Life Insurance Basics - Deepak Chaturvedi

Life Insurance
Basics: A brief
Note
1|Page Thursday, 22 October 2009

RISK MANAGEMENT
Speculative • Uncertainty is probability of happening / not happening of an

Pure Risk
Risk Event event. Event
• Risk is a sub set of uncertainty and risk, risky event has an
element of ‘chances of losses’ are present.
+ Gain
• Risk is further divided into two for ease of understanding
convenience
o Speculative Risk :- These risks cannot be insured under - Loss
and
o Pure Risk:- These risks are insured subject to conditions
• Risk can be defined as uncertainty about the future; possibility
- Loss
of a financial loss is damage to an asset.
• Human assets (dealt by life Insurance) and physical assets
(dealt by General Insurance in India) are exposed to risks.
• Risk happens because of operation of perils and existence of
hazards.
• Peril can be defined as a possible adverse event that can cause
loss to physical asset or human asset. Peril can be man made
or God made. Examples of peril are – theft, riot, flood, and
earthquake.
• Hazard is existence of a condition that can facilitate and
increase chances of financial loss due to occurrence of an
adverse event i.e. peril. Example of hazard is – house made of
wood or being used for storage of explosives in the event of
peril of fire happening.
• Risks to human life are loss of future income due to death at
young age (relatively), loss / reduction of future income and
additional expenses due to disability and dreaded / critical
diseases.
• Risks to physical assets are loss of property due to fire, flood,
riot and consequences of losses are -- loss of use of property,
loss of profits, additional expenses due to loss of property.
• Pure Risk is insured subject to these conditions
o The insured event must occur ‘by chance’ and not by
choice
o The ‘loss’ due to insured must be measurable
o The ‘loss’ due to insured event must be predictable on
big scale
o The ‘loss’ due to insured event should not be
catastrophic to insurer
• Non-financial risks cannot be insured whereas financial risks
can be insured and the insurance company can compensate for
a financial loss.
• ‘Speculative risks’ and ‘Business risks’ are self created and
cannot be insured whereas pure risks already exists and can be
insured.

• We cannot eliminate risk; however, we can manage risk after
identifying and evaluating risk. The risk can be managed in 4
ways by using CART Principle. CART stands for:
C - Risk may be controlled
A - Risk may be avoided
R - Risk may be retained
T - Risk may be transferred
 Control means reducing/minimizing the chances of loss

happening by taking precautions and/or
reducing/minimizing the quantum and value of loss after
RISK MANAGEMENT
the peril happens.
 Avoid means not taking of an activity and in the
process one may lose the potential gains arising out of
the activity.
 Retain means keeping the risk and paying for the
losses from your own sources. If the loss is bearable it
should be retained. It is self insurance.
 Transfer means either transferring the activity to an
outside agency or transferring the risk to an insurance
company. In insurance, transfer happens to the process
of contributing, pooling and sharing of losses.
Definition of Risk Management:-
 Risk management can be defined as the process of
identification, analysis and economic control of those risks
which can threaten the assets or earning capacity of an
enterprise
 Risk management is a scientific approach to the problem of
dealing with the pure risks faced by the individuals and
business.
 Pure risks are those where there is a chance of loss or chance
of no loss but never a chance of gain.
 Risk management deals with insurable and uninsurable risk &
the choice of the appropriate techniques for dealing with
them
 The emphasis in risk management is on reducing the cost of
handling risk by whatever means that are considered most
appropriate & insurance is one of several alternatives for
minimising the pure risk faced by a firm
 The primary objective of risk management effort is to
preserve the operating effectiveness of the organisations; to
make sure that it is not prevented from attaining its goals by
the losses arises from pure risk. The second objective is the
humanitarian goal of protecting employees from an accident
that might result in death or serious injury.
 Risk Identification is the first important step in risk
management
 The next step is the Analysis & Measurement of risk to know
the severity of risk and its frequency
 The next step is Risk Assessment in terms of frequency, its
monetary cost & human cost
 Risks can be classified as critical, important and
unimportant. The critical risks are those, which can result in
bankruptcy of the firm. The important risks are those, which
will require the firm to borrow in order to continue
operations. The unimportant risks are those where losses can
be met out of existing assets or current revenues
 Decision to deal with the risk could be any one of the
following
a) To retain the risk
b) To deal with the risk through loss prevention
c) To transfer the risk through insurance
 The last step in Risk Management is evaluation & review
DEFINITION
based on experience &OF LIFEsituation
business INSURANCE
The Insurance Act 1938 does not contain a definition of life
insurance contract. But section 2(11) of the Act defines life
insurance business as follows:
“Life insurance business” means the business of effecting contracts

of insurance upon human life, including any contract whereby the
payment of money is assured on death (except death by accident
only) or the happening of any contingency dependent on human life,
and any contract which is subject to payment of premiums for a
term dependent on human life and shall be deemed to include –
a) The granting of disability and double or triple indemnity

accident benefits, if so provided in the contract of
insurance
b) The granting of annuities upon human life, and
c) The granting of Superannuation allowances and annuities
payable out of any fund applicable solely to the relief and
maintenance of persons engaged or who have been
engaged in any particular profession, trade or employment
or of the dependents of such persons.
The above definition contains certain special features, such as the

inclusion of Superannuation allowances and annuities,
By omitting the special features, we may obtain a general definition
of life insurance business and of a life insurance contract. It means
the business of effecting contracts whereby a person (insurer)
agrees, for a consideration (that is payment of a sum of money or a
periodical payment, called the premium) to pay to another (insured
or his estate) a stated sum on the happening of an event dependent
on human life.
The definition of “Life insurance business” in the Act is wide enough
to include the business of effecting a policy assuring a sum payable
in the event of the life assured attaining a specified age, though
nothing more than a refund of the premiums is offered in the event
of his earlier death. Similarly, a policy providing for payment of the
sum assured only in the event of the death of the life assured will be
a life insurance policy. A policy against accident only does not
however constitute a life insurance policy, but a life insurance
policy may provide for additional benefits in the event of an
accident.
In 2006, IRDA has expanded the scope of life insurance business to

include standalone health insurance plans providing guaranteed
benefits if the policyholder undergoes hospitalisation treatment
under specified situations.
PROBABILITY THEORY &

