Академический Документы
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ON
INSURANCE MARKET
To
By:-
NEELAM SHUKLA
Benefits of Insurance:
Insurance enables people to choose which risks they take and which they
protect themselves against.
Although insurance provides enormous benefits its economic and social costs
can be great and have to be taken seriously.
Insurers tie economic resources and cause sales and administrative
expenses.
Insurance coverage can incite dishonest and incautious behaviour (moral
hazard). The assured financial indemnification can result in fraudulent or
inflated claims and an inappropriately lax attitude towards potential losses.
Auto accidents for instance may be faked or damage may be overstated to
collect benefits from the insurance companies.
There may also be significant potential social and economic costs if regulation
and surveillance of insurance companies is insufficient:
Taken together the social and economic benefits of insurance generally outweigh
its potential costs by far.
Only an appropriate regulatory and legal framework with proper surveillance will
allow to control and minimize the costs of insurance.
The insurance contract is a contract whereby the insurer will pay the insured (the
person whom benefits would be paid to, or on the behalf of), if certain defined
events occur. Subject to the "fortuity principle", the event must be uncertain. The
uncertainty can be either as to when the event will happen (i.e. in a life insurance
policy, the time of the insured's death is uncertain) or as to if it will happen at all
(i.e. in a fire insurance policy, whether or not a fire will occur at all).
Adhesion: Insurance contracts are generally considered contracts of adhesion
because the insurer draws up the contract and the insured has little or no ability
to make material changes to it. This is interpreted to mean that the insurer bears
the burden if there is any ambiguity in any terms of the contract. Insurance
policies are sold without the policyholder even seeing a copy of the contract.
Aleatory: Insurance contracts are aleatory in that the amounts exchanged by the
insured and insurer are unequal and depend upon uncertain future events. In
contrast, ordinary non-insurance contracts are commutative in that the amounts
(or values) exchanged are usually intended by the parties to be roughly equal.
Unilateral: Insurance contracts are unilateral, meaning that only the insurer
makes legally enforceable promises in the contract. The insured is not required
to pay the premiums, but the insurer is required to pay the benefits under the
contract if the insured has paid the premiums and met certain other basic
provisions.
Utmost Good Faith: Insurance contracts are governed by the principle of utmost
good faith (uberrimae fide) which requires both parties of the insurance contact to
deal in good faith and in particular it imparts on the insured a duty to disclose all
material facts which relate to the risk to be covered. This contrasts with the legal
doctrine that covers most other types of contracts, caveat emptor (let the buyer
beware). In the United States, the insured can sue an insurer in tort for acting in
bad faith
Declarations :
o The following details are usually provided on a form that is filled out by the
insurer based on the insured's application and attached on top of or
inserted within the first few pages of the standard policy form.
Identifies with details who is the Policy Holder/Owner and who is
the beneficiary
Identifies with details who is an insured, the insured's address
The insuring company
What risks [E.g accident] or property [e.g. House] are covered
The policy limits (amount of insurance)
The policy period and premium amount.
Details of Nomination if any
Details of Assignment if any
An insurance policy is issued for a limited time, and, at the end of that period, the
insurance company renews the policy. Renewal dates are important times for
insurance companies and policyholders.
Definition: A renewal date is when a policy period expires and a new policy
period begins. Renewal dates typically occur six months or one year after the
policy began or the last renewal date occurred.
Purpose: Renewal dates give both the insurance company and the insured the
opportunity to make any necessary changes to the policy.
Policy Changes: If the insurance company determines that the risk posed by the
policyholder has changed, it may amend the policy, add restrictions or terminate
coverage. General policy changes that affect all insureds also take place at
policy renewal.
Changing Policies: If the insured find a better rate with another company or are
unhappy with the insurance company's service, consider switching policies at
renewal. The insurer will avoid cancellation fees that may be imposed for mid-
term cancellations.
