1 LESSON 1 INTRODUCTION TO INSURANCE

LESSON 1
INTRODUCTION TO INSURANCE
- Meenu
Asstt. Professor, SRCC,
University of Delhi.

Every risk involves the loss of one or other kind. In older time, the
contribution by the person was made at the time of loss. Today, only one
business, which offers all walks of life, is insurance business. Owing to
growing complexity of life, trade and commerce, individual and business
firms and turning to insurance to manage various risks. Every individual in
this world is subject to unforeseen uncertainties which may make him and
his family vulnerable. At this place, only insurance helps him not only to
survive but also recover his loss and continue his life in a normal manner.

Insurance is an important aid to commerce and industry. Every

business enterprise involves large number of risks and uncertainties. It may
involve risk to premises, plant and machinery, raw material and other
things. Goods may be damaged or may be destroyed due to fire or flood.
Some risk can be avoided by timely precautions and some are unavoidable
and are beyond the control of a business. These unavoidable risks can be
protected by insurance.
What is Insurance
In D.S. Hamsell words, insurance is defined “as a social device
providing financial compensation for the effects of misfortune, the payment
being made from the accumulated contributions of all parties participating
in the scheme”
In simple terms “Insurance is a co-operative device to spread the loss
caused by a particular risk over a number of persons, who are exposed to it
and who agree to insure themselves against the risk”
Thus, the insurance is
(a) A cooperative device to spread the risk;
(b) the system to spread the risk over a number of persons who are
insured against the risk;
 (c) the principle to share the loss of the each member of the society on
the basis of probability of loss to their risk; and
(d) the method to provide security against losses to the insured
Insurance may be defined as form of contract between two parties
(namely insurer and insured or assured) whereby one party (insurer)
undertakes in exchange for a fixed amount of money (premium) to pay the
other party (Insured), a fixed amount of money on the happening of certain
event (death or attaining a certain age in case of life) or to pay the amount
of actual loss when it takes place through the risk insured (in case of
property)
Terminology used in definition of Insurance
- Insurer or insurance company – The agency involved in
Insurance business is known as insurer
- Insured/ Assured – The person who gets his property/life
insured is known as insured
- Policy - The agreement or contract which is put in writing is
known as a Policy
- Premium – The consideration in return of which the insurer
undertakes to make goods the loss or give a certain amount in case
of life insurance is known as premium

Assurance and Insurance

The two words were used synonymously at one time, but there is fine
distinction between the two. ‘Assurance’ is used in those contracts which
guarantee the payment of a certain sum on the happening of a specified
event which is bound to happen sooner or later, for example attaining a
certain age or death. Thus life policies comes under ‘assurance’.
Insurance, on the other hand, contemplates the granting of agreed
compensation of the happening of certain events stipulated in the contract
which are not expected but which may happen, for example risk relating to
fire, accident or marine.
Nature of Insurance
Following are the main characteristics of insurance which are applicable
to all types of insurance (life, fire, marine and general insurance).
1. Sharing of Risks - Insurance is a device to share the financial losses
which may occur to individual or his family on the happening of certain
events
2. Co operative Device – Insurance is a co-operative device to spread
the loss caused by a particular risk over a large caused by a particular risk
over a large number of persons who are exposed to it and who agree to
insure themselves against the risk.
3. Value of Risk – Risk is evaluated at the time of insurance. There are
several methods of valuing the risk. Higher the risks, higher will be
premium
4. Payment on Contingency -If the contingency occurs, payment is
made; payment is made only for insured contingency. If there is no
contingency, no payment is made. In life insurance contract, payment is
certain because the death or the expiry of term will certainly occur. In
other insurance contract like fire, marine, the contingency may or may
not occur
5. Amount of Payment of Claim - The amount of payment depends
upon the value of loss occurred due to the particular insured risk. The
insurance is there upto that amount. In life insurance insurer pay a fixed
sum on the happening of an event or within a specified time period.

Example – In fire insurance, if fire occurs and half the property is

destroyed, but the whole property is insured, then payment of claim
will be made only for that half building that is destroyed not the
whole amount of insured.

6. Insurance is different from Charity - In charity, there is no

consideration but insurance is not given without premium
7. Large number of Insured Person - Insurance is spreading of loss
over a large number of persons. Larger the number of persons, lower the
cost of insurance and amount of premium and incase lower the number of
persons, higher the cost of insurance and amount of premium.
8. Insurance is different from Gambling - In gambling, there is no
guarantee of gain, by bidding the person expose himself to risk of losing.
Whereas in insurance, by getting insured his life and property, he protect
himself against the risk of loss.

Functions of Insurance
Functions of insurance can be divided into parts;
I Primary functions.
 II Secondary functions.

I Primary Functions
1. Certainty of compensation of loss: Insurance provides
certainty of payment at the uncertainty of loss. The elements of
uncertainty are reduced by better planning and administration. The
insurer charges premium for providing certainty.
2. Insurance provides protection : The main function of
insurance is to provide protection against risk of loss. The insurance
policy covers the risk of loss. The insured person is indemnified for the
actual loss suffered by him. Insurance thus provide financial
protection to the insured. Life insurance policies may also be used as
collateral security for raising loans.
3. Risk sharing : All business concerns face the problem of risk. Risk
and insurance are interlinked with each other. Insurance, as a device
is the outcome of the existence of various risks in our day to day life.
It does not eliminate risks but it reduces the financial loss caused by
risks. Insurance spreads the whole loss over the large number of
persons who are exposed by a particular risk.
II Secondary Functions
1. Prevention of losses : The insurance companies help in
prevention of losses as they join hands with those institutions which
are engaged in loss prevention measures. The reduction in losses
means that the insurance companies would be required to pay lesser
compensations to the assured and manage to accumulate more
savings, which in turn, will assist in reducing the premiums
2. Providing funds for investment : Insurance provide capital
for society. Accumulated funds through savings in the form of
insurance premium are invested in economic development plans or
productivity projects.
3. Insurance increases efficiency : The insurance eliminates the
worries and miseries of losses. A person can devote his time to other
important matters for better achievement of goals. Businessman feel
more motivated and encouraged to take risks to enhance their profit
earning. This also helps in improving their efficiencies.
 4. Solution to social problems : Insurance take care of many
social problems. We have insurance against industrial injuries, road
accident, old age, disability or death etc.
5. Encouragement of savings : Insurance not only provides
protection against risks but also a number of other incentives which
encourages people to insure. Since regularity and punctuality pf
payment of premium is a perquisite for keeping the policy in force,
the insured feels compelled to save.
Principles of Insurance
The basic principles which govern the insurance are -
(1) Utmost good faith
(2) Insurable interest
(3) Indemnity
(4) Contribution
(5) Subrogation
(6) Causa proxima
(7) Mitigation of loss
1. Principle of utmost good faith : A contract of insurance is a
contract of ‘Uberrimae Fidei’ i.e., of utmost good faith. Both insurer
and insured should display the utmost good faith towards each other in
relation to the contract. In other words, each party must reveal all
material information to the other party whether such information is
asked or not. There should not be any fraud, non disclosure or
misrepresentation of material facts.
Example – in case of life insurance, the insured must revel the true
age and details of the existing illness/diseases. If he does not disclose
the true fact while getting his life insured, the insurance company can
avoid the contract.
Similarly, incase of the insurance of a building against fire, the insured
must disclose the details of the goods stored, if such goods are of
hazardous nature
A material fact means important facts which would influence the
judgment of the insurer in fixing the premium or deciding whether he
should accept the risk, on what terms. All material facts should be
disclosed in true and full form
 2. Principle of Insurable Interest: This principle requires that
the insured must have a insurable interest in the subject matter of
insurance. Insurance interest means some pecuniary interest in the
subject matter of contract of insurance. Insurance interest is that
interest, when the policy holders get benefited by the existence of the
subject matter and loss if there is death or damage to the subject
matter.
For example – In life insurance, a man cannot insured the life of a
stranger as he has no insurable interest in him but he can get insured
the life of himself and of persons in whose life he has a pecuniary
interest. So in the life insurance interest exists in the following cases:-
- Husband in the life of his wife and wife in the life of her husband
- Parents in the life of a child if there is pecuniary benefit derived
from the life of a Child
- Creditor in the life of debtor
- Employer in the life of an employee
- Surety in the life of a principle debtor
In life insurance, insurable interest must be present at the time
when the policy is taken. In fire insurance, it must be present at the time of
insurance and at the time if loss if subject matter. In marine insurance, it
must be present at the time of loss of the subject matter.
3. Principle of Indemnity : This principle is applicable in case of
fire and marine insurance only. It is not applicable in case of life,
personal accident and sickness insurance. A contract of indemnity
means that the insured in case of loss against which the policy has
been insured, shall be paid the actual cost of loss not exceeding the
amount of the insurance policy. The purpose of contract of insurance
is to place the insured in the same financial position, as he was before
the loss.
Example – A house is insured against fire for Rs. 50000. It is burnt down
and found that the expenditure of Rs. 30000 will restore it to its
original condition. The insurer is liable to pay only Rs. 30000.
In life insurance, principle of indemnity does not apply as there is no
question of actual loss. The insurer is required to pay a fixed amount
upon in advance in the event of accident, death or at the expiry of the
fixed term of the policy. Thus, a contract of a life insurance is a
contingent contract and not a contract of indemnity.
4. Principle of Contribution: The principle of contribution is a
corollary to the doctrine of indemnity. It applies to any insurance which
is a contract of indemnity. So it does not apply to life insurance. A
particular property may be insured with two or more insurers against
the same risks. In such cases, the insurers must share the burden of
payment in proportion to the amount insured by each. If one of the
insurer pays the whole loss, he is entitled to contribution from other
insurers

Example – B gets his house insured against fire for Rs. 10000 with insurer
P and for Rs. 20000 with insurer Q. a loss of Rs. 15000 occurs, P is
liable to pay for Rs. 5000 and Q is labile to pay Rs 10000. If the whole
amount pf loss is paid by Q, then Q can recover Rs. 5000 from P. The
liability of P &Q will be determined as under:

Sum insured with Individual insurer (i.e. P or Q ) x Actual Loss =

Total sum insured

Liability of P = 10000 x 15000 =

Rs.5000
30000

Liability of Q = 20000 x 15000 =

Rs.10000
30000
The right of contribution arises when:
(a) There are different policies which related to the same subject
matters;
(b) The policies cover the same period which caused the loss;
(c) All the policies are in force at the time of loss; and
(d) One of the insurer has paid to the insured more than his share
of loss.
5. Principle of Subrogation : The doctrine of subrogation is a
collorary to the principle of indemnity and applies only to fire and
marine insurance. According to doctrine of subrogation, after the
 insured is compensated for the loss caused by the damage to the
property insured by him, the right of ownership to such property
passes to the insurer after settling the claims of the insured in respect
of the covered loss.
Example – Furniture is insured for Rs. 1 lacs against fire, it is burnt
down and the insurer pays the full value of Rs. 1 Lacs to the insured,
later on the damage Furniture is sold for Rs. 10000. The insurer is
entitled to receive the sum of Rs. 10000.
A loss may occur accidentally or by the action or negligence of third
party. If the insured suffer a loss because of action of third party and
he is in a position to recover the loss from the insurer then insured can
not take action against third party, his right is subrogated
(substituted) to the insurer on settlement of the claim. The insurer,
therefore, can recover the claim from the third party.
If the insured recovers any compensation for the loss (due to third
party), from the third party, after he has already been indemnified by
the insurer, he holds the amount of such compensation as the trustee
if the insurer.
The insurer is entitled to the benefits out of such rights only to the
extent of the amount he has paid to the insured as compensation
6. Principle of Causa Proxima : Causa proxima, means
proximate cause or cause which, in a natural and unbroken series of
events, is responsible for a loss or damage. The insurer is liable for
loss only when such a loss is proximately caused by the peril insured
against. The cause should be the proximate cause and can not the
remote cause. If the risk insured is the remote cause of the loss, then
the insurer is not bound to pay compensation. The nearest cause
should be considered while determining the liability of the insured.
The insurer is liable to pay if the proximate cause is insured.

Example – In a marine insurance policy, the goods were insured

against damage by sea water, some rats on the board made a hole in a
bottom of the ship causing sea water to pour into the ship and damage
the goods. Here, the proximate cause of loss is sea water which is
covered by the policy and the hole made by the rats is a remote
cause. Therefore, the insured can recover damage from the insurer
Example – A ship was insured against loss arising from collision. A
collision took palce resulting in a few days delay. Because of the
 delay, a cargo of oranges becomes unsuitable for human consumption.
It was held that the insurer was not liable for the the loss because the
proximate cause of loss was delay and not the collision of the ship.
7. Principle of Mitigation of Loss: An insured must take all
reasonable care to reduce the loss. We must act as if the property was
not insured.
Example – If a house is insured against fire, and there is accidental
fire, the owner must take all reasonable steps to keep the loss
minimum. He is supposed to take all steps which a man of ordinary
prudence will take under the circumstances to save the insured
property.
Benefits of Insurance or Role and Importance of Insurance
Benefit of insurance can be divided into these categories -
1. Benefits to Individual
2 Benefits to Business or Industry
3. Benefits to the Society
It can be explained as under -
1. Benefits to Individual
(a) Insurance provides security & safety : Insurance gives a
sense of security to the policy holder. Insurance provide security and
safety against the loss of earning at death or in old age, against the
loss at fire, against the loss at damage, destruction of property,
goods, furniture etc.
Life insurance provides protection to the dependents in case of death
of policyholders and to the policyholder in old age. Fire insurance
insured the property against loss on a fire. Similarly other insurance
provide security against the loss by indemnifying to the extent of
actual loss.
(b) Encourage Savings : Life insurance is best form of saving. The
insured person must regularly save out of his current income an
amount equal to the premium to be paid otherwise his policy get
lapsed if premium is not paid on time.
(c) Providing Investment Opportunity : Life insurance provide
different policies in which individual can invest smoothly and with
security; like endowment policies, deferred annuities etc. There is
 special exemption in the Income Tax, Wealth Tax etc. regarding this
type of investment
2 Benefits to Business or Industry
(a) Shifting of Risk : Insurance is a social device whereby
businessmen shift specific risks to the insurance company. This helps
the businessmen to concentrate more on important business issues.
(b) Assuring Expected Profits : An insured businessman or
policyholder can enjoy normal expected profits as he would not be
required to make provisions or allocate funds for meeting future
contingencies.
(c) Improve Credit Standing : Insured assets are easily accepted
as security for loans by the banks and financial institutions so
insurance improve credit standing of the business firm
(d) Business Continuation – With the help of property insurance,
the property of business is protected against disasters and chance of
closure of business is reduced
3. Benefits to the Society
(a) Capital Formation : As institutional investors, insurance
companies provide funds for financing economic development. They
mobilize the saving of the people and invest these saving into more
productive channels
(b) Generating Employment Opportunities : With the growth
of the insurance business, the insurance companies are creating more
and more employment opportunities.
(c) Promoting Social Welfare : Policies like old age pension
scheme, policies for education, marriage provide sense of security to
the policyholders and thus ensure social welfare.
(d) Helps Controlling Inflation : The insurance reduces the
inflationary pressure in two ways, first, by extracting money in supply
to the amount of premium collected and secondly, by providing funds
for production narrow down the inflationary gap.
Type of Insurance
Insurance cover various types of risks and include various insurance
policies which provide protection against various losses.
There are two different views regarding classification if insurance:-
I. From the business point of view; and
 II From the risk points of view
I. Business point of view
The insurance can be classified into three categories from business point of
view
1. Life insurance;
2. General Insurance; and
3. Social Insurance.
1. Life Insurance: The life insurance contract provide elements of
protection and investment after getting insurance, the policyholder
feels a sense of protection because he shall be paid a definite sum at
the death or maturity. Since a definite sum must be paid, the element
of investment is also present. In other words, life insurance provides
against pre-mature death and a fixed sum at the maturity of policy. At
present, life insurance enjoys maximum scope because each and every
person requires the insurance.
Life insurance is a contract under which one person, in consideration
of a premium paid either in lump sum or by monthly, quarterly, half
yearly or yearly installments, undertakes to pay to the person (for
whose benefits the insurance is made), a certain sum of money either
on the death of the insured person or on the expiry of a specified
period of time.
Life insurance offers various polices according to the
requirement of the persons -
- Term Assurance
- Whole Life
- Endowment Assurance
- Family Income Policy
- Life Annuity Joint Life Assurance
- Pension Plans
- Unit Linked Plans
- Policy for maintenance of handicapped dependent
- Endowment Policies with Health Insurance benefits
2. General Insurance: The general insurance includes property
insurance, liability insurance and other form of insurance. Property
insurance includes fire and marine insurance. Property of the
 individual and business involves various risks like fire, theft etc. This
need insurance Liability insurance includes motor, theft, fidelity and
machine insurance