LAW OF LARGE NUMBERS
 Insurance business is conducted by following the theory of

probability and law of large numbers
 Probability theory is concerned with measuring the likelihood
that something will happen and making estimates on the basis
of this likelihood
 It deals with random events and is based on the premise that,
while some events appear to be a matter of chance, they
actually occur with regularity over a large number of trials
revealing a measurable pattern as it were.
 The likelihood of an event is assigned a numerical value
between 0 & 1, with those that are impossible assigned a value
of 0 and those that are inevitable assigned a value of 1.
 Events that may or may not happen are assigned a value
between 0 & 1, with higher values assigned to those estimated
to have a greater likelihood or probability of occurring.
 In reality events assigned 0 probability may in rare

circumstances actually happen and events assigned 1
probability may very rarely fail to happen
 The commonsense notion that the probability is meaningful

only over a large number of trials [happenings] is an intuitive
recognition of the law of large numbers, which in its simplest
form states:

The frequency with which an event happens reflects the actual
probability of the event occurring more closely if the cases
involved are larger.
Dual application of the Law of large numbers
The requirement of a large number has dual application:
a) To estimate the underlying probability accurately, the

insurance company must have a sufficiently large volume
of data. The larger the sample, the more accurate will be
the estimate of the probability
b) Once the estimate of the probability has been worked out

sufficiently large number of insurance contracts must be
entered into to avoid possible losses as a result of small
volumes.
PROBABILITY THEORY &

LAW OF LARGE NUMBERS
In Short
In insurance many persons exposed to same risk share the loss

suffered by a few therefore, we need a sufficiently large number of
persons/properties to be insured. As risk depends on the probability
of the insured event happening, it is only in large number that the
theory of probability will really be operative.
Once the probability of an insured event happening is reasonably

estimated, the likely quantum of loss to be compensated can be
found out and this is shared amongst the group of policyholders.
Their share of contribution to the pool is called premium. It
represents assets against the liability, i.e. likely loss. Without large
number & ‘sufficient data’ insurance business will be akin to
gambling.

PRINCIPLE OF UTMOST GOOD FAITH
 Commercial contracts are subject to the principles of
‘Caveat Emptor’ i.e let the buyer beware. It means that
each party can examine the terms or service, can ask for
proof to verify the correctness. No need to take statements
‘on trust’.
 In insurance contract the Caveat Emptor principle does not
apply.
 In Life insurance contract, most of the facts relating to
health, habits, personal history, which form the basis of life
insurance contract, are known to the proposer.
 Insurer cannot know these facts, if proposer does not
disclose.
 Medical Examination Report may not bring certain facts i.e.
‘Blood Pressure’ or Diabetes if controlled through medicines.
History of last illness, operation and injuries can be
suppressed.
 These facts may affect life expectancy of the proposer.
 This is material information from the point of view of
underwriter.
 In general insurance, the inspection of premises may not
disclose material information if contents of godown have
been relocated temporarily.
 The non disclosure of such facts would put the ‘insurer’ &
the community of policyholders to disadvantage.
 When ‘insurer’ and community of a policyholders are
disadvantaged, it is called ‘adverse selection’.
 Contract is unfair because one of the parties to the contract
is in a more advantageous position.
 The doctrine of utmost good faith means ‘full disclosure
without being asked of all material circumstances.
 Law imposes the duty of full disclosure of relevant
information by the proposer, to the underwriter. This duty is
one of ‘utmost good faith’ or ‘Uberrimae fides’. Any failure
would render the contract ‘void ab initio’.
What is a Material Fact?

A fact / circumstances is said to be material if it affects the
judgement of a prudent insurer in fixing the premium or accepting
the proposal for insurance. Therefore facts regarding age, height,
weight, occupation, habits, medical history, surgeries and earlier
insurance policies if any, must be disclosed.
The proposer can’t plead that he did not think that they were not
‘material’
Facts which need not be disclosed: -
− Facts of common knowledge which everyone is supposed to

know
− Facts of law
− Facts which a survey would have revealed
− Facts, which could reasonably be discovered by reference to
previousPRINCIPLE OFavailable
policies & records UTMOST withGOOD
insurer. FAITH
Duty to disclose continues:-
 In life insurance contract ‘Duty to disclose’ facts continues till

risk is
accepted.
 Risk commences when underwriter accepts risk & FPR is
issued
 Circumstances arising after Risk commencement do not affect
the validity
of contract unless the conditions of the contract require so.
For example a policy could be issued with a condition that
‘change of occupation’ after risk commencement must be
notified to the insurer who can reassess occupation risk.
 Duty of disclosure of material facts arises again at the time of
a) Alteration to the contract.
b) Revival of lapsed policy.
c) Reinstatement of surrendered policy since what follows is a
‘new
contract’.