Example:
A Insurer is going to sell life insurance cover to 10,000 for persons aged 25 for
sum assured of Rs 10,000/-
The contract provides for payment of the sum assured in case of death of any
insured within 1 year term
From the mortality table it is found that the probability of death of a healthy
person aged 25 years within one year is 0.0011
It means that out of the 10,000 persons insured 11 persons die within the one
year term
Hence the cost of benefit payment is estimated as Rs 10,000 * 11 = Rs 1,10,000
By the principle of insurance this is expected to be shared by all persons taking
insurance cover and hence the premium per person would be Rs
1,10,000/10,000 = Rs 11 Or Rs 1.10 per mille [ cost per Rs 1,000 sum assured]
The premium thus arrived at by using the expected mortality rate is called Pure
or Natural Premium
From the above it is noted that if no expenses are to be incurred and no
investments are made and no profits are to considered then the premium as
computed by the insurer would be sufficient for the term policy insurance period
of one year
However in actual practice the insurer incur operations and admin expenses, is
able to invest the premium received and earn income and profit earning is
important for sustainable insurance business
Hence there is need to compute correct premium based on all above factors
The basis for computing the appropriate premium is as shown in Table: Life
Insurance Premium Computation below
The premium arrived by using the expected mortality rate is called pure or natural
premium
From column 4 of above Table it is noted that pure premium increases with age
because the mortality increases with age and the number of surviving persons
reduces with age.
Hence the premium burden increases with the age of the insured.
Based on above Table 1 the insurer will devise premium recovery rate
As noted the pure premium is Stepped Up as the age increase
However the major disadvantage is the insureds may find it difficult to service
policy with increasing premium rate, as they age
Level Premium:
Considering the disadvantage of pure premium scheme especially for the aged
insureds the insurer will devise a system to collect higher premium in early
stages which will offset lower collection at latter stages
Alternatively the insurer will be able to meet all the claims if the collection is
made uniformly over the term of 5 years at a single rate of premium from the
surviving policy holders
From the above table level premium is arrived by diving the total cost of benefit
which Rs 1,000,000/- [column 5] by the total number of surviving members which
is 49,848 [column 2] The level premium works out to 1,000,000/49848 = 20.06
So instead of charging 5 different premiums in the 5 years of the policy term the
insurer will collect uniform premium for all the 5 years at 20.06
This system is called level premium
Net Premium
In the above example it may be noted that the insurer collect the premium in
advance [ at the beginning of the period] and settle claim at the end of the period
Thus the insurer is able to invest the premium amount for one year and can earn
interest.
To that extent the insurer can pass on the benefit to the policy holders
By incorporating interest factor say at a reasonable rate of 6%pa the present
value of the total benefit of Rs 1,000,000/- is computed as Rs 808,510/-
[column 6].
Further the insurer should also consider the present value of Re 1/- of
contribution from each surviving member at the same interest rate of 6%pa. The
same amounts to 44522.72 [column 8]
The level premium after considering interest factor is 808,510/44522.72 = 18.16
The net premium is lower than level premium and significantly lower than pure
premium
In India it is observed that Unit Linked Insurance products charge stepped
premium and endowment products charge whole life level premium
Office Premium:
Boiler & Machinery Insurance: Coverage for loss arising out of the
operations of pressure, mechanical and electrical equipment. It may cover loss
suffered by the boiler and machinery itself and may include damage done to
other property as well a business interruption losses
Burglary & Theft Insurance: Coverage against property losses due to
burglary, robbery or larceny
Level Term Life Insurance: Provides a death benefit that remains the
same amount over the term of the policy
Life Insurance: A policy that will pay a specified sum to beneficiaries upon
death of the insured
Loss Insurance: Provide indemnity for the financial loss caused to the
insured by the happening of the event insured against
Marine Insurance: Insurance of ships. This may include the marine hull the
ship itself, the cargo and damage to third parties and the environment
In some sense we can say that insurance appears simultaneously with the
appearance of human society.
In the first type of economy I.e non-money or natural economies (without money,
markets, financial instruments and so on) which is more ancient we can see
insurance in the form of people helping each other and this type of insurance
has survived to the present day in some countries where modern money
economy with its financial instruments is not widespread.