Type of General Insurance policies available are -

- Health Insurance
- Medi- Claim Policy
- Personal Accident Policy
- Group Insurance Policy
- Automobile Insurance
- Worker’s Compensation Insurance
- Liability Insurance
- Aviation Insurance
- Business Insurance
- Fire Insurance Policy
- Travel Insurance Policy
3. Social Insurance: Social insurance provide protection to the
weaker sections of the society who are unable to pay the premium. It
includes pension plans, disability benefits, unemployment benefits,
sickness insurance and industrial insurance.
II Risk Points of View
The insurance can be classified into three categories from Risk point
of view
1. Property Insurance
2. Liability Insurance
3. Other forms of Insurance
1. Property Insurance: Property of the individual and business is
exposed to risk of fire, theft marine peril etc. This needs insurance.
This is insured with the help of:-
(i) Fire Insurance
(ii) Marine Insurance
(iii) Miscellaneous Insurance
 (i) Fire Insurance: Fire insurance covers risks of fire. It is
contract of indemnity. Fire insurance is a contract under which the
insurer agrees to indemnify the insured, in return for payment of
the premium in lump sum or by instalments, losses suffered by the
him due to destruction of or damage to the insured property,
caused by fire during an agreed period of time. It includes losses
directly caused through fire or ignition. There are various types of
fire insurance policies.
- Consequential loss policy
- Comprehensive policy
- Valued policy
- Valuable policy
- Floating policy
- Average policy
(ii) Marine Insurance: Marine insurance is an arrangement by
which the insurer undertakes to compensate the owner of the ship
or cargo for complete or partial loss at sea. So it provides
protection against loss because of marine perils. The marine perils
are collisions with rock, ship attack by enemies, fire etc. Marine
insurance insures ship, cargo and freight.
The following kinds of marine policies are -
- Voyage policy
- Time policy
- Valued policy
- Hull Policy
- Cargo Policy
- Freight Policy
(iii) Miscellaneous Insurance: It includes various forms of
insurance including property insurance, liability insurance, personal
injuries are also insured. The property, goods, machine, furniture,
automobile, valuable goods etc. can be insured against the damage
or destruction due to accident or disappearance due to theft.
Miscellaneous insurance covers
- Motor
- Disability
 - Engineering and aviation risks
- Credit insurance
- Construction risks
- Money Insurance
- Burglary and theft insurance
- All risks insurance
2. Liability Insurance: The insurer is liable top pay the damage of
the property or to compensate the loss of personal injury or death. It
includes fidelity insurance, automobile insurance and machine
insurance.
The following are types of liability Insurance:-
- Third party insurance
- Employees insurance
- Reinsurance
3. Other forms of Insurance: It include export credit insurance,
state employee insurance etc. whereby the insurer guarantees to pay
certain amount at the happening of certain events.
The following are other form of Insurance-
- Fidelity Insurance
- Credit Insurance
- Privilege Insurance

10 LESSON 10 GENERAL INSURANCE–MOTOR–HEALTH &

MISCELLANEOUS

Introduction:
The primary legislations including the Insurance Act, 1938 and the IRDA Act,
1999 that deal with insurance business in India provide the legal framework
of insurance accounting in India, over and above the principles and
practices prescribed by Generally Accepted Accounting Principles (GAAP)
and the various Accounting Standards (AS) issued by the Institute of
Chartered Accountants of India(ICAI) and the international organization
Financial Accounting Standards Board (FASB). However, the following
statutes, rules and regulations are the major considerations for accounting
and financial management for insurance companies in India:
1. The Insurance Act, 1938 and Insurance Rules, 1939
2. The Insurance Regulatory and Development Authority Act, 1999
3. The Companies Act, 1956
4. The Life Insurance Corporation Act, 1956
5. The General Insurance Business (Nationalization) Act, 1972
Section 11 of the Insurance Act, 1938 provides that every insurer, on or
after the commencement of the IRDA Act, 1999 in respect of insurance
business transacted by him and in respect of his shareholders' fund, shall at
the expiration of each financial year, prepare a Balance Sheet, a Profit and
Loss account, a separate Account of Receipts and Payments (Cash Flow
Statement), Revenue Accounts in accordance with the regulations made by
the Authority. Every Insurer shall keep separate accounts relating to funds
of shareholders and policyholders.
Accounting Regulations and Financial Statements:
The IRDA (Preparation of Financial Statements and Auditor's Report of
Insurance Companies) Regulations, 2002 provide that-
· An insurer carrying on life insurance business shall comply with the
requirements of Schedule' A' to prepare financial statements.
· An insurer carrying on general insurance business shall comply with the
requirements of Schedule 'B' to prepare financial statements.
· The Report of the Auditors on the Financial Statements of every insurer/
re-insurer shall be in conformity with the requirements of Schedule 'C'.
The said regulation further provides that financial statements
comprising (i) Balance Sheet, (ii) Receipts and Payments Account (Cash Flow
Statement) (iii) Profit & Loss Account (Shareholders' Account) and (iv)
Revenue Account (policyholders' Account) shall be in conformity with the
Accounting Standards (AS) issued by the Institute of Chartered Accountants
of India to the extent applicable to the insurer except that:
· Accounting Standard 3-Cash-flow Statement shall be only under
Direct Method
· Accounting Standard 13-Accounting for Investment shall not be
applicable
· Accounting Standard 17-Segment reporting shall apply to all insurers
irrespective of the requirements for listing and turnover mentioned
therein.
 Section 2C of the Regulation provides that all words and expressions
used herein and not defined in the Insurance Act, 1938 or in the IRDAAct,
1999 or in the Companies Act, 1956 shall have the meanings respectively
assigned to those Acts. However, regulatory provisions prescribed by the
IRDA and the specific and relevant Accounting Standards promulgated by
the Institute of Charted Accountants of India are being separately discussed
in detail in subsequent units.
Financial statements of insurance companies comprise the following as
stated earlier:
· Balance sheet,
· Revenue accounts,
· Profit and loss account, and
· Receipts and payments account
Besides the financial statements, the annual reports of an insurance
company also contain the following statutory documents for the review and
analysis of the various interested groups including shareholders,
policyholders, regulators, reinsurers, employees, co-insurers, etc.
1. Report of the board of directors
2. Management report
3. Auditors report
4. Segment reporting
5. Significant accounting policies
6. Notes and disclosures forming part of accounts
Let us now discuss the above financial statements and reports with
reference to legal requirements, accepted principles and practices with a
few examples and exercises. Certain examples with hypothetical data are
also given in Annexure for clarity of understanding of students in respect of
financial statements
Directors’ Report: legal Requirement as Regards Directors’
Report (Companies Act 1956)
As per Section 217 of the Companies Act, 1956 there shall be attached
to every balance sheet laid before a company general meeting a report by
its Board of Directors with respect to following particulars:
· The state of affairs of the company.
· The amounts, if any, which it proposes to carry to any reserve
in balance sheet.
· The amount, if any, which it recommends, should be paid by
way of dividend.
· The material changes and commitments, if any, affecting the
financial position of the company, which have occurred between the
end of the financial year of the company to which the balance relates
and the date of the report.
· The technology absorption, foreign exchange earnings and
outgo and the manners thereof.
· The material changes, if occurred during the financial year in
respect of the nature and class of business of the company or its
subsidiary.
· The statement showing the name of every employee of the
company who, if employed throughout the financial year, was in
receipt of remuneration for that year, which in the aggregate was not
less than Rs. 24,00,000 per annum or if employed for a part of the
financial year was not less than Rs. 2,00,000 per month. Such state
shall also indicate that whether any such employee is a relative of any
director or manager of the company.
· The Directors' Responsibility Statement must mention that
a) In the preparation of the annual accounts, the applicable
accounting standards have been followed along with proper
explanations relating to material departure,
b) The directors had selected such accounting policies and
applied them consistently,
c) The results and estimates are reasonable and prudent so as
to give.a true and fair view of the state of affairs of the
company at the end of the financial year and of the profit or
loss of the company for that period,
d) That the directors had taken proper and sufficient care for
the maintenance of adequate accounting records in accordance
with the provisions of the Companies Act, 1956 for safeguarding
the assets of the company and for preventing and detecting
frauds and other irregularities and that the directors had
prepared the annual accounts on a going concern basis.
 · The reasons for the failure, if any, to complete the buy back
within the time specified in Section 77 A of the Act.
· The fullest and explanations on every reservation, qualification
or adverse remarks contained in the auditors' report.

Common Disclosures in Directors’ Report Contained in the

Annual Report of a General Insurance Company:
Director report of an insurance company generally furnishes the following
information specifically as per the above requirements of the Companies
Act, 1956:
1. Comparative Performance Analysis (Class-wise Underwriting
Performance) for the financial year under report with reference to
previous year) as appended in Annexure A.2 showing performance
analysis of XYZ General Insurance Co. Ltd. in respect of the following
performance review for FY 2005-06.
· Gross direct premium and percentage of growth over
previous year
· Reinsurance premium ceded
· Reinsurance accepted
· Net premium and percentage of growth over previous year
· Increase in unexpired risks reserve and percentage to net
premium
· Net premium earned
· Net incurred claims and percentage to net premium
· Others
2. Review of accounts as an annexure to accounts
3. Profit before tax and after tax
4. Proposed dividend
5. General reserves and current year transfer of profit to that reserve
6. Total assets and the contribution of increase of fair value change
account
7. Total investments, its composition/portfolio, its increase over the
last year
8. Solvency margin and its change over the previous year
9. Compliance with Section 40C in regard to prescribed % of expenses
Financial Statements:
As mentioned earlier, as per the IRDA (Preparation of Financial
Statements and Auditors' Report of Insurance companies) Regulations,
2000, an insurer shall prepare the Financial Statements including Balance
sheet, Revenue Account (Policyholders Account), Receipts and Payments
Account (Cash Flow Statements) and Profit and Loss Account (Shareholders'
account) as Accounting Standard (AS) issued by the ICAI to the extent
applicable to the insurers except that:
1. Accounting Standard 3 (AS 3) and Accounting Standard 17 (AS 17) in
case of insurers carrying on life insurance business
2. Accounting Standard 3 (AS 3), Accounting Standard 13 (AS 13) and
Accounting Standard 17 (AS17) in case of insurers carrying on non-life
insurance business

Cash flow statements will be prepared only under direct method and
segment reporting shall apply irrespective of whether the securities of the
insurer are traded publicly or not in both the cases and in case of non-life
insurance company AS 13-Accounting for investments shall not be
applicable.
Motor Insurance
Motor insurance policy is a contract between the insured and the
insurer in which the insurer promises to indemnify the financial liability in
event of loss to the insured. Motor Vehicles Act in 1939 was passed to mainly
safeguard the interests of pedestrians. According to the Act, a vehicle
cannot be used in a public place without insuring the third part liability.
According to Section 24 of Motor Vehicles Act, “No person shall use or allow
any other person to use a motor vehicle in a public place, unless the vehicle
is covered by a policy of insurance.” Classification of Motor Vehicles As per
the Motor Vehicles Act for the purpose of insurance the vehicles are
classified into three broad categories such as.
Private cars:
a) Private Cars - vehicles used only for social, domestic and pleasure
purposes
b) Private vehicles - Two wheeled
1. Motorcycle / Scooters
2. Auto cycles
 3. Mechanically assisted pedal cycles

Commercial vehicles:
1. Goods carrying vehicles
2. Passengers carrying vehicles
3. Miscellaneous & Special types of vehicles

The risks under motor insurance are of two types:

1) Legal liability due to bodily injury, death or damage caused to the
property of others.
2) Loss or damage to one’s own vehicle\ injury to or death of self and other
occupants of the vehicle.
Types of motor policies
When you buy a motor vehicle, you need to buy a motor insurance. There
are, however, many types of motor insurance policies available. The
common types are:
• Third party cover - This policy insures you against claims for bodily
injuries or deaths caused to other persons (known as the third party),
as well as loss or damage to third party property caused by your
vehicle.
• Third party, fire and theft cover - This policy provides insurance
against claims for third party bodily injury and death, third party
property loss or damage, and loss or damage to your own vehicle due
to accidental fire or theft.
• Comprehensive cover - This policy provides the widest coverage,
i.e. third party bodily injury and death, third party property loss or
damage and loss or damage to your own vehicle due to accidental fire,
theft or an accident.
Exclusions/Extensions
A standard motor insurance will not cover certain losses, such as your
own death or bodily injury due to a motor accident, your liability against
claims from passengers in your vehicle (except for passengers of hired
vehicles such as taxis and buses) and loss or damage arising from an act of
nature, such as flood, storm and landslide. However, you may pay additional
premiums to extend your policy to cover flood, landslide, landslip as well as
cover your passengers. It is important to check your policy for the
exclusions.
Important points to consider when buying motor insurance
policies
Insured value/sum insured: If you are buying a policy against
loss/damage to your vehicle, you must ensure that your vehicle is
adequately insured as it will affect the amount you can claim in the event of
loss/damage. For a new vehicle, the insured value will be the purchase
price while for other vehicles, the insured value is the market value of the
vehicle at the point you apply for the insurance policy.
• Under-insurance – If you insure your vehicle at a lower sum than its
market value, you will be deemed as self-insured for the difference,
i.e. in the event of loss/damage, you will only be partially
compensated (up to the proportion of insurance) by your insurance
company.
• Over-insurance – Should you insure your vehicle at a higher sum
than its market value, the maximum compensation you will receive is
the market value of the vehicle as the policy owner cannot ‘profit’
from a motor insurance claim.
Duty of disclosure: You should disclose fully all material facts, including
previous accidents (if any), modification to engines, etc. When in doubt as
to whether a fact is relevant or not, it is best to ask your insurance
company. If you fail to disclose any material fact, your insurance company
may refuse to pay your claim or any claim made by a third party against
you. In such cases, you are personally liable for such claims.
Price: The price you pay for your motor insurance will depend on the type
of policy selected. The insurance premium charged by your insurance
company is the standard minimum rate in accordance with the Motor Tariff.
However, in addition to the standard minimum rate, your insurance
company may impose additional premiums known as loadings to the
premium payable in view of higher risk factors involved such as age of
vehicle and claims experience.
No-claim-discount: The premium payable may be reduced if you have
no-claim-discount (NCD) entitlement. NCD is a ‘reward’ scheme for you if no
claim was made against your policy during the preceding 12 months of
policy. Different NCD rates are applicable for different classes of vehicles.
For a private car, the scale of NCD ranges from 25% to 55% as provided in
the policy.
Transfer of ownership: In case of any sale of vehicle involving transfer
of policy, the insured should apply to the insurer for consent to such
transfer. The transfer is allowed, if within 15 days of receipt of application,
the insurer does not reject the plea. The transferee shall apply within
fourteen days from the date of transfer in writing to the insurer who has
insured the vehicle, with the details of the registration of the vehicle, the
date of transfer of the vehicle, the previous owner of the vehicle and the
number and date of the insurance policy so that the insurer may make the
necessary changes in his record and issue fresh Certificate of Insurance.
Excess: Also known as a ‘deductible’. This is the amount of loss you have
to bear before your insurance company will pay for the balance of your
vehicle damage claim. The types of excess applicable are as follows:
· Compulsory excess of RM400: If your vehicle is driven
by a person not named in your policy or a person named in your
policy who is under the age of 21, the holder of a provisional (L)
driving license or the holder of a full driving license of less than two
years.
· Other excess: applicable at the discretion of your insurance
company and in some cases, no excess is imposed. You can
negotiate with your insurance company on this excess.
What you should do in the event of an accident/loss
• Take notes of the accident – If you are involved in a motor
accident, take notes of the accident, i.e. the names and addresses of all
drivers and passengers involved, vehicle registration numbers, make and
model of each vehicle involved, the drivers’ licence numbers and
insurance identification as well as the names and addresses of as many
witnesses as possible
• Make a police report – You are required by law to lodge a police
report within 24 hours of a road accident.
• Notify your insurance company – You must notify your insurance
company in writing with full details as soon as possible. Depending on the
type of claim you intend to make, you may have to notify other insurance
companies. If you fail to report the accident, you will be liable for your
own loss as well as any third party claim against you.
 • Select the workshop – You must send your damaged vehicle to a
workshop approved by your insurance company. If the accident occurs
during office hours, you may call the hotline/ emergency assistance
numbers provided by your insurance company. Otherwise, you may call
your insurance company for the nearest approved workshop. Should the
accident occur outside office hours and you are making a claim against
your policy, i.e. an own damage claim, you should ensure that your
vehicle is towed to a workshop approved under Repairers Scheme.
Claim Settlement
Claim arises when:
1) The insured’s vehicle is damaged or any loss incurred.
2) Any legal liability is incurred for death of or bodily injury
3) Or damage to the third party‘s property.
The claim settlement in India is done by opting for any of the following by
the insurance company.
· Replacement or reinstatement of vehicle
· Payment of repair charges
In case, the motor vehicle is damaged due to accident it can be repaired
and brought back to working condition. If the repair is beyond repair then
the insured can claim for total loss or for a new vehicle. It is based on the
market value of the vehicle at the time of loss. Motor insurance claims are
settled in three stages. In the first stage the insured will inform the insurer
about loss. The loss is registered in claim register. In the second stage, the
automobile surveyor will assess the causes of loss and extent of loss. He will
submit the claim report showing the cost of repairs and replacement charges
etc. In the third stage, the claim is examined based on the report submitted
by the surveyor and his recommendations. The insurance company may then
authorize the repairs. After the vehicle is repaired, insurance company pays
the charges directly to the repairer or to the insured if he had paid the
repair charges.
Section 110 of Motor Vehicle Act, 1939 empowers the State
Government in establishing motor claim tribunals. These tribunals will help
in settling the third party claims for the minimum amount
Theft claims
 • After submission of the claim form, you must cooperate fully with your
insurance company or its representative during the course of
investigation of the theft claim.
• In view that the police and your insurance company will require time to
investigate your claim, you will receive the offer of settlement from
your insurance company within six months from the theft notification or
upon completion of police investigations, whichever is earlier
Heath Insurance
Health insurance, like other forms of insurance, is a form
of collectivism by means of which people collectively pool their risk, in this
case the risk of incurring medical expenses. The collective is usually publicly
owned or else is organized on a non-profit basis for the members of the
pool, though in some countries health insurance pools may also be managed
by for-profit companies. It is sometimes used more broadly to include
insurance covering disability or long-term nursing or custodial
care needs. It may be provided universally through government as a feature
of social solidarity, as is typical in many industrial countries, or as form of
government charity such as the United States Medicaid program. It may be
purchased privately on a group basis (e.g., by a firm to cover its employees)
or purchased by an individual for himself or his family. In each case, the
covered groups or individuals pay a fee, premium, or tax, to help protect
themselves from health care expenses.
“Health insurance is an insurance, which covers the financial loss
arising out of poor health condition or due to permanent disability, which
results in loss of income.” A health insurance policy is a contract between
an insurer and an individual or group, in which the insurer agrees to provide
specified health insurance at an agreed upon price (premium). It usually
provides either direct payment or reimbursement for expenses associated
with illness and injuries. The cost and range of protection provided by
health insurance depends on the insurance provider and the policy
purchased.