Breach of Utmost Good Faith through Non-disclosures or
misrepresentation.
Conditions for Breach are that misrepresentation or non-

disclosure should be
a) Substantially false & known to the proposer as false.
b) Not known to the second party.
c) Concerned with facts material to assessment /
acceptance of risk or material to benefits obtained by the
proposer.
d) Calculated to induce the other party to enter into
contract on terms beneficial to the party.
The Declaration:-
In life insurance the proposer makes a declaration as under:-

- All the statements in the proposal form are true &
complete in every
respect
- The proposal form shall form the basis of the contract
- If any statement is found untrue, the insurer can treat the
contract as
null & void & can forfeit all the ‘Premiums paid’
Contract of warranty:-
The above ‘declaration’ turns ‘representations’ made in the

proposal form into ‘warranties’, which must be wholly true.
Insurance contract, therefore, is a contract of warranty & any
untrue statement or non-disclosure whether material or not
can vitiate the contract
PRINCIPLE OF UTMOST GOOD FAITH

Section 45 of Insurance Act:-
 While an insurer can cancel contract based upon above

‘declaration’ still his rights to cancel contract are limited by Section
45.
 Section 45 states that a policy cannot be called in question

after 2 years
- On the ground of inaccurate or false statement.
- Unless it is proved by the insurer that non disclosure /
misrepresentation was made deliberately, was material to
the risk and the intention of the party was to play ‘fraud’

with the insurance company. It makes Life Insurance
Contract as indisputable.
Utmost good faith principle applies to both the parties to the

contract.
Duty of full disclosure applies to the ‘Proposer’ & the ‘Insurer’
Examples of untrue statement by the insurer or his agent could

be
i) Making untraced statement about features & benefits of

product during sale
ii) Not informing the policyholder that loans are not available
under some plans.
iii) Not informing that use of sprinklers systems entitles the
proposer to a rebate in fire premium.
iv) Not explaining the features, benefits, exclusions and
limitations of the insurance plan properly in the sales
literature and brochure.
PRINCIPLE OF INSURABLE INTEREST
Definition of Insurable interest: -

 Insurable interest is not defined in Insurance Act 1938 but
based upon Court Judgements, we can define as under:
− Insurable interest is a financial interest in the subject
matter of insurance which is recognized in law and
gives a legal right to insure
− What is insured is not ‘Life’ or ‘property’ but the
financial interest of the insured in the subject matter of
insurance.
10 | P a g e Thursday, 22 October 2009

− The relationship should be such that the insured
benefits from safety of the subject matter and would
be prejudiced by its loss or damage.
− In simple words, insurable interest means that the
insured is interested in the continuance of subject
matter of insurance and ‘could suffer a loss’ due to its
discontinuance
The question of insurable interest will arise when a Life

Insurance policy is taken by one person on the life of
another person.
Insurance and Wager:-
− What distinguishes an
‘Insurance Contract’ from a ‘Wagering Contract’ is that the
insured must have ‘insurable interest’ in the subject matter
of insurance. Insurance Contract without insurable interest
is invalid & becomes a wagering contract.
− Wagering Contract is illegal &
void u/s 30 of the Indian Contract Act
Who all have insurable interest?

1. A person has unlimited insurable interest in himself. (it does
not mean that insurer will grant unlimited amount of
insurance cover)
2. A husband or wife has unlimited insurable interest in the life
of spouse. (Law presumes the existence of insurable interest
between the spouses)
3. An employer has insurable interest in the life of his
employee to the limited extent of value of his services.
4. An employee has insurable interest in the life of his
employer to the extent of his salary for the notice period.
5. A creditor has ‘insurable interest’ in the life of a debtor to
the extent of the debt (Principal & outstanding interest)
6. A surety has ‘insurable interest’ in the life of co- surety to
the extent of debt and also in the life of the principal debtor.
7. Partners have insurable interest in the lives of each other to
the extent of capital, undistributed profits and goodwill.
8. A company has insurable interest in the life of key
employees.
9. An employer has insurable interest in the life of its
employees.
PRINCIPLE OF INSURABLE INTEREST

Who do not have insurable interest?

1. Insurable interest does not exist because of family
relationship. Parents, children, brothers, sisters have no
insurable interest in the life of each other because of
blood relationship.
2. It is not legally established that parents have insurable
interest in the life of ‘Child’. Children policies are issued
in India because ‘child’ can’t enter into contract. There
is ‘automatic’ Vesting’ clause on the attainment of age of
majority by the child.
3. A debtor has no insurable interest on the life of a creditor
since he would be more interested in the death of
creditor than his living so that he can avoid repayment of
loan.
When should insurable interest exist?
 In a Life insurance contract, insurable interest must exist at

the time of start of contract & it may not exist thereafter i.e.
at the time of claim.
 In Marine Insurance Policy, the insurable interest must exist
at the time of claim. It may not exist at the start of contract
e.g when an importer takes insurance cover while ordering
goods, he is not the owner on the date of order and has no
insurable interest but insurance is allowed.
 In general insurance except ‘Marine Insurance’. Insurable
interest must exist both at the inception of contract as well
as at the time of claim.
Proof of Insurable Interest
 Not required if insurance is on

- Own Life
- Husband & Wife
 Required in all other cases (When the proposal is on the life

of another except Husband & Wife.