The Babylonians developed a system which was recorded in the famous Code
of Hammurabi, c. 1750 BC, and practised by early Mediterranean sailing
merchants. If a merchant received a loan to fund his shipment, he would pay the
lender an additional sum in exchange for the lender's guarantee to cancel the
loan should the shipment be stolen or lost at sea
Achaemenian monarchs of Ancient Persia were the first to insure their people
and made it official by registering the insuring process in governmental notary
offices. The insurance tradition was performed each year in Norouz (beginning of
the Iranian New Year)
The Greeks and Romans introduced the origins of health and life insurance c.
600 AD when they organized guilds called "benevolent societies" which cared for
the families and paid funeral expenses of members upon death. Guilds in the
Middle Ages served a similar purpose. The Talmud deals with several aspects of
insuring goods.
Before insurance was established in the late 17th century, "friendly societies"
existed in England, in which people donated amounts of money to a general sum
that could be used for emergencies.
Separate insurance contracts (i.e., insurance policies not bundled with loans or
other kinds of contracts) were invented in Genoa in the 14th century, as were
insurance pools backed by pledges of landed estates. These new insurance
contracts allowed insurance to be separated from investment, a separation of
roles that first proved useful in marine insurance. Insurance became far more
sophisticated in post-Renaissance Europe, and specialized varieties developed.
Insurance as we know it today can be traced to the Great Fire of London, which
in 1666 devoured more than 13,000 houses. The devastating effects of the fire
converted the development of insurance "from a matter of convenience into one
of urgency” and after a number of attempted fire insurance schemes came to
nothing, in 1681 Nicholas Barbon, and eleven associates, established England's
first fire insurance company
The first insurance company in the United States underwrote fire insurance and
was formed in Charles Town (modern-day Charleston), South Carolina, in 1732.
Benjamin Franklin helped to popularize and make standard the practice of
insurance, particularly against fire in the form of perpetual insurance. In 1752, he
founded the Philadelphia Contributionship for the Insurance of Houses from Loss
by Fire. Franklin's company was the first to make contributions toward fire
prevention. Not only did his company warn against certain fire hazards, it refused
to insure certain buildings where the risk of fire was too great, such as all wooden
houses.
In the second type of economy I.e money economies (with markets, money,
financial instruments and so on) insurance markets have become centralized
nationally and internationally and insurance in a modern money economy is part
of the financial sphere.
This institution is of great importance and relevance for the protection of interests
of policy holders and also in building their confidence in the system.
The institution has helped to generate and sustain the faith and confidence
amongst the consumers and insurers.
Eligibility: Ombudsman are drawn from Insurance Industry, Civil Services and
Judicial Services.
The offices of the twelve insurance Ombudsmans are located at (1) Bhopal, (2)
Bhubaneswar, (3) Cochin, (4) Guwahati, (5) Chandigarh, (6) New Delhi, (7)
Chennai, (8) Kolkata, (9) Ahmedabad, (10) Lucknow, (11) Mumbai, (12)
Hyderabad. The areas of jurisdiction of each Ombudsman has been mentioned
in the list of Ombudsman.
Removal from office: An Ombudsman may be removed from service for gross
misconduct committed by him during his term of office.
o The governing body may appoint such person as it thinks fit to conduct
enquiry in relation to misconduct of the Ombudsman.
The complaint may relate to any grievance against the insurer i.e.
(a) any partial or total repudiation of claims by the insurance companies,
(b) dispute with regard to premium paid or payable in terms of the policy,
(c) dispute on the legal construction of the policy wordings in case such dispute
relates to claims;
(d) delay in settlement of claims and
(e) non-issuance of any insurance document to customers after receipt of
premium.
The complainant should have made a representation to the insurer named in the
complaint and the insurer either should have rejected the complaint or the
complainant have not received any reply within a period of one month after the
concerned insurer has received his complaint or he is not satisfied with the reply
of the insurer.
The complaint is not made later than one year after the insurer had replied.
The same complaint on the subject should not be pending with before any court,
consumer forum or arbitrator.
Award:The ombudsman shall pass an award within a period of three months from
the receipt of the complaint. The awards are binding upon the insurance
companies.
If the policy holder is not satisfied with the award of the Ombudsman he can
approach other venues like Consumer Forums and Courts of law for redressal of
his grievances.