Health Insurance Policies and Main Features:

Types of Health Insurance Policies:
Health Insurance policies are broadly classified into types-Individual Health
Insurance and Group Health Insurance. The following Health Insurance
policies are available in India:
 1. Individual Mediclaim Insurance
2. Group Mediclaim Insurance
3. Overseas Mediclaim Insurance
4. UHI
5. Health Plus Medical Expenses Policy
6. Group Health Plus Medical Expenses Policy
Major Characteristics of Individual Health Insurance Policy
Coverage: Individual coverage are generally classified into the following
broad heads:
1. Hospital Surgical Insurance
2. Major Medical Insurance
3. Long-term Care Insurance
4. Disability Income Insurance
Hospital Surgical Insurance: It covers the following expenses:
· Hospital expenses: A typical Individual Health Insurance
policy covers impatient hospital expenses subject to a specified
limit and subject to certain amount of deductible or co-insurance
· Surgical expenses
· Cost of medicines and nursing
· Domiciliary expenses up to certain limits
Major characteristics of Medical Insurance :It covers major or broader
coverage than basic coverage with the following characteristics:
1. Broad coverage for hospital charges, drugs, nursing, medical
equipments, etc.
2. High maximum limit, say Rs. 5,00,000 or Rs. 10,0000, etc.
3. Benefit period: maximum amount paid under a major benefit
policy depending on the length of the policy
4. Deductible that must be satisfied before the benefit is granted,
which may be
yearly deductible, family deductible, etc.
 5. Co-insura'lce is provided in most of the policies to avoid moral
hazards
6. Taxation benefits subject to compliance of certain requirements
7. Pre-exiting conditions clause to avoid adverse selection
Common exclusions
1. Expenses caused by war or military conflict
2. Cosmetic surgery
3. Dental care except as a result of an accident
4. Eye and examination aids unless there is an accident
5. Pregnancy or childbirth unless specifically provided
6. Expenses covered under W.C. laws or similar laws
7. Services furnished by governmental agencies unless the patient
has the obligation to pay
8. Experimental surgery
Standard Individual Mediclaim Insurance- Underwriting
Guidelines
Coverage: This policy covers reimbursement of hospital is at ion or
domiciliary hospitalization expenses for illness or diseases or injury
sustained. In the event of any claim becoming admissible under this scheme,
the insurer will pay to the insured person the amount of such expenses as
would fall under different heads of medical expenses mentioned below and
as are reasonable and necessarily incurred by or on behalf of such insured
persons but not exceeding the sum insured in anyone period of insurance:
1. Room and boarding expenses provided by hospital or nursing home
2. Nursing expenses
3. Fees of surgeon, anesthetist, consultant etc.
4. Anesthesia, blood oxygen, OT, X-ray, surgical appliances,
medicines etc.
The sum insured in this policy varies from ` 15,000 to 5,00,000 per
person. This policy provides for family discount on total premium for the
members of the family. In case of no claim, cumulative discount is also
available as per the company's underwriting policy. In case of cost of health
check, as per the policy conditions, generally once in four years is available.
Underwriting Guidelines: Individual Mediclaim Insurance has been
showing very high incurred claim ratio since long. In the tariff market, this
product has been sold by almost all underwriters with huge cross-subsidy
from profitable products like fire and engineering. But in the de-tariff
market, the prevalence of cross-subsidy is ruled out. Every product must
stand on its own revenue. One product cannot subsidize other product. In
view of our huge claim ratio of around 140 per cent of Individual Mediclaim
Insurance, the underwriters have adopted the following underwriting
measures to ensure prudent underwriting for this product today:
1. Fresh proposal for a single person above 45 years of age is discouraged.
2. Though mediclaim policy is available to persons between 5 years and 80
years of age, fresh acceptance of cover for a person beyond 60 years is
discouraged, unless he is a member of a big family or group to be covered
or otherwise potential.
3. Policy already in force for insured exceeding 75 years of age may be
renewed on the basis of claim experience and risk evaluation with or
without restrictive condition as per the risk analysis findings.
4. Cancellation of policy is done subject to the following underwriting
policy:
a. Policy to be renewed by mutual consent.
b. Company is not bound to notify that policy is due for renewal.
c. Policy may be cancelled by company after giving 30-days notice and
pro rata premium to be refunded, provided no claim has been paid
under this policy.
d. Company remains liable for any claim arising prior to date of
cancellation.
e. The insured may cancel the policy any time; the company would
refund premium subject to 'No-claim' during the policy period.
5. Renewal of policy is done on the basis of the following norms:
a. In case renewal is agreed, the illness for which the expenses have
been paid in previous policy are not to be excluded. Renewal is done on
earlier terms.
b. If policy is renewed for enhanced sum insured, reimbursement of
illness occurred in the previous policy shall be restricted to old sum
insured.
6. Cost of health check up is allowed up to I per cent of average sum
insured of four claims-free underwriting years.
7. Issuance of policies for period less than one year is prohibited.
8. Policies for persons above 75 years to be decided on the claim
experience merit.
9. Extension for suspended mediclaim may be allowed only when overseas
mediclaim policy has been taken by an individual or family as whole when
one of the person goes abroad by taking overseas mediclaim policy.
10. Tax-benefit under Section 80D of the IT Act available when premium is
paid by cheque.
11. General exclusions: provided under the policy:
a. All diseases or injuries which are pre-existing when the cover
incepts for the first time.
b. Any diseases other than those mentioned below contracted by the
insured person during the first thirty days from the commencement of
the policy.
c. During the first year of the operation of insurance cover, the
expenses on treatment of diseases such as cataract, benign
prostatic hypertrophy, hysterectomy for menorrhagia or
fibromyoma, hernia, hydrocele, congenital internal diseases, fistula
in anus, piles, sinusitis and related disorders.
d. Injury or disease directly or indirectly caused by or arising from
or attributable to war, invasion, act of foreign enemy, war-like
operations (whether war be declared or not).
e. Circumcision unless necessary for treatment of a disease not
excluded hereunder or as may be necessitated due to an accident,
vaccination or inoculation or change of life or cosmetic or aesthetic
treatment of any description, plastic surgery other than as may be
necessitated due to an accident or as a part of any illness.
f. Cost of spectacles, contact lenses, hearing aids.
g. Any dental treatment or surgery which is a corrective, cosmetic or
aesthetic procedure, including wear and tear, unless arising from
disease injury and requires hospitalisation for treatment.
h. Convalescene, general debility, 'run-down' condition or rest
corrective, congenital external disease defects or anomalies,
 sterility, venereal disease, intentional self-injury and use of
intoxicating drugs or a1chol.
1. All expenses arising out of any condition directly or indirectly
caused to or associated with human T cell lymph tropic virus type III
(HTD-III) or lymphadinopathy-associated virus (LAV) or the mutants
derivative or variations deficiency syndrome or any HTTB-III
syndrome or condition of a similar kind commonly referred to as
AIDs.
J. Charges incurred at hospital or nursing home primarily for
diagnostic, X-ray or laboratory examinations not consistent with or
incidental to the diagnosis and treatment of the positive existence or
presence of any ailment, sickness or injury for which confinement is
required at a hospital or nursing home.
k. Expenses on vitamins and tonics unless forming part of treatment
for injury or disease as certified by the attending physician.
1. Injury or disease directly or indirectly caused by or contributed to
by nuclear weapons or materials. '
m. Treatment arising from or traceable to pregnancy, childbirth,
miscarriage, abortion or complications of this kind, including caesrian
section.
n. Naturopathy treatment.
Guidelines for Group Mediclaim Policy: The underwriters generally
follow the underwriting procedures mentioned below to ensure prudent
underwriting and high incurred claim ratio:
1. Group policy will be issued for named persons only.
2. Group shall be of any of seven specified categories, namely, (i)
Employer-employee relationship, (ii) Pre-defined segment where
premium is paid by Government, (iii) Members of a registered club,
(iv) Members of a registered co-society, (v) Holders of credit cards of
banks, visa or master cards (vi) Holders of deposit certificates of
banks /NBFC, and (vii) Shareholders of a company.
3. Group discount generally varies from 2.5 per cent to 30 per cent
available for various groups from 101 to 50,000 and above.
4. Monthly endorsement for any addition or deletion of any number
of members shall be without any change in discount.
 5. Group below 100 persons may be given group policy without
discount.
6. Maternity benefit up to Rs. 50,000 available with 10 per cent
loading on basic premium.
7. Cost of health check-up will not be available in group
policy.
8. 5 per cent service charges on group policy.
Universal Health Insurance
This Health Insurance is a very important policy for people below the
poverty line and is thus of great importance for social security and National
Health Policy. Let us now discuss the important provisions of such Health
Insurance as a matter of case study on underwriting of a Health Insurance
product essential for National Health Policy.
Sum Insured:
1. Section I: Hospitalisation benefit per family-Rs. 30,000
2. Section II: Accidental death benefit for head of family-Rs. 25,000
3. Section III: Disability compensation on hosptalisation for head of
family for maximum period of 15 days- Rs. 50 per day
Premium:
1. Individual person: Rs. 365 p.a.
2. Family of five persons (insured + spouse + 3 children): Rs. 548 p.a.
3. Family of seven persons (as above + parents): Rs. 730 p.a.
Benefits
Section I
1. Reimbursement of total medical expenses for anyone accident: Rs.
15,000
2. Reimbursement for a member of family-individually or collectively: Rs.
30,000, subject to following sub-limits of hospital expenses:
a. Room or boarding expenses: up to Rs. 150 per day
b. ICU reimbursement: up to Rs. 150 per day
c. Fees of surgeon, anaesthesist, consultant, etc.: up to Rs.
4,500 per illness
 d. Anesthesia, blood, oxygen, QT, X-ray, surgical appliances,
medicines, etc.: up to Rs. 4,500 per illness
The insurer's liability in respect of all claims admitted during period of
insurance shall not exceed the SI ofRs. 30,000 per person or per family.
Section II
Death Compensation for earning head of the family solely and directly due
to accident caused by outward, violent and visible means will be to SI, i.e.
Rs. 25,000

Section III
Disable compensation for earning head the family solely and directly due to
accident for which a valid claim under Section I is admitted will be up to Rs.
50 per day with excess of three days for a maximum period of 15 days.
General Exclusions:
1. All pre-existing diseases are not admissible.
2. Any disease other than those stated in the policy contracted
by the insured person during the first 30 days of commencement of
the policy, provided that in the opinion of panel doctors the insured
could not have known the existence of the disease or any symptom
and had not taken any consultation treatment or medication.
3. Some diseases like cataract, benign prostate hypertrophy,
hysterectomy, hernia, menorrhagia or fibromyoma, hydrocele,
congenital, internal disease, fistula, piles, sinusitis and related
disorders are not payable.
4. Disease arising from or attributable to war or war-like
operations.
5. Circumcision unless necessary for treatment or due to
accident.
6. Cost of spectacles, contact lenses and hearing aids.
7. Dental treatment, which is cosmetic, corrective or aesthetic.
8. Convalescence general debility, 'run down' condition or rest
cure, congenital external disease or defects or anomalies, sterility,
venereal disease, intentional self-injury and use of drugs.
 9. Any cosmetic treatment or surgery, sterility, venereal
disease, HIV, AIDS 10.
10. Diagnostic, X-ray or laboratory examination not consistent
with diagnosis
11. Vitamins and tonics not forming part of treatment.
12. Disease or injuries attributable to nuclear weapons.
13. Treatment arising from pregnancy, childbirth, miscarriage,
etc.
14. Naturopathy treatment.
Specific Exclusion for Section II
1. Compensation in respect of death directly or indirectly
contributed or traceable to any disability existing on the
commencement of the policy.
2. Death arising directly or indirectly from:
a. Internal self-injury or suicide.
b. Pregnancy or any complication thereof.
c. Whilst engaging in aviation, ballooning, mounting or
traveling in any aircraft other than as a passenger.
d. Whilst under the influence of intoxication, liquor or
drugs.
e. Directly or indirectly caused by venereal diseases or
insanity.
f. Breach of law with criminal intent.
General Conditions:
1. Only one policy will be issued to one family.
2. The pre- and post-hospitalization expenses are excluded.
3. Proposal form and prospectus to be signed by the proposer with
all details.