PRINCIPLE OF INDEMNITY
Third principle of insurance is the ‘Principle of indemnity’
 Insurance is meant to compensate losses.
 By implication it means, insurance cannot be used to
make a profit.
 The claim amount cannot exceed the amount of loss.
 The principle of indemnity is that insurance should
place the insured in the same financial position after a
loss as he enjoyed before it & not better.
Linkage between ‘Indemnity’ & ‘Insurable interest’: -
 Insurer insures the interest of the insured in the subject

matter of insurance.
 Therefore amount of claim is limited to the amount of
interest
 The principle of indemnity applies to all insurance
contracts except ‘Accident Insurance’ & Life Insurance’
because insurable interest in own life is unlimited and
human loss cannot be financially measured at the time of
loss.
Problems & Methods of settling claims:-
 General insurance claims involve ‘assessment of loss’

and ‘salvage values’ at the time of claim. This often gives
rise to disputes between insurer & insured about the loss
and claim amount.
 General insurance claims may be paid in the four ways:-

i) Cash
ii) Repair
iii) Reinstatement
iv) Replacement
 In life insurance as ‘definite amount’ is paid as

‘benefit’ & loss is not determined at the time of
claim.
 Life Insurance is not a contract of Indemnity

 Life Insurance is an insurance contract with assured
benefits in the form of minimum guaranteed sum assured.
 Non Life Insurance is Insurance where maximum amount
of Indemnity is Sum Insured.
 Indemnity is the main differentiator between
general insurance and life insurance contract.

HUMAN LIFE VALUE
 Just as physical assets are financial value, human life also

has financial value.
 Financial value of a physical asset is determined based

upon its market price. Financial value of a human being is
determined based upon loss of future income to the family
on the occurrence of an insured adverse event.
 Human life value concept is that the financial value of an

individual is the present value of future income of a
person meant for the family.
 Amount of an insurance cover for individual should be

equal to his human life value.
 Just as the market price of physical assets keeps on

changing, similarly the financial value of a human being
keeps on changing depending upon change in age,
income, rates of interest.
 When a property is insured against the risk of loss, it is

insured on the basis of it’s ‘appraised value’.
 What method should be used to estimate the economic

value or money value of a human life?
 Human life value concept is one of the methods of

determining the amount of life insurance cover for an
individual to preserve his economic value.
 Human life value concept is based upon the economic

value of an individual to his family & dependents
 If an individual earns say Rs.10000 p.m. and spares

Rs.7000 p.m for his family after spending Rs.2500 on
himself and paying Rs.500 as taxes to government, his
human life value will be a sum of money which provides
monthly income of Rs.7000 to his family.
 If an individual earns say Rs.10,000/- per month and

spend everything on himself and spares nothing for his
family, his human life value will be zero.

 Human Life Value is therefore, the present value of
family’s share of deceased breadwinner’s future earnings.
 Suppose a person aged 40 has an annual Post tax earning

HUMAN
of Rs.1,30,0000, and heLIFE VALUE
has another 25 years to earn.
 Assuming he spends Rs.30,000 annually on personal

expenses and taxes, the income meant for the family
comes to rs.1,00,000 per annum.
 Assuming the earnings to be constant, the total loss of

income to the family for 25 years will be 25,00,000.
 The discounted value of the same @ 5% discount rate

works out to Rs.14,00,000. This much amount would be
required to protect the loss of income to the family. So he
will require insurance cover of Rs.14 lacs to protect the
family against the loss of income in the event of his
untimely death
 Just as appraised value of property undergoes changes,

the human life value also changes and insurance cover
should be reviewed periodically
 Human Life fluctuates with changes in income. It also

increases or decreases if the rate of interest decreases or
increases. If the rate of interest goes down HLV goes up &
vice versa
 Human life value when discounted @10% discount rate

will be far lower as against HLV amount @5% rate of
discount as would be evident from the Present Value
Tables.
Enclosure : Table of Present Value of Re.1

Table of Present Value of Re.1

HUMAN LIFE VALUE
PREMIUM
Year Discounted Rate
5% 8% 12% 16%
1 0.95238 0.92593 0.89286 0.86207
2 0.90703 0.85734 0.79719 0.74316
3 0.86384 0.79383 0.71178 0.64066
4 0.82270 0.73503 0.63552 0.55229
5 0.78353 0.68058 0.56743 0.47611
6 0.74622 0.63017 0.50663 0.41044
7 0.71068 0.58349 0.45235 0.35383
8 0.67684 0.54027 0.40388 0.30503
9 0.64461 0.50025 0.36061 0.26295
10 0.61391 0.46319 0.32197 0.22668
11 0.58468 0.42888 0.28748 0.19542
12 0.55684 0.39711 0.25668 0.16846
13 0.53032 0.36770 0.22917 0.14523
14 0.50507 0.34046 0.20462 0.12520
15 0.48102 0.31524 0.18270 0.10793
16 0.45811 0.29189 0.16312 0.09304
17 0.43630 0.27027 0.14564 0.08021
18 0.41552 0.25025 0.13004 0.06914
19 0.39573 0.23171 0.11611 0.05961
20 0.37689 0.21455 0.10367 0.05139
12.46221 9.81815 7.46944 5.92884
21 0.35894 0.19866 0.09256 0.04430
22 0.34185 0.18394 0.08264 0.03819
23 0.32557 0.17032 0.07379 0.03292
24 0.31007 0.15770 0.06588 0.02838
25 0.29530 0.14602 0.05882 0.02447
14.09394 10.67478 7.84314 6.09709
26 0.28124 0.13520 0.05252 0.02109
27 0.26785 0.12519 0.04689 0.01818
28 0.25509 0.11591 0.04187 0.01567
29 0.24295 0.10733 0.03738 0.01351
30 0.23138 0.09938 0.03338 0.01165
15.37245 11.25778 8.05518 6.17720
31 0.22036 0.09202 0.02980 0.01004
32 0.20987 0.08520 0.02661 0.00866
33 0.19987 0.07889 0.02376 0.00746
34 0.19035 0.07305 0.02121 0.00643
35 0.18129 0.06763 0.01894 0.00555
36 0.17266 0.06262 0.01691 0.00478
37 0.16444 0.05799 0.01510 0.00412
38 0.15661 0.05369 0.01348 0.00355
39 0.14915 0.04971 0.01204 0.00306
40 0.14205 0.04603 0.01075 0.00264
17.15909 11.92461 8.24378 6.23350
What is premium?
 Premium is a ‘consideration’ paid by the policyholder in

