employees for fixed sums against hospitalization costs and can be extended to cover spouse, children and dependent parents) 2. Group Term Insurance - covers employees to provide death benefit to employees family/nominee for a fixed sum which can be based on salary, graded slabs or a flat sum across employees. 3. Group Personal Accident Insurance - similar to Group Term, this plan also covers employees to provide death benefit but only in the case of Accidental Death. A group accident plan also provides disability benefits as a result of accident. 4. Group Travel Insurance - As a lot of employers in India specially in the IT sector have frequent travelers to international client locations, such a plan makes it simple for HR to cover their employees with international medical insurance and also makes it very cost effective. 5. Group Gratuity - As this a fixed sum factored by employers and mandated by the law, the Gratuity scheme also provides for a life cover linked to the amount of money due. In the event of an employee dying, the dependents are due to be paid the Gratuity due even if under 5 years and this can become a serious burden for employers. Hence it is advisable to manage the money as well as life protection from insurers.

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6. EDLI - Employees Deposit linked Insurance (India Death payment Scheme) All employees to whom the Employee's Provident Fund and Miscellaneous Provision Act , 1952 applies, have a Statutory liability to subscribe to Employee's Deposit Linked Insurance Scheme, 1976 to provide for the benefit of Life insurance to all their employees. Under the scheme as amended with 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. Thus if the length of service is not adequate and/ or the salary is low the average balance may be substantially less and such the benefit to the employee's family is either inadequate or non-existent. The contribution @ 0.50% of each employee's salary is payable by the Employer to the Provident Fund Authorities.

7. GROUP SUPERANNUATION Old-age security is one of the key parameters of gauging the development of an economy and an individual's standard of living. India as a nation is still to travel a long way to match the standards of developed nations when it comes to old age security. Barely 10% of the total population enjoys an access to old age security. With the advent of the concept of nuclear family and increasing longevity of human life the issue of old age security further demands higher attention.

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Life insurance companies, however, have already taken steps on this path, introducing the superannuation schemes on group platform. Superannuation schemes, also known as pension or annuity schemes, are of two types defined contribution and defined benefit. Defined contribution scheme is one in which the employer decides the contribution to the scheme. This contribution is ascertained as a percentage of the salary. The pension amount is ascertained at the time of retirement, depending on the accumulated amount. Defined benefit scheme on the other hand takes into account the amount of benefit an employee will get on his retirement. Actuarial valuation is conducted to ascertain the funding rate. Based on various factors like years of contribution left, accumulated funds with interest, interest rate estimates, etc, the funding is ascertained. Being voluntary in nature, employers can decide on the benefits and eligibility criteria for the scheme. The insurance companies invest the superannuation fund in approved securities. Individual employee accounts reflecting the contributions and the interest accumulations are maintained. Upon retirement, the accumulated amount (also known as purchase amount) is released to provide funds to secure the benefits.

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2.3 KEY BENEFITS Old age security while one works: An employee secures old age security over his working life. The employer's contribution to superannuation scheme builds old age security slowly but steadily over a period of time, without pinching the employee's pocket. Experts support: The schemes floated by insurance companies, provide the employers with actuarial support to ascertain the liability and the benefits to the employees along with asset management expertise at minimum cost. The insurance companies ensure that the pensions are paid as per schedule over long timeframe, even beyond the lifetime of the organisations. Retention tool: The group superannuation scheme is useful as an effective retention tool for the employers. Tax benefits: The contributions to the scheme are deductible as a business expense and interest earned on the pension fund is tax-free. The contributions up to Rs. 1,00,000 per employee are exempt from fringe benefit tax.

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