Health Insurance Policies in India: The health insurance policies

available in India are:
(a) Mediclaim policy (individuals and groups)
 (b) Overseas mediclaim policy
(c) Raj Rajeshwari Mahila Kalyan Yojna
(d) Bhagyashree Child Welfare Policy
(e) Cancer Insurance Policy
(f) Jan Arogya Bima Policy
· Mediclaim policy (individuals and groups): Mediclaim policy is
offered to individuals and groups exceeding 50 members. It covers the
hospitalization for diseases or sickness and for injuries. Under group
mediclaim policy, group discount is allowed to groups exceeding 101
people. The medical expenses will be reimbursed only if the insured is
admitted in the hospital for a minimum duration of 24 hours. Cost of
treatment includes consultation fee of doctors, cost of medicines and
hospitalization charges. Health insurance in India is available at very
economical rates. It is very popular among professionals like Chartered
accountants, Advocates, Engineers etc. It is very suitable for self-
employed persons because it covers risks against several general and
serious diseases.
· Overseas Mediclaim Policy: In 1984, the Overseas Mediclaim
Policy was developed. This policy will reimburse the medical expenses
incurred by Indians upto 70 years of age while traveling abroad. The
premium will be charged based on their age, purpose of travel,
duration and plan selected by the insured under the policy. This policy
is provided is provided to businessmen , people going on holiday tour,
traveling for educational professional and official purposes.
· Raj Rajeshwari Mahila Kalyan Yojna: It is a personal accident
policy offered by an insurance company for the welfare of women. It
is offered to women residing in rural and urban areas. Women
between 10-75 years of age are eligible for this policy irrespective of
their occupation and income level.
· Bhagyashree Child Welfare Policy: It is offered to girls between 0-
18 years. The age of the parents of the girls shouldn’t be more than 60
years. It provides coverage to one girl child in a family who loses her
father or mother in an accident.
· Cancer insurance policy: It is designed for cancer patients aid
association members. The persons insured under this policy will pay
premium to their association along with the membership fee. This
policy will offer coverage to the insured in case he develops cancer.
 All the expenses incurred for treatment of cancer not exceeding the
sum insured will be paid directly to the insured person.
· Jan Arogya Bima Policy: This policy provides medical insurance to
poorer section of the people. This policy covers illness like heart
attack, jaundice, food poisoning, and accidents etc. that requires
immediate hospitalization.
Miscellaneous Insurance:
Personal Accident Insurance: Personal Accident is an insurance cover
wherein, in the event of the person sustaining bodily injuries resulting solely
and directly from an accident caused by EXTERNAL, VIOLENT & VISIBLE
means , resulting into death or disablement. An accident may include events
like: Rail / Road / Air Accident, Injury due to any collision/fall, Injury due
to Bursting of gas cylinder, Snake-bite, Frost bite/Dog bite , Burn Injury,
Drowning, Poisoning etc.
Personal Accidental policy covers accidental death, loss of limbs,
permanent total and partial disablement as selected and granted by the
insurance companies based on the underwriting norms. On payment of
additional premium, medical expenses reimbursement can be covered.
These expenses are payable, in case, if the claim is admitted under the
basic policy cover. In addition to the Personal Accident Insurance cover the
policies available are : Nagrik Suraksha Poicy, Janta Personal Accident
Policy, Gramin Personal Accidental Policy , Student Package Policies for
students, Bhagashree for Girl-children, Raj Rajeshwari for Women etc.
Further as an ad-on cover Motor Vehicle Package Policy & Overseas
Mediclaim Policy too offer personal accidental injuries cover.
Sum insured is based on various factors namely:
(1) Income from gainful employment,
(2) Type of occupation,
(3) Age as on date of proposal,
(4) Period of insurance
(5) Conditions prevailing at the place from where the proposal is made etc.
(6) As regards the non-earning spouse of the insured the sum insured in
respect of such spouse shall not exceed 50% of the eligibility of the
insured, subject to a limit of Rs. One Lakh under benefits available
under Table III of the policy.
(7) Dependent children can be offered a sum insured not exceeding
Rs.50000/- to cover death and disablement only. No temporary
disablement cover shall be offered.
Generally Personal Accident policies are maximum for one year only.
However, depending upon the requirement of the proposer it can be offered
for a period which could even be lesser than 12 months.

Fidelity Insurance: Fidelity insurance protects organizations from

loss of money, securities, or inventory resulting from crime.
Common Fidelity claims allege employee dishonesty, embezzlement,
forgery, robbery, safe burglary, computer fraud, wire transfer fraud,
counterfeiting, and other criminal acts. These schemes involve
every possible angle, taking advantage of any potential weakness in
your company’s financial controls. From fictitious employees,
dummy accounts payable, non-existent suppliers to outright theft of
money, securities and property. Fraud and embezzlement in the
workplace is on the rise, occurring in even the best work
environments. Liabilities covered by crime insurance usually fall into
two categories, although many polices combine both types of
coverage:
 Money and security coverage pays for money and securities taken by
burglary, robbery, theft, disappearance and destruction.
 Employee dishonesty coverage pays for losses caused by most dishonest
acts of your employees, such as embezzlement and theft.
Fidelity insurance includes comprehensive coverage of:
 Employee theft
 Money and securities while on premises or in transit
 Forgery
 Funds transfer fraud
 Computer fraud
 Money order and counterfeit currency fraud
 Credit card fraud
 Optional client coverage
 Coverage for investigative costs for covered losses
 Responds to Employee Retirement Income Security Act of 1974 (ERISA)
plan bonding requirement.
 Broad definition of employee, including directors and officers;
employees, including part-time, leased, temporary, and seasonal
employees; and volunteers.
 Worldwide coverage.

Burglary Insurance: Such a policy provides protection against loss or

damage caused by housebreaking, robbery or theft. It is also known as
‘robbery, theft or larceny insurance’. For this purpose a comprehensive
policy may be taken or each risk may be separately insured. Full details of
the article insured are given in the policy. Insured items include gold and
gold ornaments and other assets including household items such as TV,
fridge, air conditioner etc. A burglary policy for business premises would
provide cover against loss to damage by house breaking and burglary of
stock-in -trade, goods in- transit, cash-in-safe, fixture and fittings etc.

Credit Insurance: Credit insurance policy is taken to cover the loss

which may arise due to bad debts or non-payment of dues by the debtors.
This insurance is very useful to businessmen who sell goods on credit. It
protects them from loss arising out of insolvency of their debtors. In India,
Export Credit and Guarantee Corporation (ECGC) provide credit insurance to
exporters.

Workmen’s Compensation Insurance: In India, Workmen’s

Compensation Act was passed in 1934 and 1946. According to this act, an
employer is required to pay compensation to his workers who receive
injuries or contract occupational diseases during the course of their work.
An employer may obtain an insurance policy to cover such liability. The
premiums are payable usually on the basis of wages. It is also known as
‘Employers Liability Insurance’. This policy is essential to every employer
who employs ‘workmen’ as defined under the Workmen’s Compensation Act
in order to protect himself against the legal liabilities arising out of death or
bodily injury to this workman. It also extends coverage through
reimbursement of medical, surgical and hospitalization expenses including
transportation costs on the payment of additional premium. The National
Insurance Company Ltd, United India Insurance Company Ltd, Oriental
Insurance Company Ltd, and the New India Assurance Company Ltd offer
workmen’s compensation policies.

Travel Insurance: Travel insurance covers travel related accidents also.

While traveling outside India, individuals face risks such as loss of baggage,
accidents involving injuries, illnesses and medical emergencies requiring
hospitalization treatment. All this can pose serious consequences to the
overseas travellers. A rational person should therefore secure the required
coverage before leaving his home country. In India travel insurance has
become popular among International travellers. The coverage offered under
travel insurance policies in India are as follows:
· Medical assistance in case of an emergency
· Covers Personal Accident, Medical Expenses & Medical
Evacuation & Repatriation
· Loss & delay of Checked Baggage
· Covers pre-existing medical conditions
· Convalescence after hospitalization
· Takes care of sudden and unforeseen expenditure Convenient
and hassle free trip for the family

Wedding Insurance: These days, weddings have become quite an

expensive and elaborate affair. People do take care to make this once-in-a-
lifetime event a memorable one. In case of any postponement or
cancellation, there is a certain risk of monetary loss. The wedding insurance
package can compensate for the monetary loss. This unique product covers
the specific risks related to weddings. This Policy can protect you against
certain types of financial losses you may incur in the event of unpredictable
situations during the period leading up to and including your wedding day.
The period of insurance will be 24 hours prior to the start of the customary
functions or rituals or programmes of events mentioned in the printed
invitations till the end of the function or five days from the beginning
whichever occurs earlier. This policy provides cover for expenses actually
and already incurred or advances paid in connection with marriage hall,
catering, pandit, guests, music parties, photos and videography, loss on
cancellation of travel tickets etc. Liability is restricted only when such
cancellation arises out of cancellation or postponement of marriage. The
policy does not cover any loss arises when marriage is cancelled or
postponed because of dispute between marriage parties, willful negligence
and criminal misconduct of the bride, bridegroom or their parents.

Employee State Insurance Scheme: The Employee State Insurance Scheme

(ESIS) is an insurance system which provides both the cash and medical
benefits. It is managed by the Employee State nsurance Corporation (ESIC),
a wholly government-owned enterprise. It was conceived as a compulsory
social security benefit for workers in the formal sector. The original
legislation creating the scheme allowed it to cover only factories which has
been using power and employing 10 or more workers. However, since 1989
the scheme has been expanded, and it now includes all such factories which
are not using power and employing 20 or more persons. Mines and
plantations are explicitly excluded from coverage under the ESIS Act.

Unemployment Insurance: Unemployment insurance is designed to

provide short term protection for regularly employed persons who lose their
jobs and who are willing and able to work. Unemployment insurance has
several basic objectives:
1) Provide cash income during involuntary unemployment.
2) Help unemployed workers find jobs.
3) Encourage employees to stabilize employment.
4) Help stabilize economy.
Unemployment insurance is a popular concept in developed countries like
U.S. where they have well defined laws and regulations. However in India it
will take a long time to come.
Personal Liability Insurance: Personal liability insurance provides
protection against the legal liability, which arises due to insured’s personal
acts. The insurance company will pay for legal defense to third party
damages or injuries up to policy limit. Except legal liability, which arises
due to automobile accidents and professional liability, most other personal
acts are covered under personal liability insurance. The personal liability
insurance covers damages caused to properties and injuries to other people
due to the negligence of the insured. Under this policy, the insurance
company is bound to defend the insured, should the matter go to court of
law. It can also settle the matter out of court by negotiating with parties for
a settlement within the policy limit. Personal liability policy offers very
wide coverage. The following instances of loss, damages or injuries caused
by an insured individual come under the purview of personal liability
insurance in which coverage will be available up to the policy limit.
· Accidental fire to neighbor’s house as a result of insured’s
negligence
· Accidental injury to a third party while playing
· Damaging costly antique accidentally belonging to neighbor
· Injuring another person while riding a bicycle

Self Assessment Questions

1) Define fire insurance. What are the essential features of a fire insurance
contract?
2) What is the claim settlement procedure followed for a fire insurance
policy?
3) What is a floating policy?
4) What is marine insurance? How it is different from fire insurance?
5) What is meant by “perils of the sea”?
6) Briefly describe the different types of losses under marine insurance.
7) Is third party insurance a must under motor vehicle Act?
8) How is subrogation helpful to the insurer?
9) What would be the status of the claim if the vehicle were covered under
liability policy?
10) Explain Travel insurance.
11) Explain the scope of Fidelity insurance.
12) Discuss the main clauses of marine policies.
13) Enumerate the various types of marine insurance policies.
14) What do you mean by ‘assignment of policy’? Indicate the manner in
which a marine policy can be assigned.
15) Distinguish between express warranties and implied warranties in
relation to marine insurance policy.
16) Write a short note on the following:
i) Unemployment insurance
ii) Wedding insurance

References:
· Bhatia R.C., (2005), Business Organization and Management, One
Books, New Delhi.
· Gupta C. B., (2005), Business Organization and Management,
Sultan Chand & Sons, New Delhi.
· Gupta P. K., (2005), Insurance and Risk management, Himalaya
Publisher, New Delhi.
· Prakash Jagdish, (1995), Business Organization and Management,
Kitab Mahal, New Delhi.
· Singh B.P. & Chhabra T.N., (2004), Business Organization and
Management, Dhanpat Rai & Co., New Delhi.
· Mishra, K.C. and Guria, R.C.(2009), Practical Approach to General
Insurance Underwriting, Cengage Learning, Delhi.

4 LESSON 4 THE INSURANCE ACT, 1938 AND IRDA ACT,1999

LESSON 4
THE INSURANCE ACT, 1938 AND IRDA ACT,1999

- Meenu
Asstt. Professor, SRCC,
University of Delhi.

THE INSURANCE ACT, 1938

Earlier to the Insurance Act, 1938, the insurance business was carried
by the insurance companies in accordance with the principles of the
Company Law,1913. When the business started growing, the need for an
independent law to regulate the insurance business was noticed and a
separate Act, the Insurance Act, 1938 was legislated. The Act was used for
all purposes relating to both life and general insurance businesses and their
regulations. With regards to general insurance, this Act is being used to
regulate the marine insurance, fire insurance and other insurances. Further
growth of business has made it complex and more legal provisions were
required to regulate it. The Marine Insurance Act, 1963, Public Liability
Insurance Act, 1991, Insurance Regulatory and Development Authority Act,
1999 and regulations made by the IRDA are some of the legislations that
govern the insurance business.
Short title, extent and commencement
1. (1) This Act may be called Insurance Act, 1938.
(2) It extends to the whole of India.
(3) It shall come into force on such date3 as the Central Government
may, by Notification in the Official Gazette, appoint in this behalf.
Definitions
2. In this Act, unless there is anything repugnant in the subject or
context, -
(1) “Authority” means the Insurance Regulatory and Development
Authority established under sub-section (1) of section 3 of the
Insurance Regulatory and Development Authority Act, 1999;
(2) “Policy-holder” includes a person to whom the whole of the
interest of the policy-holder in the policy is assigned once and for all,
but does not include an assignee thereof whose interest in the policy
is infeasible or is for the time being subject to any condition;
(3) “Approved securities,” means-
(i) Government securities and other securities charged on the
revenue of the Central Government or of the Government of a
State or guaranteed fully as regards principal and interest by the
Central Government or the Government of any State;
(ii) debentures or other securities for money issued under the
authority of any Central Act or Act of a State Legislature by or on
behalf of a port trust or municipal corporation or city
improvement trust in any Presidency-town;
(iii) shares of a corporation established by law and guaranteed fully
by the Central Government or the Government of a State as to
the repayment of the principal and the payment of the divided;
 (iv) securities issued or guaranteed fully as regards principal and
interest by the Government of any Part B State and specified as
approved securities for the purposes of this Act by the Central
Government by notification in the Official Gazette; and

(4) "Auditor" means a person qualified under the Chartered

Accountants Act, 1949 (38 of 1949), to act as an auditor of companies;
(5) "Chief agent" means a person who, not being a salaried employee
of an insurer, in consideration of any commission-
(i) Performs any administrative and organizing functions for the
insurer, and
(ii) Procures life insurance business for the insurer by employing or
causing to be employed insurance agents on behalf of the insurer;
[(5-A) "Controller of Insurance" means the officer appointed by
the Central Government under section 2B to exercise all the powers,
discharge the functions and performs the duties of the Authority under
this Act or the Life
Insurance Corporation Act, 1956 (31 of 1956) or the General Insurance
Business (Nationalization) Act, 1972 (57 of 1972) or the Insurance Regulatory
and Development Authority Act, 1999;]
(6) "Court" means the principal Civil Court of original jurisdiction in a
district and includes he High Court in exercise of its ordinary original
civil jurisdiction;
(7) "Government security" means a Government security as defined
in the Public Debt Act, 1944 (18 of 1944);
[(7A) “Indian insurance company” means any insurer being a
company-
(a) which is formed and registered under the Companies Act, 1956
(1 of 1956);
(b) in which the aggregate holdings of equity shares by a foreign
company, either by itself or through its subsidiary companies or
its nominees, do not exceed twenty-six percent paid-up equity
capital of such Indian insurance company;
(c) whose sole purpose is to carry on life insurance business or
general insurance business or re-insurance business.
 (8) "Insurance company" means any insurer being a company,
association or partnership which may be wound up under the Indian
Companies Act, 1913 (7 of 1913), or to which the Indian Partnership
Act, 1932 (9 of 1932), applies;
(9) "Insurer" means-
(a) any individual or unincorporated body of individuals or body
corporate incorporated under the law of any country other than
India, carrying on insurance business not being a person specified in
sub-clause (c) of this clause which-
(i) carries on that business in India, or
(ii) has his or its principal place of business or is domiciled in India, or
(iii) with the object of obtaining insurance business, employs a
representative, or maintains a place of business, in India;
(b) any body corporate [not being a person specified in sub-clause (c) of
this clause] carrying on the business of insurance, which is a body
corporate incorporated under any law for the time being in force in
India; or stands to any such body corporate in the relation of a
subsidiary company within the meaning of the Indian Companies Act,
1913 (7 of 1913), as defined by sub-section (2) of section 2 of that
Act, and
(c) any person who in India has a standing contract with underwriters
who are members of the Society of Lloyd's whereby such person is
authorized within the terms of such contract to issue protection
notes, cover notes, or other documents granting insurance cover to
others on behalf of the underwriters.But does not include a principal
agent' chief agent, special agent' or an insurance agent or a
provident society as defined in Part III;
(10) "Insurance agent" means an insurance agent licensed under Sec.
42 who receives agrees to receive payment by way of commission or
other remunerationin consideration of his soliciting or procuring
insurance business including business relating to the continuance,
renewal or revival of policies of insurance;
(11) "Managing agent" means a person, firm or company entitled to
the management of the whole affairs of a company by virtue of an
agreement with thecompany, and under the control and direction of
the directors except to the extent, if any, otherwise provided for in
 the agreement, and includes any person, firm or\ company occupying
such position by whatever name called.
(12) "Prescribed" means prescribed by rules made under this Act; and
(13) "Principal agent" means a person who, not being a salaried
employee of an insurer, in consideration of any commission,—
(i) Performs any administrative and organizing functions for the
insurer; and
(ii) Procures general insurance business whether wholly or in part by
employing or causing to be employed insurance agents on behalf of
the
(14) "Special agent" means a person who, not being a salaried
employee of an insurer, in consideration of any commission, procures
life insurance business for the insurer whether wholly or in part by
employing or causing to be employed insurance agents on behalf of
the insurer, but does not include a chief agent.
(15) Insurance cooperative society means any insurer being a
cooperative society, which is registered on or after the
commencement of the insurance (amendment) act, 2002, as a
cooperative society under the cooperative societies act, 1912, or
under any other law for the time being in force in any state relating to
cooperative societies or under the multi-state cooperative societies
act, 1984, having a minimum paid up capital (excluding the deposits
required to be made under section 7), of rupees one hundred crores ,
in which no body corporate, whether incorporated or not, formed or
registered outside India, either by itself or through its subsidiaries or
nominees, any time, holds more than 26 percent of the capital of such
cooperative society, and whose sole purpose is to carry on life
insurance business or general insurance business in India.
Requirements as to capital
No insurer carrying on the business of life insurance, general insurance
or re insurance in India on or after the commencement of the Insurance
Regulatory and Development authority Act, 199, shall be registered unless
he has,-
(i) paid-up equity capital of rupees one hundred crores, in case of a
person carrying on the business of life insurance or general insurance;
or
 (ii) a paid-up equity capital of rupees two hundred crores, in case of a
person carrying on the reinsurance business.
Further, no public company limited by shares having its registered
office in India, shall carry on life insurance business, unless the capital of
the company consists only of ordinary shares each of which have a single
face value, and the same paid up amount for all shares, whether existing or
new, except during any period not exceeding one year allowed by the
company for payment of calls on shares.
The act also provides that no prompter shall any time hold more than
26 percent or such other percentage as may be prescribed. Of the paid up
capital in an Indian insurance company, and if he does, the promoters shall
divest in a phased manner the share capital in excess of the 26 percent of
the paid up equity capital or such excess paid up equity capital as may be
prescribed, and within such period as may be prescribed by the central
government.