advance to the insurance company for an ‘Insurance Contract’,
in order to get benefits offered by an Insurance Policy on a
future date.
 Premium is the ‘Price’ paid for securing insurance policy
benefits.
 Premium can be paid ‘once; i.e. one time.
 Often premium is paid regularly over the period of policy or for
a limited period.
a) Default in premium payment:-
 A default in premium payment will result into

discontinuance of contract. The policy will be treated as
‘lapsed’ & ‘expected’ benefits will not be available.
 Consequences of default in premium payment are
stated in the policy contract.
b) Key factors for determining premium rates:-
 Premium rates are determined based upon actuarial &

statistical Principles.
 Only trained professional called ‘Actuary’ can do it.
 Different plans of insurance offering different benefits have
different premium rates.
 Tables of premium rates for each plan of insurance are made
by the Actuary.
 These tables are made available to the FCs to quote rates to
the prospects.
 FCs and staff performers should know the rationale behind
premium calculation.
 Premiums used by a Life insurance Company are called Office
Premium determined by an Actuary. The key factors or
assumptions regarding premium is denoted by mnemonic
MICE
i) Mortality rates
ii) Interest rate
iii) Expense factor
iv) Contingency factor

PREMIUM
General Principles: -
 Higher the rate of mortality assumed, higher will be the
rate of premium
 Higher the rate of interest assumed, the lower will be the
rate of premium
 Higher the expenses assumed, higher will be premium rate
 Higher the contingency provided for, higher will be the rate
of premium.
 Premiums used by a Life insurance Company are called
office premium
Kinds of premium
Risk Premium System (Natural Premium System):-
Cost to meet the risk of death for one year at a particular age
is called ‘the Risk Premium’.
Risk Premium is based upon the probabilities of death at
various ages.
Probabilities of death of standard lives at different Ages are
contained in Mortality Tables prepared by Actuary for use by
an insurance officer Agent.
Risk premium is the amount adequate to pay the death claim
within one year for Term Insurance Policies.
Mortality Tables are constructed to show no. of people dying
in
a year & also no. of people ‘Surviving at the end of year’. In
Endowment Plan insurers pay death claim & survival (Maturity)
claim and as such premium rates are more.
Risk premium is also called ‘Natural Premium’.
Level Premium as distinguished from Natural Premium:-
 If a Life Insurance Policy is taken at age 40 for 20 years, risk

premium for each of the 20 years will be different. It will be
lower at age 40 and will go on increasing every year and will
become very high at age 55, 56, 57, 58, 59, 60.
 Insurer will find it difficult to administer & Policyholder will
find it difficult to pay and they may be without protection
when they need it most.
 To overcome this difficult the insurer spreads the risk level
uniformly over the term of the policy and premium remains
constant for 20 years.
 Such uniform premium is called ‘Level Premium’.

 Level premium collected will be higher than ‘natural
premium. In early years of the policy than required for the
PREMIUM
risk and less than necessary is the later part of the policy.
 Reserves created out of the excess premium collected in
early years should be enough to compensate the shortfall in
premium collected in later part of the policy.
 Another reason for charging ‘Level Premium’ is to avoid
‘adverse selection’.
In natural premium system healthier lives will opt out of the ‘Pool’
and remaining policyholders will not be the same kind of population
as the ‘Mortality Tables’ assumed. Calculations of insurer will go
wrong & business cannot be done.
Net Premium or Pure Premium:-

 Premiums are collected in advance and claims are paid later
on.
 Premiums are invested & earn interest.
 Premium calculated after considering ‘Interest earned’ is
called ‘
Net Premium’ or Pure premium.
a) Office Premium:-
 Pure Premium + Loadings = Office Premium.
 Office Premium is printed in the brochures or Agent’s Manual
 Office Premium is also called Tabular Premium as given in the
Premium Tables.
 Office Premium is also called ‘Gross Premium’.
Loadings to Pure Premium:-

 Administrative expenses for running insurance business are
recovered from the policyholders by way of addition to the
‘Pure Premium’. These additions are called loadings.
 Loadings to Net Premium arise in the following ways to provide

for:-
a) Office expenses.
b) Unexpected contingencies or fluctuation –
epidemics, earthquake, accidents, riots can raise the
number of deaths to higher levels as compared to
normal number. Risk premium based upon ‘Mortality
Tables’ will not cover such contingencies & catastrophic
claims.
c) Loading on account of bonus to ‘Participating
policy holders’ who have to be paid ‘bonus’ annually.
Adjustments for Actual Premium:-

 Office premium is adjusted to arrive at actual premium.
 Adjustments will depend upon practice of each insurer.
Administrative costs are more if premium is collected monthly or
Quarterly because of more premiums
PREMIUM notices being sent and more
receipts being issued, more accounting entries being made.
If premium is collected yearly
– the probability of default in the subsequent renewal premium
to complete the year does not arise.
– the insurer collects more money to invest & to earn more
interest.
Therefore premium rates will be slightly increased or decreased
depending upon the mode of payment. Increase or decrease can be
a percentage of tabular premium or add / subtract say Rs.1/-
Practices vary. Some insurers allow ‘rebate’ for yearly mode & no
adjustment for Quarterly or Monthly mode. This depends upon how
the insurer has worked out office premium.
Insurer may allow rebate for large sum assured or charge extra
for small sum assured depending upon method of loading in the
office premium.
Rated up Premium
 Rated up Premiums are charged under some policies because
of -
 Additional benefits such as Accident Benefit or
Premium Waiver
 Benefit.
 Rated up of Premium may be charged because of extra risk
on
 account of health or occupation or habits.
 Rated up of Premium are generally stated as Rs.2 per
thousand or
 Rs.3 per thousand sum assured
 Rated up of Premium are added to the premium otherwise
chargeable.
Calculating Age:-
 There are different premium rate tables for different plans.
 Under the same plan, premium rates vary with age and term
of the policy
 Lower the age, lower the premium, higher the age, higher the
premium.
 If age is found to be higher / lower than stated in the proposal
form, difference of premium is charged / refunded from
inception of the policy.
 Insurers generally admit age at the time of commencement of
policy.
 Age is calculated on the date of commencement of policy.