As per the policy-holder's protection regulations, every insurer shall inform the
policy holder along with the policy document in respect of the insurance
Ombudsman in whose jurisdiction his office falls for the purpose of grievances
redressal arising if any subsequently.
Life Insurance is a contract between the insurer and the Policy Holder whereby a
benefit is paid to the designated beneficiaries if an insured event occurs which is
covered by the policy
The specific uses of the terms "insurance" and "assurance" are sometimes
confused. In general, in these jurisdictions "insurance" refers to providing cover
for an event that might happen (fire, theft, flood, etc.), while "assurance" is the
provision of cover for an event that is certain to happen (death).
Life Insurance is a policy that people buy from a life insurance company, which
can be the basis of protection and financial stability after one's death. Its function
is to help beneficiaries financially after the owner of /person named in the policy
dies
In return, the Policy Holder agrees to pay a stipulated amount called premiums at
regular intervals or in lump sums.
There may be conditions in some countries where bills and death expenses
plus catering for after funeral expenses should be included in Policy Premium
The value for the policyholder is derived, not from an actual claim event, rather it
is the value derived from the 'peace of mind' experienced by the policyholder,
due to the negating of adverse financial consequences caused by the death of
the Life Assured.
To be a life policy the insured event must be based upon the lives of the people
named in the policy.
o Death
o Accidents
o Serious Illness
o Disability
o Dismemberment
Life insurance
o Suicide
o Fraud
o War
There is a difference between the insured and the policy owner (policy holder),
although the owner and the insured are often the same person.
o For example, if A buys a policy on his own life, he is both the owner and
the insured.
o But if A buys a policy on his wife B then A is the owner and B is the
insured .
The policy owner is the guarantee and he or she will be the person who will pay
for the policy.
The insured is a participant in the contract, but not necessarily a party to it.
The beneficiary receives policy proceeds upon the insured's death. The owner
designates the beneficiary, but the beneficiary is not a party to the policy.
The Policy Owner can change the beneficiary unless the policy has an
irrevocable beneficiary designation. With an irrevocable beneficiary, that
beneficiary must agree to any beneficiary changes, policy assignments, or cash
value borrowing.
In cases where the policy owner is not the insured or also referred to as Celui
Qui Vit [CQV] insurance companies have sought to limit policy purchases to
those with an "insurable interest" in the CQV.
For life insurance policies, close family members and business partners will
usually be found to have an insurable interest.
The "insurable interest" requirement usually demonstrates that the purchaser will
actually suffer some kind of loss if the CQV dies. Such a requirement prevents
people from benefiting from the purchase of purely speculative policies on people
they expect to die. With no insurable interest requirement, the risk that a
purchaser would murder the CQV for insurance proceeds would be great.
Stranger Originated Life Insurance [STOLI] is a life insurance policy that is held
or financed by a person who has no relationship to the insured person. STOLI
has often been used as an investment technique whereby investors will
encourage someone (usually an elderly person) to purchase life insurance and
name the investors as the beneficiary of the policy. This undermines the primary
purpose of life insurance as the investors have no financial loss that would occur
if the insured person were to die. In some jurisdictions, there are laws to
discourage or prevent STOLI.
Special provisions may apply, such as suicide clauses wherein the policy
becomes null if the insured commits suicide within a specified time (usually two
years after the purchase date; some states provide a statutory one-year suicide
clause). Any misrepresentations by the insured on the application is also grounds
for nullification
The face amount on the policy is the initial amount that the policy will pay at the
death of the insured or when the policy matures, although the actual death
benefit can provide for greater or lesser than the face amount. The policy
matures when the insured dies or reaches a specified age (such as 100 years
old).
The premium computation for all life insurance is a function of Mortality Table,
Morbidity Table, Longevity Table
With all life insurance, there are basically two functions that make it work. There's
a mortality function and a cash function.
The mortality function would be the classical notion of pooling risk where the
premiums paid by everybody else would cover the death benefit for the one or
two who will die for a given period of time.
The cash function inherent in all life insurance says that if a person is to reach
age 95 to 100 (the age varies depending on state and company), then the policy
matures and endows the face value of the policy.
Life insurance may be divided into two basic classes And in the following
subclasses
o Temporary