Deposits
Every insurer shall, in respect of the insurance business carried on by
him in India, deposit and keep deposited with the Reserve Bank of India in
one of the offices in India of the Bank for and on behalf of the Central
Government the amount hereafter specified, either in cash or in approved
securities estimated at the market value of the securities on the day of
deposit, or partly in cash and partly in approved securities so estimated:-
(a) in the case of life insurance business, a sum equivalent to one per
cent of his total gross premium written direct in India in any financial
year commencing after the 31st day of March, 2000, not exceeding
rupees ten crores;
(b) in the case of general insurance business, a sum equivalent to three
per cent of his total gross premium written in India, in any financial
year commencing after the 31st day of March, 2000, not exceeding
rupees ten crores;
(c) in the case of re-insurance business, a sum of rupees twenty crores
(d) in case the business done or to be done is marine insurance
only and relates exclusively to country craft or its cargo or both, the
amount shall be one hundred thousand rupees only.
 An insurer shall not be registered for any class of insurance business in
addition to the class or classes for which , he is already registered until the
full deposit required has been made.
Audit
The balance-sheet, profit and loss account, revenue account and
profit and loss appropriation account of every insurer, in respect of his
insurance business, shall, unless subject to audit under the Indian
Companies Act, 1913 (7 of 1913), be audited annually by an auditor who
shall in have the powers of, exercise the functions vested in, and discharge
the duties and be subject to the liabilities and penalties imposed on,
auditors of companies by section 145 of the Indian Companies Act, 1913.
Investment of assets
Every insurer shall invest and at all times keep invested assets
equivalent to not less than the sum of-

(a) the amount of his liabilities to holders of life insurance policies in

India on account of matured claims, and

(b) the amount required to meet the liability on policies of life insurance
maturing for payment in India, less-
(i) the amount of premiums which have fallen due to the insurer
on such policies but have not been paid and the days of grace
for payment of which have not expired, and
(ii) any amount due to the insurer for loans granted on and within
the surrender values of policies of life insurance maturing for
payment in India issued by him or by an insurer whose business
he has acquired and in respect of which he has assumed liability,
in the manner following, namely,
(a) twenty-five per cent of the said sum in Government
securities,
(b) further sum equal to not less than twenty-five per cent
of the said sum in Government securities or other
approved securities and
(c) the balance in any of the approved investments specified
in any over investment.
 Every insurer carrying on the business of life insurance, shall every
year, within thirty-one days from the beginning of the year submit to the
authority a return showing as at 31 day of December of the preceding year
st

the assets held invested in accordance with section 27 and 27A and all other
particulars necessary to establish that the requirements of that section have
been complied with, and such return shall be certified by a principal officer
of the insurer. Every such insurer shall also furnish, within fifteen days from
the last day of March , June and September , a return certified as aforesaid
showing as at the end of each of the said months the assets held invested in
accordance with section 27.
Power to appoint staff
The Authority may appoint such staff, and at such places as it or he
may consider necessary, for the scrutiny of the returns, statements and
information furnished by insurers under this Act and generally to ensure the
efficient performance of the functions of the Authority under this Act.
Registration of principal agents, chief agents and special
agents
(1) The Authority or an officer authorized by it in this behalf shall in the
prescribed manner and on payment of the prescribed fee, which shall
not be more than twenty-five rupees for a principal agent or a chief
agent and ten rupees for a special agent, register any person who
makes an application to him in the prescribed manner if,—
(a) in the case of an individual, he does not suffer from any of the
disqualifications mentioned in sub-section (4) of Section 42, or

(b) in the case of a company or firm, any of its directors or

partners does not
suffer from any of the said disqualifications, and a certificate to
Act as a principal agent, chief agent or special agent, as the
case may be, for the purpose of procuring insurance business
shall be issued to him.
(2) A certificate issued under this section shall entitle the holder
thereof to act as a principal agent, chief agent, or special agent, as
the case may be, for any insurer.
(3) A certificate issued under this section shall remain in force for a
period of twelve months only from the date of issue, but shall, on
application made on this behalf, be renewed from year to year on
 production of a certificate from the insurer concerned that the
provisions of clauses (2) and (3) of Part A of the Sixth Schedule in the
case of a principal agent, the provisions of clauses (2) and (4) of Part B
of the said Schedule in the case of a chief agent, and the provisions of
clauses (2) and (3) of Part C of the said Schedule in the case of a
special agent, have been complied with, and on payment of the
prescribed fee, which shall not be more than twenty-five rupees, in
the case of a principal agent or a chief agent, and ten rupees in the
case of a special agent, and an additional fee of the prescribed
amount not exceeding five rupees by way of penalty, in cases where
the application for renewal of the certificate does not reach the
issuing authority before the date on which the certificate ceases to
remain in force:
Provided that, where the applicant is an individual, he does not suffer
from any of the disqualifications mentioned in clauses (b) to (d) of
sub-section (4) of section 42 and where the applicant is a company or
a firm, any of its directors or partners does not suffer from any of the
said disqualifications.
(4) Where it is found that the principal agent, chief agent or special
agent being an individual is, or being a company or firm contains a
director or partner who is suffering from any of the disqualifications
mentioned in subsection (4) of section 42, without prejudice to any
other penalty to which he may be liable, the Authority shall, and
where a principal agent, chief agent or special agent has contravened
any of the provisions of this Act may cancel the certificate issued
under this section to such principal agent, chief agent or special
agent.
(5) The authority which issued any certificate under this section may
issue a duplicate certificate to replace a certificate lost, destroyed or
mutilated on payment of the prescribed fee, which shall not be more
than two rupees.

(6) Any person who acts as a principal agent, chief agent or special
agent, without holding a certificate issued under this section to act as
such, shall be punishable with fine which may extend to five hundred
rupees, and any insurer or any person acting on behalf of an insurer,
who appoints as a principal agent, chief agent or special agent any
person not entitled to act as such or transacts any insurance business
 in India through any such person, shall be punishable with fine which
may extend to one thousand rupees.
(7) Where the person contravening sub-section (6) is a company or a
firm, then, without prejudice to any other proceedings which may be
taken against the company or firm, every director, manager, secretary
or any other officer of the company, and every partner of the firm
who is knowingly a party to such contravention shall be punishable
with fine which may extend to five hundred rupees.
(8) The provisions of sub-sections (6) and (7) shall not take effect until
the expiry of six months from the commencement of the Insurance
(Amendment) Act, 1950.
(9) No insurer shall, on or after the commencement of the Insurance
(Amendment) Act, 2002, appointment or transacts any insurance
business in India through any principal agent, chief agent or special
agent.
Regulation of employment of principal agents
(1) No insurer shall, after the expiration of seven years from the
commencement of the Insurance (Amendment) Act, 1950, appoint, or
transact any insurance business in India, through a principal agent.
(2) Every contract between an insurer and a principal agent shall be in
writing and the terms contained in Part A of the Sixth Schedule shall
be deemed to be incorporated in, and form part of, every such
contract.
(3) No insurer shall, after the commencement of the Insurance
(Amendment) Act, 1950 (47 of 1950), appoint any person as a principal
agent except in a presidency-town unless the appointment is by way of
renewal of any contract subsisting at such commencement.
(4) Within sixty days of the commencement of the Insurance
(Amendment) Act, 1950 (47 of 1950), every principal agent shall file
with the insurer concerned a full list of insurance agents employed by
him indicating the terms of the contract between the principal agent
and each of such insurance agents, and, if any principal agent fails to
file such a list within the period specified, any commission payable to
such principal agent on premiums received from the date of expiry of
the said period of sixty days until the date of the filing of the said list
shall, notwithstanding anything in any contract to the contrary, cease
to be so payable.
 (5) A certified copy of every contract as is referred to in sub-section (2)
shall be furnished by the insurer to the Authority within thirty days of
his entering into such contract, and intimation of any change in any
such contract shall be furnished by the insurer with full particulars
thereof to the Authority within thirty days of the making of any such
change.
(6) If the commission due to any insurance agent in respect of any
general insurance business procured by such agent is not paid by the
principal agent for any reason, the insurer may pay the insurance
agent the commission so due and recover the amount so paid from the
principal agent concerned.
(7) Every contract as is referred to in sub-section (2), subsisting at the
commencement of the Insurance (Amendment) Act, 1950 (47 of 1950),
shall, with respect to terms regarding remuneration, be deemed to
have been so altered as to be in accordance with the provisions of sub-
section (4) of section 40A.
(8) If any dispute arises as to whether a person is or was a principal
agent the matter shall be referred to the Authority, whose decision
shall be final.
(9) Every insurer shall maintain a register in which the name and
address of every principal agent appointed by him, the date of such
appointment and the date, if any, on which the appointment ceased
shall be entered.
Commission, brokerage or fee payable to intermediary or
insurance intermediary
(1) No intermediary or insurance intermediary shall be paid or contract
to be paid by way of commission, fee or as remuneration in any form,
an amount exceeding thirty per cent of the premium payable as may
be specified by the regulations made by the Authority, in respect of
any policy or policies effected through him:
Provided that the Authority may specify different amounts payable by
way of commission, fee or as remuneration to an intermediary or
insurance intermediary or different classes of business of insurance.
(2) Without prejudice to the provisions contained in this Act, the
Authority may, by the regulations made in this behalf, specify the
requirements of capital, form of business and other conditions to act
as an intermediary or insurance intermediary.
Register of insurance agents
Every insurer and every person who acting on behalf of an insurer
employs insurance agents shall maintain a register showing the name and
address of every insurance agent appointed by him and the date on which
his appointment began and the date, if any, on which his appointment
ceased.
IRDA ACT 1999
Prior to 1999, insurance companies were owned by the Government. In
1999, the government of India introduced the insurance regulatory and
development authority act, thereby, deregulating the insurance sector and
allowing private companies into the insurance.
The Insurance Regulatory and Development Authority Act, 1999 is an
act to provide for the establishment of an Authority to protect the interests
of holders of insurance policies, to regulate, promote and ensure orderly
growth of the insurance industry and for matters connected therewith or
incidental thereto and further to amend the Insurance Act, 1938, the Life
Insurance Corporation Act, 1956 and the General insurance Business
(Nationalization) Act, 1972
Extent and Commencement
The act extends to the whole of India and will come into force on such date
as the Central Government may, by notification in the Official Gazette.
The Act has defined certain terms, some of the most important ones are as
follows: -
A) Appointed day means the date on which the Authority is
established under the act.
B) Authority means the IRDA established under this Act.
C) Interim insurance regulatory authority means the insurance
regulatory authority set up by the central government through
resolution no. 17(2)/94-InsV , dated the 23 January 1996.
rd