 Age has to be calculated in full integers & not in months
or days.
 Insurers follows three methods of calculating age: -
a) Age next birthday
b) Age last birthday
c) Age nearest birthday.
For a person born on 20/08/1976 & if policy is commenced on

17/07/2002 age next birthday on 17/07/2002 will be 26, last
birthday would be 25 & age nearest birthday will be 26 years.
INTRODUCTION
 A proposal form is an application for insurance cover

 When a proposal is received, insurer does not grant
cover automatically
 Insurer decides about admissibility of the proposer into
the ‘pool of policyholders’
 Insurer has to play the role of ‘trustee’ to ensure that
members of the pool are ‘exposed to similar risk’
 Process of verifying and assessing the ‘level of risk’ of
new entrants is called ‘selection’ or underwriting
Implications of Underwriting going wrong
 If risk is not assessed properly, premium charged will

not be appropriate
 A lower premium would affect solvency of the
insurer/fund
 Cost of additional risk, if not recovered from the
policyholder, will be borne by the rest of policyholders
 If premium charged is more, it will be unfair to the
proposer and violate the principle of Utmost Good Faith
 Selection has implication of fairness to the insurer and
to the policyholders individually and collectively
Standard Risk
 If the underwriter finds that the ‘life proposed’ has

no adverse features affecting mortality, such a risk is
called’ standard’ and life is classified ‘normal’ or ‘standard
or average’ or ‘first class’. He will be charged premium as
per ‘tabular rates’

Factors affecting risk
 Factors affecting risk on the life of an individual are

called ‘Hazards’
 Hazards are of three types:
(a) Physical
(b) Occupational
(c) Moral
UNDERWRITING
A. PHYSICAL HAZARDS
1. Age
− Higher the age, higher the probability of death
− Premium rates are linked with age
− Certain risks increase with age while others decrease
with age
− Overweight at younger age is not ‘unfavorable factor’
while it increases ‘other risks’ at higher ages
− Underweight at young age is an ‘adverse factor’ and
not at higher ages
2. Gender
− Mortality rate of female lives at younger ages (child
bearing age) is higher than males among poor and
uneducated sections
− Females, in general, live longer than male
− Female lives are charged lower premium as compared
to men of same age and same risk
3. Build
− Height, weight, chest and abdomen measurements
affect longevity
− Girth of abdomen more than chest and overweight as
compared to standard weights may suggest greater
chances of diabetes or cardiac ailment. The combined
effect of two adverse factors is much more on risk to
life
4. Physical Conditions
− Medical examination of reflexes, B.P. pulse rate, urine
etc provides data with regard to important system of
the body
5. Physical impairments

− Blindness, loss of limb, deafness are not illnesses but
pose extra hazard increasing the probability of death
6. Personal History
− Past history of diseases, operations provides useful data
for ‘nature of risk’
7. Habits and Lifestyle
− Addiction to drinking, smoking, drugs, stressful life pose
greater hazards
8. Family History
− Family history of early death of parents, brothers,
sisters due to heart attack, diabetes etc indicate
chances of premature death
− If parents have lived long, it is a ‘favourable factor’
UNDERWRITING
B. OCCUPATIONAL HAZARD
− Certain occupations increase ‘Health Hazard’ or

Accident Hazard
− People working in chemical industries are exposed to
the risk of respiratory diseases
− People working on heights, with high speed machines,
with high voltage electricity are exposed to risk of
accident, electrocution, burns
− Underwriters charge extra premium for ‘occupation
hazard’
C. MORAL HAZARD
− Moral hazard refers to the intention of the proposer to

make gain out of insurance i.e. to get insurance at
lower premium or to make some monetary gains
− Moral hazard is a matter of opinion based upon
circumstantial evidence
− Moral Hazard can be environmental e.g. living in
Nexalite or Terrorist areas.
− Moral hazard is ‘suspected’, it cannot be ‘established’
− If moral hazard is suspected, proposals are ‘declined’
and not accepted even with extra premium
Examples of Moral Hazard
 First time insurance for ‘large S.A.’ at advanced age

 Large amount of insurance with low income
 Large amount of insurance for non earning member
while earning members of family are insured for very
small amount
 Taking Insurance while under threat from terrorist
group
UNDERWRITING
FINANCIAL UNDERWRITING
 Insurance cover cannot be disproportionate to the current

level of income of the proposer otherwise it may give rise to
moral hazard
 Though insurable interest of an individual is ‘unlimited’ yet
underwriter will link ‘insurance cover amount’ to current
income since premium has to be paid regularly
 If someone else is financing the policy, question of ‘insurable
interest’/
Gamble will arise
 Financial underwriting is making judgement in these financial
aspects
 Thumb rule is ‘Insurance Amount not more than 10 years
income’ or 10 times the Annual Income
 Insurers may grant life insurance cover between 5
to 25 times the annual incomes.
DATA FOR UNDERWRITING (Assessing Risk)
 Proposal form provides data about the proposer and person to

be insured with regard to health, habits, family history,
personal history of the person to be insured
 Confidential Report of the Medical Examiner
 Confidential Report of Agent