D) Intermediary or insurance intermediary includes insurance

brokers, reinsurance brokers, insurance consultants , surveyors and
loss assessors.
E) Member means whole time or a part time member of the authority
and includes the chairperson .
F) Notification means a notification published in the official gazette.
 G) Regulations means the regulations made by the authority.
Establishment and incorporation of authority (section 3)
With effect from such date as the Central Government may, by
notification, appoint the Insurance Regulatory and Develop is to be
constituted. The Authority 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 to contract and can be
sue or be sued in its own name. The head office of the Authority shall be at
such place as the Central Government may decide from time to time and it
may establish offices at other places in India.
Composition of Authority
The Authority shall consist of the following members, namely
(a) a Chairperson;
(b) not more than five whole-time members;
(c) not more than four part-time members, to be appointed by the
Central Government
Tenure of office of Chairperson and other members
The Chairperson and every other whole-time member shall hold office
for a term of five years from the date of appointment shall be eligible for
reappointment:
However, no person shall hold office as a Chairperson after he has
attained the age of sixty-five years and no person shall hold office as such
whole-time
member after he has attained the age of sixty-two years.
A part-time member shall hold office for a term not exceeding five
years from the date of his appointment and shall be eligible for
reappointment
A member may:
resign by giving in writing to the Central Government notice of not less
than three months; or be removed from his office in accordance with the
provisions.
Removal from office
The Central Government may remove from office any member who: -
(a) is, or at any time has been, adjudged as insolvent;
 (b) has become physically or mentally incapable of acting as a member;
(c) has been convicted of any offence which, in the opinion of the
Central Government, involves moral turpitude;
(d) has acquired such financial or other interest as is likely to affect
prejudicially his functions as a member;
(e) has so abused his position as to render his continuation in office
detrimental to the public interest.
Salary and allowances of Chairperson and members
The act u/s 7 prescribes-The salary and allowances payable to, and
other terms and conditions of service of, the members other than part-time
members shall be such as may be prescribed. The part-time members shall
receive such allowances as may be prescribed. The salary, allowances and
other conditions of service of a member shall not be varied to his
disadvantage after appointment in respect of all administrative matters of
the Authority.
Meeting of Authority
The Authority shall meet at such times and places, and shall observe
such rules and procedures in regard to transaction of business at its
meetings (including quorum at such meetings) as may be determined by
regulations. The Chairperson, or if for any reason he is unable to attend a
meeting of the Authority, any other member chosen by the members
present from amongst themselves at the meeting shall preside at the
meeting. All questions which come up before any meeting of the Authority
shall be decided by a majority vote of the members present and voting, and
in the event of equality of votes, the Chairperson, or in his absence, the
person presiding shall have a second or casting vote. The Authority may
make regulations for the transaction of business at its meetings.
Duties, powers and functions of Authority
Subject to the provisions of this Act and any other law for the time
being in force, the Authority has the duty to regulate, promote and ensure
orderly growth of the insurance business and re-insurance business. The
powers and functions of the Authority include:-
(a) to issue to the applicant a certificate of registration, to renew,
modify, withdraw, suspend or cancel such registration
b) protection of the interests of the policy-holders in matters
concerning assigning of policy, nomination by policy-holders, insurable
 interest, settlement of insurance claim, surrender value of policy, and
other terms and conditions of contracts of insurance
(c) specifying requisite qualifications code of conduct and practical
training for intermediary or insurance intermediaries and agents
(d) specifying the code of conduct for surveyors and loss assessors
(e) promoting efficiency in the conduct of insurance business
(f) promoting and regulating professional organizations connected with
the insurance and reinsurance business
(g) levying fees and other charges for carrying out the purposes of this
Act
(h) calling for information from, undertaking inspection of, conducting
enquiries and investigations including audit of the insurers,
intermediaries, insurance intermediaries and other organizations
connected with the insurance business
(i) control and regulation of the rates, advantages, terms and
conditions that may be offered by insurers in respect of general
insurance business not so controlled and regulated by the Tariff
Advisory Committee under section 64U of the Insurance Act, 1938
(j) prescribing the form and manner in which books of account shall be
maintained and statement of accounts will be rendered by insurers
and other insurance intermediaries
(k) Regulating investment of funds by insurance companies
(l) regulating maintenance of margin of solvency
(m) adjudication of disputes between insurers and intermediaries or
insurance intermediaries
(n) supervising the functioning of the Tariff Advisory Committee
(o) specifying the percentage of premium income of the insurer to
finance schemes for promoting and regulating professional
organizations
(p) specifying the percentage of life insurance business and general
insurance business to be undertaken by the insurer in the rural or
social sector
(q) exercising such other powers as may be prescribed
Fund
There shall be constituted a fund to be called "The Insurance
Regulatory and Development Authority Fund" is to be established and the
following sums will be credited thereto:
(a) All Government grants, fees and charges received by the Authority
(b) All sums received by the Authority from such other source as may be
decided upon by the Central Government
(c) The percentage of prescribed income received from the insurer.
The Fund shall be applied for meeting the following expenses:
(a) the salaries, allowances and other remuneration of the members,
officers and other employees of the Authority
(b) the other expenses of the Authority in connection with the discharge
of its functions and for the purposes of this Act.
Accounts and audit
The Authority shall maintain proper accounts and other relevant
records and prepare an annual statement of accounts in such form as may
be prescribed by the Central Government in consultation with the
Comptroller and Auditor General of India. The accounts of the Authority
shall be audited by the Comptroller and Auditor General of India at such
intervals as may be specified by him and any expenditure incurred in
connection with such audit shall be payable by the Authority to the
Comptroller and Auditor General of India. The Comptroller and Auditor-
General of India and other person appointed by him in connection with the
audit of the accounts of the Authority shall have the same rights and
privileges and authority in connection with such audit as the Comptroller
and Auditor General generally has in connection with the audit of the
Government accounts and, in particular, shall have the right to demand the
production of books, accounts, connected vouchers and other documents
and papers and to inspect any of the officers of the Authority. The accounts
of the Authority as certified by the Comptroller and Auditor General of India
or any other person appointed by him in this behalf together with the audit
report thereon shall be forwarded annually to the Central Government and
that Government shall cause the same to be laid before each House of
Parliament.
Powers of Central Government
Under the act
 1) Power to issue directions - The Authority shall, in exercise of
its powers or the performance of its functions under this Act, be
bound by such directions on questions of policy, other than those
relating to technical and administrative matters, as the Central
Government may give in writing to it from time to time
2) Power to supersede Authority -If at any time the Central
Government is of the opinion:-
(a) that, on account of circumstances beyond the control of the
Authority, it is unable to discharge the functions or perform the
duties imposed on it by or under the provisions of this Act: or
(b) that the Authority has persistently defaulted in complying
with any direction given by the Central Government under this
Act or in the discharge of the functions or performance of the
duties imposed on it by or under the provisions of this Act and as
a result of such default the financial position of the Authority or
the administration of the Authority has suffered; or
(c) that circumstances exist which render in necessary in the
public interest so to do, the Central Government may, by
notification and for reasons to be specified therein, supersede
the Authority for such period, not exceeding six months, as may
be specified in the notification and appoint a person to be the
Controller of Insurance
The Central Government shall cause a copy of the notification issued
and a full report of any action taken under this section and the
circumstances leading to such action to be laid before each House of
Parliament at the earliest.
3) Power to make rules - The Central Government may, by
notification, make rules for carrying out the purposes of this Act. Such
rules may provide for all or any of the following matters, namely:
(a) the salary and allowances payable to and other conditions of
service of the members other than part-time members
(b) the allowances to be paid to the part-time members
(c) such other powers that may be performed by the Authority
(d) the form of annual statement of accounts to be prepared by
the Authority
 (e) the time at, the form and the manner in which returns and
statements and particulars are to be furnished to the Central
Government
(f) the matters on which the Insurance Advisory Committee shall
advise the authority
(g) any other matter which is to be, or may be, prescribed, or in
respect of which provision is to be or may be made by rules.
4) Power to remove difficulties - If any difficulty arises in
giving effect to the provisions of this act, the central government
may, by order published in the official gazette, make such provisions
not inconsistent with the provisions of this act as may appear to be
necessary for removing the difficulty
5) Grants by central government - The central government
may, after due appropriation made by parliament by the law in this
behalf, make to the authority grants of such sums of money as the
government may think fit for being utilised for the purposes of this
act.
Furnishing of returns, etc., to the Central Government
The Authority must furnish to the Central Government at such time
and in such form and manner as may be prescribed, or as the Central
Government may direct, to furnish such returns and statements and such
particulars in regard to any proposed or existing programme for the
promotion and development of the insurance industry as the Central
Government may, from time to time, require.
The Authority must, within nine months after the close of each
financial year, submit to the Central Government a report giving a true and
full account of its activities including the activities for promotion and
development of the insurance business during the previous financial year.
Copies of the reports must be laid, as soon as may be after they are
received, before each House of Parliament.
The Chairperson, members, officers and other employees of the
Authority shall in this regard be deemed to be public servants.
Delegation of powers
The Authority may, by general or special order in writing, delegate to
the Chairperson or any other member or officer of the Authority, subject to
such conditions, if any, as may be specified in the order such of its powers
and functions under this Act as it may deem necessary. The Authority may,
by a general or special order in writing, also form Committees of the
members and delegate to them the powers and functions of the Authority as
may be specified by the regulations.
Establishment of Insurance Advisory Committee
The Authority may, by notification, establish with effect from such
date as it may specify in such notification, a Committee to be known as the
Insurance Advisory Committee. The Insurance Advisory Committee shall
consist of not more than twenty-five members excluding ex officio members
to represent the interests of commerce, industry, transport, agriculture,
consumer forum, surveyors, agents, intermediaries, organizations engaged
in safety and loss prevention, research bodies and employees' association in
the insurance sector. The Chairperson and the members of the Authority
shall be the ex officio Chairperson and ex officio members of the Insurance
Advisory Committee. The objects of the Insurance Advisory committee shall
be to advise the Authority on matters relating to the making of the
regulations. The Insurance Advisory Committee may advise the Authority on
such other matters as may be prescribed.
Penalty for default in complying with, or act in contravention
of, this Act
lf any person, who is required under this Act, or rules or regulations
made there under,-
(a) to furnish any document, statement, account, return or report to
the Authority, fail to furnish the same; or
(b) to comply with the directions, fails to comply with such directions;
(c) to maintain solvency margin, fails to maintain such solvency margin;
(d) to comply with the directions on the insurance treaties, fails to
comply with sue directions on the insurance treaties, he shall be liable
to a penalty not exceeding five lakhs rupees for each such failure and
punishable with fine.
lf a person makes a statement, or furnishes any document, statement,
account, return or report which is false and which he either knows or
believes to be false or does not believe to be true,-
(a) he shall be liable to a penalty not exceeding five lakhs rupees for
each such failure; and
(b) he shall be punishable with imprisonment which may extend to three
years or with fine for each such failure.
Offences by companies
Where any offence under this Act has been committed by a company,
every person who, at the time the offence was committed, was in charge of,
and was responsible to, the Company for the conduct of the business of the
company as well as the company shall be deemed to be guilty of the offence
and shall be liable to be proceeded against and punished accordingly.
Power to make regulations
The authority may, in consultation with the insurance advisory
committee, by notification, make regulations, consistent with this act and
providing for all or any of the following matters
The time and places of meetings of the authority and the procedure to
be followed at such meetings including the quorum necessary for the
transaction of business.
The transaction of business at its meeting under section 10(4).
The terms and conditions of service of officers and other employees of
the authority under subsection (2) of section 12.
The powers and functions which may be delegated to committees of
the members under subsection (2)of section 23.
Any other matter which is required to be, or may be, specified by
regulations or in respect of which provisions is to be or may be made by
regulations.

Rules and regulations to be laid before parliament

Every rule and every regulation under this act shall be laid, as soon as
may be after it is made, before each house of parliament, while it is in
session, for a total period of thirty days, which may be comprised in one
session oe in two or more successive sessions, and if, before the expiry of
the session immediately following the session or the successive sessions
aforesaid, both houses agree in making any modifications in the rule or
regulations or both houses agree that the rule or regulations should not be
made, the rule or regulation shall thereafter have effect only in such
modified form or be no effect, as the case may be.
7 Unit 6 LESSON 7 LIFE INSURANCE

Introduction
Life Insurance is universally acknowledged as a tool to eliminate risk,
substitute certainty for uncertainty and ensure timely aid of the family in
the unfortunate event of the death of the breadwinner. In other words, it is
the civilized world's partial solution to the problems caused by death. In
other words, Life insurance is protection against financial loss resulting from
insured Individual’s death. In realistic terms, life insurance provides you and
your family the financial security and certainty to deal with the aftermath
of any unseen unfortunate events.
Life Insurance is a contract for payment of a sum of money to the
person assured (or failing him/her, to the person entitled to receive the
same) on the happening of the event insured against. Usually the insurance
contract provides for the payment of an amount on the date of maturity or
at specified dates at periodic intervals or at unfortunate death if it occurs
earlier. Obviously, there is a price to be paid for this benefit. Among other
things, the contract also provides for the payment of premiums by the
assured.
In a nutshell, life insurance helps in two ways: premature death,
which leaves dependent families to fend for itself and old age without
visible means of support. Any person who has attained majority and is
eligible to enter into a valid contract can take out a life insurance policy for
himself / herself. Policies can also be taken out, subject to certain
conditions, on the life of one’s children.
The need for life insurance will change as you grow older. When you
are young, you may believe you have no need for life insurance. But as you
grow older, possibly get married and take on more responsibilities, your
desire to take out an insurance policy increases.
What is the reach and significance of Life Insurance as an economic activity?
§ So long as the maintenance of a family depends on the earning power
of the bread-winner.
§ So long as the earning can be destroyed by death, old age or disability.
§ Just so long life as insurance continues to be the keystone of the
individual and those who are dependent on him.
Thus, life insurance is universal and will play a useful role as long as the
family set up survives. Life Insurance caters to an important social need.
Need For Life Insurance
The need for life insurance comes from the need to safeguard our
family. If you care for your family’s needs you will definitely consider
insurance. Today insurance has become even more important due to the
disintegration of the prevalent joint family system, a system in which a
number of generations co-existed in harmony, a system in which a sense of
financial security was always there as there were more earning members.
Times have changed and the nuclear family has emerged. Therefore you
need to save a part of income for the future too.This is where insurance
helps us.
Factors such as fewer numbers of earning members, stress, pollution,
increased competition, higher ambitions etc. are some of the reasons why
insurance has gained importance and where insurance plays a successful
role. Insurance provides a sense of security to the income earner as also to
the family. Buying insurance frees the individual from unnecessary financial
burden that can otherwise make him spend sleepless nights. The individual
has a sense of consolation that he has something to fall back on. From the
very beginning of your life, to your retirement age insurance can take care
of all your needs. Your child needs good education to mold him into a good
citizen. After his schooling he need to go for higher studies, to gain a
professional edge over the others - a necessity in this age where cut-throat
competition is the rule. His career needs have to be fulfilled. Insurance is a
must also because of the uncertain future adversities of life. Accidents,
illnesses, disability etc. are facts of life which can be extremely
devastating. Disability can be taken care of by insurance. Your family will
not have to go through the grind due to your present inability.
Moreover, retirement, an age when every individual has almost
fulfilled his responsibilities and looks forward to relaxing can be painful if
not planned properly. Have we considered the increasing inflation and
taxes? Will our investment offer us attractive returns under such
circumstances? Will it take care of our family after us? An insurance policy
will definitely take care of these and a lot more. Insurance has become a
necessity today. It provides timely financial as also rewards with bonuses.
Life Insurance has come a long way from the earlier days when it was
originally conceived as a risk covering medium for short periods of time,
covering temporary risk situations, such as sea voyages.
Therefore after going through the discussion let us summarize our
points and understand the need of life insurance :
a) Temporary needs / threats: The original purpose of life insurance
remains an important element, namely providing for replacement of income
on death etc.
b) Regular Savings / Family Protection: Providing for one's family
and oneself, as a medium to long term exercise (through a series of regular
payment of premiums). This has become more relevant in recent times as
people seek financial independence for their family.
c) Investment: Put simply, the building up of savings while safeguarding
it from the ravages of inflation. Unlike regular saving products, investment
products are traditionally lump sum investments, where the individual
makes a one off payment.
d) Old age provision: Provision for later years becomes increasingly
necessary, especially in a changing cultural and social environment. One can
buy a suitable insurance policy, which will provide periodical payments in
one's old age.
e) Children benefit: Provision for the education, marriage and start in
life for the children.
f) Special needs provision: Protection against loss arising out of
accident, disability, sickness, loan repayment on death.
g) Tax benefits: Under the Income Tax Act, premium paid is allowed as a
deduction from the total income under section 80C.

Why Is Insurance Superior To Other Form Of Savings?

§ An immediate estate is created in favor of the policy holder
§ Protection in case of death
§ Liquidity in case of need
§ Tax relief – income tax, wealth tax etc.
§ Policies can be offered as collateral security
§ Policies can be taken under M.W.P. Act 1874, to protect against
creditors
Let us take an example to understand the need for insurance:
Mr. Atul is 45 and self-employed. His wife Nandini, who is a housewife, looks
after their two children aged 3 and 7 years. They stay in a rented
accommodation, where the rent is 15,000 rupees per month. Mr. Atul has
 taken up a loan of Rs. 2 lakh. His monthly earnings on average are 40,000
rupees. Mr. Atul passes away in an unfortunate road accident. What are
some of the financial implications of his death on his family.
There may be several financial implications on his family. Some of these
are:
a) The monthly income, previously provided by Mr. Atul would stop.
b) His wife and children may have to seek financial assistance from other
relatives.
c) His wife may not have enough money to pay back the loan of Rs. 2 lakhs.
d) The family may have to move into a cheaper accommodation.
e) His widow may have to take up work to earn money.
f) The education of his children may suffer.

This simple example illustrates the impact premature death can have on a
family, where the main earner has no life cover. Had Mr. Atul taken life
cover, his family would not have faced such hardships in the event of his
unfortunate death. A simple life insurance policy could have provided Mr.
Atul's family with a lump sum that could have been invested to provide an
income equal to all or part of his income. In simple words, insurance
protects against untimely losses. Insurance has been found useful in the
lives of persons both in the short term and long term. Short term needs like
sudden medical costs and long term needs like marriage expenses etc can be
met with using life insurance.
Basic Principles Of Life Insurance Contract.
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. So basic principles of life insurance contract
are as follows:
1. Insurable interest: The insured must have insurable interest in the life
assured. In absence of insurable interest, Contract of insurance is void.
Insurable interest must be present at the time of entering into contract with
insurance company for life insurance. It is not necessary that the assured
should have insurable interest at the time of maturity also.Insurable interest
exists in the following cases:
a) A person has an unlimited insurable interest in his/her own life.
b) A person has an insurable interest in the life of his/her spouse.
c) A father has an insurable interest in the life of his son or daughter on
whom he is dependent. Likewise a son may have insurable interest in life of
his parents.
d) A creditor has an insurable interest in the life of the debtor, to the
extent of the debt.
e) A servant employed for a specified period has insurable interest in the
life of his employer.
2. Utmost good faith: The contract of life insurance is a contract of utmost
good faith. The insured should be open and truthful and should not conceal
any material fact in giving information to the insurance company, while
entering into a contract with insurance company. Misrepresentation or
concealment of any fact will entitle the insurer to repudiate the contract if
he wishes to do so.
3. A contract of indemnity: The life insurance contract is not a contract of
indemnity. A Contract of life insurance is not a contract of indemnity. The
loss of life cannot be compensated and only a fixed sum of money is paid in
the event of death of the insured. So, the life insurance contract is not a
contract of indemnity. The loss resulting from the death of life assured
cannot be calculated in terms of money.

Types Of Insurance Policies

Though there are a lot of policies available in the market under
different names and by different companies, the policies can broadly be
classified into the following categories:
 Term Insurance Policy
 Whole Life Policy
 Universal Life Insurance Policy
 Money Back Policy
 Endowment Policy
 Pension Plans or Annuities

§ Joint Life Policy

§ Group Insurance Policy
§ Unit Linked Insurance Plan
Term Insurance Policy
Term insurance provides life insurance coverage for a specific period
of time. Presently one year, five year, ten year, and fifteen year, are the
periods one can buy term life insurance policy. If the insured person dies
during the period the insurance is in force, the insurance company pays off
the face value of the policy. If the insured lives longer than the term of the
policy, the policy is no longer in effect and nothing is paid. Term insurance
is the least expensive form of life insurance. It is commonly used when the
insured needs temporary protection or can’t afford the premiums for the
other forms of life insurance. The other reason an insured may want term
insurance is to purchase life insurance and invest the difference between
the term policy and cash value policy elsewhere.
Term insurance comes in several forms. There is renewable & non –
renewable. Non – renewable means that on the expiry of your policy you
must go under another physical test and filling out another questionnaire.
On the other hand, with renewable policy you don’t need to undergo these
formalities again and you automatically re – qualify to continue your
policy.Then there is convertible & non – convertible policy. Convertible
policy is the one which can be converted into a permanent policy, whereas
non – convertible is the one which cannot be converted into a permanent
policy or in other words the policy cannot be converted to any other form of
life insurance policy.

Whole Life Policy

The whole life policy provides insurance coverage for the entire life of
the insured regardless of how many years the insurance is paid. Premiums
may be paid throughout the insured’s entire life or for a portion of his life.
Additionally, the premium can be paid in one lump – sum when the policy is
taken out. This is referred to as a single premium whole life policy. When
the premium is paid throughout the life it is known as straight life policy,
but when the premium is paid for a specified period of time it is known as
limited life policy.
The premiums are higher for Whole life insurance as opposed to
term insurance. The reason for this is that the policy has investment
features as well as death benefits. The cash value portion of the whole life
insurance belongs to the insured. One can take it out in the form of policy
loans or can cash the policy in. Another advantage of whole life insurance is
that the premiums are fixed, i.e. regardless of your age, you pay the same
amount for the coverage each year.
Universal Life Insurance Policy
Universal Life is a type of permanent life insurance based on a cash
value. That is, the policy is established with the insurer where premium
payments above the cost of insurance are credited to the cash value. The
cash value is credited each month with interest, and the policy is debited
each month by a cost of insurance (COI) charge, and any other policy
charges and fees which are drawn from the cash value if no premium
payment is made that month. The interest credited to the account is
determined by the insurer; sometimes it is pegged to a financial index such
as a bond or other interest rate index.

Money Back Policy

Money back policies provide for periodic payments of partial survival
benefits during the term of the policy, as long as the policy holder is alive.
An important feature of this type of policies is that in the event of the death
at any time within the policy term, the death claim comprises the full sum
assured, without deduction of any survival benefit amounts, which may have
already been paid as money back components. Similarly the bonus is also
calculated on the entire sum assured.

Endowment Policy
An endowment policy covers the risk for a specified period, at the end
of which the sum assured is paid back to the policy holder, along with the
bonus accumulated during the term of the policy. This feature of payment
of endowment to the policy holder when the policy’s term is complete is
responsible for the popularity of endowment policies. The amount received
on maturity can either be utilized either to buy an annuity policy to
generate a monthly pension for the rest of the life, or put it into any other
suitable investment of our choice. This is one important benefit which the
endowment policy offers over a whole life insurance policy.
Overall, endowment policies are the most suitable of all insurance
plans for covering the risks to a family breadwinner’s life. Not only do these
policies provide financial risk cover for the family, were the policy holder to
die prematurely but the insurance amount is also repaid once this risk is
over. The endowment amount can then be used for meeting major
expenditures such as children’s education and marriage, etc.
Alternately, the endowment sum is available for a suitable investment
geared to providing an income for the remainder of one’s own life. These
types of plans are particularly suitable to those who other than having a risk
cover are also interested in a savings component
simultaneously.
Pension Plan or Annuities
An annuity is an investment that we make, either in a single lump
sum or through installments paid over a certain number of years, in return
for which we receive a specific sum every year, every half – year or every
month, either for whole life or a fixed number of years. After the death of
an annuitant or after the fixed annuity period expires for annuity payments,
the invested annuity fund is refunded, perhaps along with a small addition,
calculated at that time. Annuities differ from all the other form of life
insurance in one fundamental way – an annuity does not provide any life
insurance cover but, instead offers a guaranteed income either for life or a
certain period.
Typically annuities are bought to generate income during one’s
retired life, which is why they are also called pension plans. Annuity
premiums and payments are fixed with reference to the duration of human
life.
Joint Life Policy
Joint life insurance policies are similar to endowment policies as they
too offer maturity benefits to the policyholders, apart form covering risks
like all life insurance policies. But joint life policies are categorized
separately as they cover two lives simultaneously, thus offering a unique
advantage in some cases, notably, for a married couple or for partners in a
business firm. Under a joint life policy the sum assured is payable on the
first death and again on the death of the survivor during the term of the
policy. Vested bonuses would also be paid besides the sum assured after
the death of the survivor. If one or both the lives survive to the maturity
date, the sum assured as well as the vested bonuses are payable on the
maturity date. The premiums payable cease on the first death or on the
expiry of the selected term, whichever is earlier.
Accident benefits equivalent to the sum assured are available under
Joint life insurance policies on the first death. In case both the lives are
covered under Double Accident Benefit (DAB), the surviving life is covered
under DAB until the end of the policy year, in which the first life dies under
the cover of the policy. Both the policy holders can avail these benefits, if
 · Both the policy holders die simultaneously owing to an
accident. To avoid such an eventuality, nomination is allowed
under the policy OR
· Both of them die within the specified period as a result
of the same accident OR
· The second policy holder also dies in the same policy
year as result of another accident. To avoid such an
eventuality, nomination is allowed under the policy.
Joint life insurance policy is ideal for married couples as it provides
financial security and risk protection to both the individuals.
Group Insurance Policy
Group insurance offers life insurance protection under group policies
to various groups such as employers-employees, professionals, co-
operatives, weaker sections of society, etc. It also provides insurance
coverage for people in certain approved occupations at the lowest possible
premium cost. Group insurance plans have low premiums. Such plans are
particularly beneficial to those for whom other regular policies are a costlier
proposition. Group insurance plans extend cover to large segments of the
population including those who cannot afford individual insurance. A
number of group insurance schemes have been designed for various groups.
These include employer-employee groups, associations of professionals (such
as doctors, lawyers, chartered accountants etc.), members of cooperative
banks, welfare funds, credit societies and weaker sections of society.
Many employees see group insurance coverage as a major perk for
faithful company service. The premium payments are usually deducted
automatically from the pay itself. Some companies will absorb the entire
cost of the policy as a benefit for employees. The main advantages of the
group insurance schemes are low premium and simple insurability
conditions. Premiums are based upon age combination of members,
occupation and working conditions of the group.
A major feature of group insurance is that the premium cost on an
individual basis may not be risk-based. Instead it is the same amount for all
the insured persons in the group. Another distinctive feature is that under
group insurance a person will normally remain covered as long as he or she
continues to work for a certain employer and pays their insurance
premiums. This is different from the individual insurance policy where the
insurance company often has the right to reject the renewal of a person's
policy, depending on his risk profile.
 Unit Linked Insurance Plan
Unit linked insurance plan (ULIP) is life insurance solution that
provides for the benefits of risk protection and flexibility in investment. The
investment is denoted as units and is represented by the value that it has
attained called as Net Asset Value (NAV). The policy value at any time varies
according to the value of the underlying assets at the time.
In a ULIP, the invested amount of the premiums after deducting for all the
charges and premium for risk cover under all policies in a particular fund as
chosen by the policy holders are pooled together to form a Unit fund. A Unit
is the component of the Fund in a Unit Linked Insurance Policy.
The returns in a ULIP depend upon the performance of the fund in
the capital market. ULIP investors have the option of investing across
various schemes, i.e, diversified equity funds, balanced funds, debt funds
etc. It is important to remember that in a ULIP, the investment risk is
generally borne by the investor. In a ULIP, investors have the choice of
investing in a lump sum (single premium) or making premium payments on
an annual, half-yearly, quarterly or monthly basis. Investors also have the
flexibility to alter the premium amount during the policy's tenure. For
example, if an individual has surplus funds, he can enhance the contribution
in ULIP. Conversely an individual faced with a liquidity crunch has the option
of paying a lower amount (the difference being adjusted in the accumulated
value of his ULIP). ULIP investors can shift their investments across various
plans/asset classes (diversified equity funds, balanced funds, debt funds)
either at a nominal or no cost. Expenses Charged in a ULIP are as follows:
Premium Allocation Charge: A percentage of the premium is appropriated
towards charges initial and renewal expenses apart from commission
expenses before allocating the units under the policy.
· Mortality Charges: These are charges for the cost of insurance coverage
and depend on number of factors such as age, amount of coverage, state of
health etc.
· Fund Management Fees: Fees levied for management of the fund and is
deducted before arriving at the NAV.
· Administration Charges: This is the charge for administration of the
plan and is levied by cancellation of units.
· Surrender Charges: Deducted for premature partial or full encashment
of units.
Fund Switching Charge: Usually a limited number of fund switches are
allowed each year without charge, with subsequent switches, subject to a
charge.
· Service Tax Deductions: Service tax is deducted from the risk portion of
the premium.
Pricing
For life insurance policy you must pay a price in terms of premium. All
insurance companies employ actuaries to fix the premiums of their policies.
The actuaries need to consider various factors (both measurable and non-
measurable) and build them into the premiums. There are some factors that
the actuaries already have information on (like mortality rate, claims paid
percentages, etc.,) and the rest of the information comes from the
applicant. We will first look at the information provided by the applicants
that play a part in Life Insurance Price, one by one.
· Age: Young, fit people who are just about to begin the most productive
part of their lives are the ones who get the cheapest policies. The premium
component gradually increases as the age of the applicant progresses. There
is no intentional discrimination here against older people. Mortality trends
state that the chances of mortality increase is directly proportional to age
increase and the insurance companies base their calculations on the age risk
factor. So, the older you are the higher you pay!
· Type of policy: There are various types of policies; term, partial
payment, pension plans, cash value…..etc., As a general rule, you can be
sure that premiums increase directly proportional to the cash value benefits
and complexity. Term plans are the cheapest and any other investment
based policy will cost you higher. The coverage amount also plays a part.
Higher the coverage, higher the premium.
· Duration of the policy: This plays a more important part in wealth
building insurance policies but even otherwise, longer duration policies are
priced cheaper.
· Medical history and health: History of previous illness is a risk while
underwriting a policy and therefore carries such people carry higher
premium. This is a very important factor and if an applicant has illness
history or have existing ailments, they have to be disclosed to the company,
otherwise, the insurance company will outright reject the claim (when the
need arises) citing suppression of vital information. Height and weight
details are also used as factors.
· Personal habits and occupation: Habitual smokers and drinkers will be
charged higher, as will people employed in hazardous jobs (Fire fighters,
scuba divers). Some hobbies (bungee jumping, car racing) are also deemed
high risk and will attract higher premiums.
· Other factors: Apart from the information provided by the applicant,
the insurance actuaries need to input many other factors listed below:
o Mortality – Life insurance is based on the sharing of the risk of
death by a large group of people. The amount at risk must be
known to predict the cost to each member of the group.
Mortality tables are used to give the company a basic estimate
of how much money it will need to pay for death claims each
year. By using a mortality table a life insurer can determine the
average life expectancy for each age group.
o Interest – The second factor used in calculating the premium is
interest earnings. Companies invest your premiums in bonds,
stocks, mortgages, real estate, etc., and assume they will earn a
certain rate of interest on these invested funds.
o Expense – The third consideration is the expenses of
operating the company. The company estimates such
expenses as salaries, agents’ compensation, rent, legal
fees, postage, etc. The amount charged to cover each
policy’s share of expenses of operation is called the
expense loading. This is a cost area that can vary from
company to company based on its operations and
efficiency
Underwriting
The process of assessing the risk profile of the life insurance applicant
whether individual or group and then fixing the rate of premium is called
risk classification or underwriting. The methods by which an insurer
manages risks are:
[a] Risk avoidance
[b] Risk transfer
[c] Risk sharing, and
[d] Risk acceptance and management.
Risk acceptance would be through a process of underwriting. The typical
underwriting decisions [on a proposal] of a life insurer are as follows:
· Accepted [on ordinary terms/rates], that is, the insurer has
decided to undertake the risk on the proposed life on standard
terms of the company.
· Accepted [on terms other than those suggested] and offered
some other plan /term / other condition like imposing an extra
premium to meet higher health/occupation risk etc. for undertaking
risk on the proposed life.
· Postponed, consideration of the proposal is postponed
anticipating that the effects of some of the high risk factors faced by
the proposed life may come down in future.
· Declined, the proposed life would almost definitely result in a
claim by death within the proposed term.
Underwriters of insurance Companies arrive at the above decisions, or
rather conclusions, based on the analysis of the risks they are likely to face
on the life of the proposer or applicant for insurance. Risks on a life are
associated with his family history, personal history, individual and social
habits, occupation, hobbies and the future possibilities of joining the armed
forces or Para trooping, diving or hazardous researches etc. Broadly
speaking these factors usually consider for appraising the risk of an
applicant:
· Age
· Sex (except in several states that require "uni-sex" rates,
even though actuarial data shows women live longer than
men)
· Height and weight,
· Health history (and often family health history -- parents
and siblings),
· The purpose of the insurance (such as for estate planning,
or business or for family protection)
· Marital status and number of children
· The amount of insurance the applicant already has, and
any additional insurance s/he proposes to buy (as people
with far more life insurance than they need tend to be poor
insurance risks)
· Occupation (some are hazardous, and increase the risk of
death)
· Income (to help determine suitability)
 · Smoking or tobacco use (this is an important factor, as
smokers have shorter lives)
· Alcohol (excessive drinking seriously hurts life expectancy)
· Certain hobbies (such as race car driving, hang-gliding, piloting
non-commercial aircraft) and
· Foreign travel (certain foreign travel is risky).