 Special Examination reports called for large S.A., at advanced
age or some past history of ailment
 Moral Hazard Report of Senior Official
 Income, occupation, health, operation questionnaires.
WHO UNDERWRITES RISK?
 Underwriter interprets data and decides about ‘level of risk’ in

each case
 Underwriter need not be an actuary’
 Underwriter may use the services of doctors called ‘Medical
Referees’ who are in the panel of insurance companies for
medical opinion or mortality of certain diseases
 For large S.A. cases, reference could be made to specialists in
the panel of reinsurers
UNDERWRITING
UNDERWRITING DECISIONS
Underwriting decisions could be one of the following types:
1. Accept at standard rates – which means life is assessed as

standard and tabular premium can be charged
2. Accept with rated up premium of Rs. per thousand for

health or for occupation or both which means premium
charges will be increased by ‘rated up premium’
3. Accept with modified terms i.e. offer ‘lower risk plan’ or lower
term of the policy. Risk of insurance varies from Plan to Plan.
Whole Life is more risky than Endowment. Term Insurance is
most risky. A shorter period policy has lower risk
4. Postpone for a certain period which means risk cover be

assessed again after expiry of postponement period with fresh
medical report
5. Decline: Which means risk is ‘uninsurable’, too high to be

insured. So it is declined or rejected

NON MEDICAL UNDERWRITING
 It is underwriting risk without medical examination report
 Experience shows that 90% of proposals are accepted at

standard rates
 Medical exam from qualified doctors is not easy at all places,

even at urban centres proposers have to wait at doctor’s
clinics
 Non-medical underwriting means deciding the risk based

upon proposer’s declarations and personal statement
 Non-medical proposals considered subject to certain

conditions e.g.
− Age not more than 45 years
− S.A. not more than 5 lacs
− Maturity age not more than 60 years or 65 years
− More risky plans not allowed
− Conditions for non medical underwriting vary
UNDERWRITING
across insurers
FEMALE LIVES UNDERWRITING
 Insurers in India were cautious about insuring ladies because

of pregnancy related death, and history of frauds
 Working women are given insurance at par with men
 Women having income from other sources and are income

tax assesses are given insurance as per need and paying
capacity and they are underwritten differently from working
women
 Housewives are considered for insurance only if husband is

adequately insured and insurance amount is limited to
husband’s insurance or Rs.10 lacs whichever is lower
 Premium rates for female lives are lower as compared to men

of the same age.
 Widows are given insurance on merits of each case.
ROLE OF AGENT IN UNDERWRITING

 Agent is the primary underwriter who sees the proposer
 Agent’s report is a source of data for underwriting by the
office
 Agent has a duty both to the insurer and to the proposer to
disclose all facts fully and accurately
 If claim is repudiated, claimant may say that agent was at
fault
RECENT TRENDS
 Dreaded diseases of the past are now manageable

 New diseases like Aids have appeared
 Insurers exchange data for mutual benefit
 Persons who were not given insurance 40 years back are now
insurable
 Benefit of low premium is given to non smokers
 Suppression of drinking or smoking for lower premium benefit
may result in repudiation of claim
IRDA REGULATIONS
Decision on a proposal to be conveyed within 15 days from

the date of receipt of proposal form.
LIFE INSURANCE ACCOUNTING
The principal source of income for a Life Insurance Company is the

Premium.
The other sources of income are dividend, interest, etc. on

investments made by the company besides rent, if any, on
immovable properties.
The main expenses for a Life Insurance Company are Management

Expenses in the form of commission and salaries. The outgoes are
by way of payment of benefits on death or maturity including
surrenders.
• PREMIUM ACCOUNTING: -
a. First premium: -
When a proposal is received along with first premium amount,

it is kept in Proposal Deposit A/C. The deposit is adjusted
towards First Premium Account after acceptance of risk.

Proposal Deposits under Annuities are credited to Single
Premium A/C or Consideration for Annuities Granted.
b. First Year Renewal Premium A/C: -
Where the premium frequency is other than yearly i.e. half

yearly or quarterly the premium instalments, falling due after
the First Premium in the first year are credited to First Year
Renewal Premium A/C
c. Renewal Premium A/C: -
Remittances towards Renewal premiums are credited to

Renewal Premium A/C.
d. Outstanding Premium: -
At the end of the financial year, provision for outstanding

premiums is made in the Revenue A/C & the Balance –Sheet
in respect of policies where premiums have fallen due but
have not been paid and the Days of Grace have not expired.
2. OUTGOES – BENEFIT PAYMENTS: -
Accounting entries for claim payments in respect of Death

Benefits, Maturity Benefits & Survival Benefits are made at
two stages
1. While creating liability for Benefits :-
Claims by Death/Maturity/
Survival Benefit (Gross Amount)
………………………….. Dr
Less:-
To Unpaid Premiums (if any) ……………………….
……...Cr
To Policy Loans (if any) ………………….……….…...
….....Cr
To Interest on Policy Loans (if any) …………..
…………….Cr
To Outstanding Death/Maturity/
Survival Benefit Claims (Net Amount).
……………………Cr
2. While making payment of Benefits:-
Outstanding Death / Maturity/

Survival Benefit Claims ………....
………………….Dr
To Bank A/C……………………………………………………
Cr
2. Repudiation of Death Claims:-
Repudiated Death Claim A/C…………………………….