The guidelines and regulations for underwriting are different

for different insurance companies. As mentioned above, the life
insurance underwriting process takes a series of factors into
consideration to decide the premium amount for an applicant for a
particular coverage policy. After an individual applies for a life insurance
quote, the insurance company will circulate a questionnaire form that the
applicant has to fill up with the answers. Underwriting is confidential, which
is maintained under strict regulations. Depending upon the underwriting
standards of the insurance company, the questions may vary. After the
applicant fills up the answers to these queries, the form is sent back to the
insurance company.
Once the form is received, the underwriters of the life
insurance company review the risk profile of the applicant and accordingly,
the final premium amount is charged to the policyholder. In general there
are four categories of risks, which are classified according to the standard
underwriting guidelines. The four risk classifications include proffered
(charge with low premium), standard (standard premium amount), rated
(relatively high premium amount) and declined (uninsurable). This way, life
insurance underwriting process is a crucial step to calculate the premium
amount for policyholders.
For better understanding about life insurance underwriting, let's take
an example of two individuals applying for the same life insurance quote.
Let's consider that first is below 30 years without any underlying health
condition (low death risk), while the second applicant is above 45 years with
hypertension condition (high death risk). With underwriting process, the
death risks for the two applicants are examined, after which the insurance
company will charge a low premium for the first applicant (preferred), while
charging a higher premium rate for the second policyholder (rated).
Documentation
 The contract for the life insurance starts with the proposal made by
the proposer in standard application form available with insurance company
and then various other documents are prepared.
Proposal Forms
The proposal form is a standardized form. The proposal form is a type of an
application form, which a proposer has to fill all the relevant details about
the life to be assured. The agent has the proposal form with him provided by
the insurer. There are different types of policies and so the different types
of proposal forms are there. It has the entire details regarding the duration
of the policy, type of plan, mode of payment, etc. A proposal form is to be
to be completed by the proposer in his own handwriting and signed in the
presence of the agent. The proposal form contains a declaration at the end,
to ensure the authenticity of the information given.
Usually the proposal form contains the following information to be
filled by the prospective insured:
1. Name of life assured
2. Address
3. Date of Birth
4. Occupation
5. Age
6. Name of the employer (if any)
7. Sum assured of the proposed policy
8. Number and age of the family members
9. Family medical history
10. Proposer’s Medical history
Besides these there are other related forms regarding health, occupation,
the agent’s confidential report and many others. In addition there is a
consent letter which shows the consent of the life assured to the imposition
of some clause or extra premium, duly signed by the life assured.
First Premium Receipt
The agent provides the proposal form and other related documents
and the underwriter examines the form and other documents and then
determines the terms on which to accept the risk or reject the same. The
consent of the person assured is obtained in the form of payment of
premium. After receiving the payment, the insurance company issues the
First Premium Receipt, which acknowledges the proposal of the life-assured.
It contains all particulars of the policy. It has the details of the next
premium to be paid. The policy bond is sent within 45-50 days from the date
of first premium receipt to the life assured. The First Premium Receipt is an
important and powerful document on the basis of which the life-assured can
ask the insurer to issue the policy bond, which is treated as Evidence of the
Contract of Life assurance.
Policy Bond
After issuing the First Premium Receipt, the next step is that of the
insurer of sending the policy bond to the life-assured and this document is
also known as Policy Contract, which is the ultimate evidence of the life-
assured. The Policy Contract contains all the terms and conditions of the
contract between insurance company and the life assured, duly stamped as
per the Indian Stamp Act. The policy is sent to the life assured by the
insurer. The policy contract contains the details of the insurance such as
duration of the policy, the type of policy, sum assured, premium amount
and the date of maturity, extra premium, nominee, assignee etc.
Alterations and Endorsements
Endorsement is an authenticated noting on the back of Policy Contract
and forms a part of the contract. In the case of lack of space, the
endorsements can be put on a separated sheet of papers and attached to
the policy. Endorsements are required because life assurance is a long-term
contract and the life assured may want certain changes in the terms of
contract. There are different type of alterations or modifications that can
be made during the tenure of the policy such as changes regarding increase
or reduction in the sum assured, mode of payment of premium, modification
related on account of mistakes in the preparation of the policy by the
insurer, modifications related to reduction in term, conversion from “Non-
profit” to “With Profit” and similar other like change of name, plan-term
and so on.
Reminding Notice
It is basically information sent by the insurer to the policyholder,
reminding the latter about the due date of a particular premium and the
amount of premium. However it is not the duty of the insurance company
(insurer) to do so. The insurer also informs the policyholder about the lapse
of a policy if the premiums are not paid in time.
Other Documents
 Apart from other documents there are some other specialized
documents, which are as follows:
i. Proposal on the lives of Non Resident Indians, which consists of some
special questionnaire asking for relevant information.
ii. Partnership Insurance which consist of papers asking for the Profit &
Loss account of the firm for the last three years, the insurance of the
partner, the partnership deed and the deed of variation allowing the
purchase of the assurance policy.
Policy Servicing And Settlement Options
Servicing of policy holders include:
(1) Proof of age: The age of the life assured must be proved either
during the period of the policy or after the claim arises, because age is an
important factor for calculating at the rate of premium to be charged for a
particular policy.
(2) Nomination: The Policyholder should be advised for nomination, if
no nomination was effected. When nomination or assignment is effected by
a policyholder, it should be scrutinized thoroughly to see whether it was in
order or not. If there is any material omission or mistake, it may be
returned to the policyholder or the assignee with a covering letter giving
instructions as to the corrections to be made in the assignment or
nomination. When a document is sent for correction, reminders should be
sent every fortnight until the requirements are complied with. The
policyholder should follow the instructions printed on the back of
assignment or nomination.
(3) Assignment: Assignment is a means whereby the right and title
under a policy gets transferred from assignor to assignee. Assignor is the
policyholder who transfers the title and assignee is the person who gets the
title of the policy from the assignor. Assignment can be made either by
endorsement on the policy or on a separate paper duly stamped. Assignor
must be a major. Assignment must be in writing and assignor’s signature
along with a witness is required. Notice of assignment should be submitted
to the insurer by the assignor.
(4) Alteration / Changes: After issue of a Policy, the Policy holder
desires an alteration in the terms thereof to suit his convenience, e.g., an
alteration in the mode of payment of premiums, Plan of Assurance,
reduction in the premium-paying period, etc. An alteration may be allowed
provided the policy is in force and has not become fully paid up. It is stated
 in the prospectus that no alteration from one class of Assurance to another
subject to a lower scale of premium is permissible. However, an alteration
from the with profits Limited Payment plan to the with profits Endowment
Assurance Plan with premiums payable for a term not exceeding the original
premium-paying term will be allowed even if the premium payable on
alteration is lower. Alterations from certain Classes of Assurance to certain
other Classes are not allowed at all.
(5) Paid up value & surrender value: When a policyholder wants to
terminate the policy, he may convert the same into paid-up policy. In this
case, the amount of paid-up value is payable to the insured only after the
full term (maturity) of the policy. The option of converting the policy into
paid up policy and stop paying the further premiums can be taken only if the
policy has been in force for at least two years.
If the insured is unwilling or unable to pay the premium of the policy,
he may surrender the policy and ask for its surrender value. Surrender value
is the cash value payable by the insurance on voluntary termination of the
policy contract by the life assured before the expiry of the term of the
policy. Surrender value depends on the type of policy and number of premia
paid. A policy can be surrendered only when the premia is paid for the three
years.
Settlement:
The easy and timely settlement of a valid claim is an important
function of an insurance company. The yardstick to judge insurance
company’s efficiency is as to how quick the claim settlement is. The speed,
kindness and fairness with which an insurer handles claims show the
maturity of the company and may lead to great satisfaction of the client. In
every insurance company claim handling is of immense importance. It is the
liability of the insurance company to honour valid and legal claims. At the
same the company must identify the fraudulent and invalid claims. A claim
may arise:
· On death of Policyholder before the maturity date.
· On maturity, i.e. after expiry of the endowment period specified in the
policy contract when the policy money becomes payable.

Certain features are common to all life insurance claims. These are:
1. Policy must be in force at the time of claims.
2. Insured must be covered by the policy.
3. Nothing was outstanding to the insurer at the time of claim.
4. Claim is covered by the policy.
Death Claims
I. Intimation of Death
The death of the life assured has to be intimated in writing to the
insurer. It can be done by the Assignee or nominee under the policy or from
a person representing such Assignee or Nominee or when there is no
nomination or assignment by a relative of the life assured, the employer,
the agent or the development officer. Where policy is assigned to a creditor
or a bank for valuable consideration, intimation of death may be received
from such assignee. Sometimes, the office need not wait till the intimation
of claim is received. The concerned agent, newspaper reports in case of
accidents or air crashes, obituary columns may give information and claim
action can be started. However, the identity of the deceased should be
established carefully. The intimation of the death of the life assured by the
claimant should contain the following particulars: (1) his or her relationship
with the deceased, (2) the name of the policyholder, (3) the number/s of
the policy/policies, (4) the date of death (5) the cause of death and (6) sum
assured etc. If any of these particulars are missing the claimant can be
asked to furnish the same to the insurer. The intimation must satisfy two
conditions (1) It must establish properly the identity of the deceased person
as the life assured under the policy, (2) It must be from a concerned person.
II. Proof of Death and Other Documents
In case of claim by death, after the receiving the intimation of death
the insurance company ensures that the insurance policy has been in force
for the sum assured on the date of death and the intimation has been
received from assignee, nominee or other claimant.
The following documents are required:
(i) Certificate of death.
(ii) Proof of age of the life assured (if not already given).
(iii) Deeds of assignment / reassignments.
(iv) Policy document.
(v) Form of discharge.
If the claim has accrued within three years from the beginning of the policy,
the following additional requirements may be called for:
a) Statement from the hospital if the deceased had been admitted to
hospital.
b) Certificate of medical attendant of the deceased giving details of
his/her last illness.
c) Certificate of cremation or burial to be given by a person of known
character and responsibility present at the cremation or burial of the body
of the deceased.
d) Certificate by employer if the deceased was an employee.
Proof of death and other documents to be submitted will depend upon the
cause of death and circumstances of each case.
1. In case of an air crash the certificate from the airline authorities would
be necessary certifying that the assured was a passenger on the plane. In
case of ship accident a certified extract from the logbook of the ship is
required. In case of sudden cardiac arrest, murder the doctors’ certificate
may not be available.
2. The insurance may waive strict evidence of title if the sum assured of
the policy is small and there is no dispute among the survivors of the policy
moneys.
3. If the life assured had a death due to accident, suicide or unknown cause
the police inquest report, panchanama, post mortem report, etc would be
required.
If by any chance policy contract is lost, advertisement of the lost of policy is
to be given. Payment can be made on the basis of an indemnity given by the
policyholder. If the deceased has taken out policies with more than one
branch and the claimant has produced proof of death to any one of them
and desires that the other branch or branches, may act on the same proof,
his request should be complied with. The Branch requiring proof of death
should directly call for the certified copies from the branch concerned.
III. Net Payable Amount of Claim
After receiving the required documents the company calculates the
amount payable under the policy. For this purpose, a form is filled in which
the particulars of the policy, assignment, nomination, bonus etc. should be
entered by reference to the Policy Ledger Sheet. If a loan exists under the
policy, then the section dealing with loan is contacted to give the details of
outstanding
 loan and interest amount, which is deducted from the gross policy amount
to calculate net payable claim amount. The net amount of claim payable is
calculated and is called payment voucher. In the case of ‘in force’ policy
unpaid premiums if any due before the Assured’s death with late fee where
necessary and the premium falling due in the policy year current at the time
of death should be deducted from the claim amount.
Maturity Claims
If the life insured survives to the full term, then basic sum assured is
payable. This payment by the insurer to the insured on the date of maturity
is called maturity payment. The amount payable at the time of the maturity
includes a sum assured and bonus/incentives. The insurer sends in advance
the intimation to the insured with a blank discharge form for filling various
details in it. It is to be returned to the office along with
• Original Policy document
• Age proof if age is not already submitted
• Assignment /reassignment, if any. .
Legally no claim is acceptable in respect for a lapsed policy or death of the
Life assured happening within 3 years from the date of beginning of the
policy. However, some concessions are given and payment of claims is
made:
· If the Life assured had paid at least 3 years' premiums and thereafter if
premiums have not been paid, the nominees/life assured get proportionate
paid up value.
· In the event of the death of' the Life assured within 3 years and the
policy is under the lapsed position, nothing is payable.
Procedure of the Maturity Claims
Settlement procedure for maturity claim is simple after receipt of
completed and stamped discharge form from the person entitled to the
policy money along with policy documents, claim amount will be paid by
account payee cheque.
· If the life assured is reported to have died after the date of maturity
but before the receipt is discharged, the claim is to be treated as the
maturity claim and paid to the legal heirs. In this case death certificate and
evidence of title is required.
· Where the assured is known to be mentally deranged, a certificate
from the court of law under the Indian Lunacy Act appointing a person to act
as guardian to manage the properties of the lunatic should be called.
Additional Benefits apart from Regular Claims
Double Accident Benefit: For claiming the benefits under the Double
Accident Benefit the claimant has to produce the proof to the satisfaction of
the Corporation that the accident is defined as per the policy conditions.
Normally for claiming this benefit documents like FIR, Post-mortem Report
are required.
Disability Benefit Claims include waiver of all premiums to be paid in
future till the expiry of the policy of the life assured if a person is totally
and permanently disabled and cannot earn any wage/compensation/profit
as a result of the accident.
Presently, all over the country there are 12 centers where the
Insurance Ombudsman has been appointed. They are part of grievance
redressal machinery. They consider the complaints regarding disputes
related to premiums, claims etc.
Distribution Channel
The channel of distribution (place) is an important ingredient of
marketing mix as however useful the product might be and how so ever
suitable its price be, unless and until the products/services are mad
available to consumers at ‘centres of convenient buying’ the consumers will
not be buying the same. Insurance being a service business requires
marketing department to play a key role in delivery of service.
The marketing department conducts research for identification of
target customers, help in maintaining and promoting the distribution system
and also plays an active role in development of new products. It is the most
vibrant department in an insurance organization since it has to necessarily
deal with all the other department of the organization. Insurance business is
business of law of large numbers. The law requires the insurer to attract a
sufficient number of exposures to allow credible ratio prediction.
The major task of sales managers in charge of the sales section of
insurance company is the supervision of the sales functions of the branches.
This section is also responsible for spreading awareness among the general
public about the benefits of life Insurance. Sales training section is
entrusted with responsibility for training in product, in selling and sales
planning in the
personnel such as development officers and agents.
Insurance policies are mainly sold by the agents of insurance
company. Beside insurance agents, Banks and cooperative societies have
emerged as strong business partners amongst alternate channels in terms of
first premium mobilization.
Life Insurance Sector In India
In India, insurance has a deep-rooted history. It finds mention in the
writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and
Kautilya ( Arthasastra ). The writings talk in terms of pooling of resources
that could be re-distributed in times of calamities such as fire, floods,
epidemics and famine. This was probably a pre-cursor to modern day
insurance. Ancient Indian history has preserved the earliest traces of
insurance in the form of marine trade loans and carriers’ contracts.
Insurance in India has evolved over time heavily drawing from other
countries, England in particular.
1818 saw the advent of life insurance business in India with the
establishment of the Oriental Life Insurance Company in Calcutta. This
Company however failed in 1834. In 1829, the Madras Equitable had begun
transacting life insurance business in the Madras Presidency. 1870 saw the
enactment of the British Insurance Act and in the last three decades of the
nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire
of India (1897) were started in the Bombay Residency. This era, however,
was dominated by foreign insurance offices which did good business in India,
namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe
Insurance and the Indian offices were up for hard competition from the
foreign companies.
In 1914, the Government of India started publishing returns of
Insurance Companies in India. The Indian Life Assurance Companies Act,
1912 was the first statutory measure to regulate life business. In 1928, the
Indian Insurance Companies Act was enacted to enable the Government to
collect statistical information about both life and non-life business
transacted in India by Indian and foreign insurers including provident
insurance societies. In 1938, with a view to protecting the interest of the
Insurance public, the earlier legislation was consolidated and amended by
the Insurance Act, 1938 with comprehensive provisions for effective control
over the activities of insurers.
The Insurance Amendment Act of 1950 abolished Principal Agencies.
However, there were a large number of insurance companies and the level
of competition was high. There were also allegations of unfair trade
practices. The Government of India, therefore, decided to nationalize
insurance business. An Ordinance was issued on 19 January, 1956
th

nationalising the Life Insurance sector and Life Insurance Corporation came
into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian
insurers as also 75 provident societies—245 Indian and foreign insurers in all.
The LIC had monopoly till the late 90s when the Insurance sector was
reopened to the private sector.
Following the recommendations of the Malhotra Committee report, in
1999, the Insurance Regulatory and Development Authority (IRDA) was
constituted as an autonomous body to regulate and develop the insurance
industry. The IRDA was incorporated as a statutory body in April, 2000. The
key objectives of the IRDA include promotion of competition so as to
enhance customer satisfaction through increased consumer choice and lower
premiums, while ensuring the financial security of the insurance market.
The IRDA opened up the market in August 2000 with the invitation for
application for registrations. Foreign companies were allowed ownership of
up to 26%. The Authority has the power to frame regulations under Section
114A of the Insurance Act, 1938 and has from 2000 onwards framed various
regulations ranging from registration of companies for carrying on insurance
business to protection of policyholders’ interests. In December, 2000, the
subsidiaries of the General Insurance Corporation of India were restructured
as independent companies and at the same time GIC was converted into a
national re-insurer. Parliament passed a bill de-linking the four subsidiaries
from GIC in July, 2002. Today there are 24 general insurance companies
including the ECGC and Agriculture Insurance Corporation of India and 23
life insurance companies operating in the country. The insurance sector is a
colossal one and is growing at a speedy rate of 15-20%. Together with
banking services, insurance services add about 7% to the country’s GDP. A
well-developed and evolved insurance sector is a boon for economic
development as it provides long- term funds for infrastructure development
at the same time strengthening the risk taking ability of the country.
Check List For Buying The Right Policy
DO’S
§ Look out for no commission policies.
“ low load “ life insurance policies have fewer expenses built into
them, such as agent commissions and fees for marketing. This can
translate into lower premiums or for variable life insurance, these
 lower expenses mean that a higher percentage of your premium goes
to work for you right away so that you can build your cash faster.
§ Buy as soon as the need exists
An advantage to buy life insurance earlier in life is that your premiums
will be low. As you grow old, the likelihood that you will die increases,
which is why older individuals pay more for life insurance.
DONT’S
§ Don’t buy a guaranteed issue policy if you are healthy
“ Guaranteed issue” term life insurance policies normally require no
medical exam and are sold to anyone who comes along. While these
policies can be a great way for people who have medical problems to
obtain a life insurance policy, if you are healthy don’t buy these
policies as you will get better rates by taking the tests.
§ Don’t buy more or less than you need
Many experts say the best way to pinpoint a smart life insurance
benefit amount is through a needs analysis which can be broken into a
simple formula
Short term needs + long term needs – resources = how much life
insurance you need
Self-Assessment:
1. Explain Fundamental Principles of Life Insurance contract.
2. Discuss various documents prepared by the insurance company while
entering a life insurance contract with the proposer.
3. Explain the procedure of settlement of claims in case of maturity of the
policy.
4. Explain the claim settlement procedure in case of death of the assured.
5. Explain the procedure of underwriting of new business.
6. Discuss various life insurance pricing elements.
References:
· Mishra M.N., Life Insurance, Administration and Management, Sultan
Chand & Co., New Delhi.
· Gupta C.B., Business Organization and Management, 2005, Sultan Chand
& Co., New Delhi.
· Gupta P.K. ‘Insurance and Risk Management’, 2005, Himalaya
Publishing House, New Delhi.
· Ray R.M. ‘Life Insurance in India’, 1999, Indian Institute of Public
Administration.
· Mann T.S., ‘Law and Practice of life Insurance in India’, 2000, Deep and
Deep Publication, New Delhi.
· www.licindia.com
· www.irdaindia.org