…….Dr
To Claims by Death A/C…………………………………….
…Cr
3. EXPENSES OF MANAGEMENT:-
Expenses of management means all charges whenever incurred
whether directly or indirectly & includes
i. Commission payments of all kinds:-
Commission payment is classified as First Year
Commission, Renewal Commission & Bonus Commission
ii. Other expenses of management:-

Such as salaries, rents, stationery, Policy Stamps,
telephones, etc as permitted u/s 40B of the Insurance Act
1938
FINAL ACCOUNTS:-
As per Insurance Act 1938 & IRDA Regulations 2002 a Life Insurance
Company has to prepare, Final Accounts in the formats prescribed.
Audited accounts & statements are to be printed & four copies

thereof are to be furnished as Returns to IRDA by 30 th September
every year after incorporating Valuation Results.
Financial Statements, Auditors Report have to be submitted

together with Management Report.
Life Insurance Companies have to follow Accounting Standards as
issued by ICAI except Standards relating to Segment Reporting and
method of Cash Flow Statement.
Disclosures forming part of Financial Statements inter alia include

Contingent Liabilities, basis of allocation of investment for
Policyholders’ Account & Share holders’ Account
General Instructions for preparation of Financial Statements inter

alia include extent of risk retained & reinsured to be disclosed
separately:
Contents of Management Report inter alia include:-
i. Confirmation regarding the continued validity of

the registration granted by the Authority;
ii. Certification that all the dues payable to the
statutory authorities have been duly paid;
iii. Confirmation to the effect that the shareholding
pattern and any transfer of shares during the year are
in accordance with the statutory or regulatory
requirements;
iv. Declaration that the management has not directly
or indirectly invested outside India the funds of the
holders of policies issued in India;
v. Confirmation that the required solvency margins
have been maintained;
Financial Statements would include

Revenue A/C (Policyholders’ A/C)
Profit & Loss A/C (Shareholders’ A/C)
Balance Sheet in Form A-RA, Form A-PL, Form A-BS
Revenue A/c & Balance Sheet for the following business to be
prepared Separately:
- Linked Business & Non Linked Business
- LIFE INSURANCE
Participating ACCOUNTING
Policies & Non Participating Policies
- Business with in India & Out of India
Schedules forming part of Financial Statements would include
- Premium
- Commission Expenses
- Operating Expenses
- Benefits Paid
- Reserves & Surplus
- Investments – Shareholders, Policy Holder s
(Separately)
- Loans
- Fixed Assets
- Cash & Bank Balances
- Advances & Other Assets
- Current Liabilities
- Provisions
- Miscellaneous Expenditure
Limit on Expenses of Management in Life Insurance Business:

Law & regulations prescribe limits on Management Expenses for
Annuity Business & Life Insurance Business. For Single Premium
Annuity, the limit is 5% of the single premium. For Life Insurance
Policy of term of 12 years or more limit is 90% of First year
premium & 10% of Renewal Premiums. There are separate limits
on payment of commission to agents which is part of
Management Expenses
Renewal Expenses Ratio:-
It is an indicator of efficiency of the Insurance Company.
Maximum Renewal Expense ratio permitted under law is 15%.
Renewal expense Ratio is proportion of Renewal Premium in a
year spent in payment of renewal Commission & other renewal
expenses after allowing for the cost of new business of that year.
Overall Expense Ratio:-
Another Measure of efficiency of an Insurance Office is the
Overall Expense Ratio which is total management expenses
divided by total premium income * 100
Conservation Ratio:-
Higher Conservation Ratio indicates lesser lapsation of policies.
This is computed by dividing the renewal premium of the year by
total premium of the previous year * 100
Taxation of Life Insurance Profits:-
Taxation of Life Insurance Companies is done differently and the
same is under review However, presently valuation surplus
declared by a Life Insurance Company is taxed at the rate of
12.5% + surcharge @10% + Education Cess @ 3%.

Statement of Charges under Unit Linked Plan

LIFE OFFICE ORGANISATION
Introduction

 An organization has offices, departments, sections
 Revenue generating activities and customer service
related activities are more important than other activities
 An organization has ‘positions’,’ people’, responsibilities
Important activities in a Life Office:
 Securing proposals from prospective buyers of

insurance
 Underwriting of proposals
 Issuing policy documents, inserting terms and
conditions and endorsements
 Keeping record of premium payments and other
benefits paid
 Policy servicing like nomination, assignment,
alterations, loans, surrenders, claim payments
 Investments of Funds
 Maintenance of Accounts
 Management of Personnel
 Data Processing
 Compliance with Laws
Organizing these Activities
Depending upon size of operations, all activities can be

centralized or distributed across various offices.
Indian Insurance Organisation
 After Insurance Amendment Act 1950, restrictions were

imposed on Managing Agencies, on expenses and nature
of remuneration payable to Agents. Prior to this insurance
companies were getting administrative work done from
specialized agencies at considerable cost.
 After nationalisation of Life Insurance Business in 1956 and

the passing of the LIC Act, LIC was given the exclusive
mandate to do life insurance business vide Section 30 of
LIC Act. Postal Life Insurance was allowed to be continued.
 Since 2000 several private sector insurers have started life

insurance business. Every company has its own
LIFE
organization OFFICE ORGANISATION
structure.
 Prior to nationalization, foreign companies were doing

insurance business in India

 Since 2000 only ‘Indian Companies’ are allowed to do
insurance business in India and foreign companies are not
allowed
 Foreign companies can come as shareholders in Indian

Companies with maximum 26% shareholding
Four tier structure of LIC
 LIC has central office at Mumbai, 7 zonal offices, 100

divisional offices and over 2000 branch officers in India.
Foreign branches report directly to C.O. All offices have
defined territories except city branches.
 Over 90% of policy servicing is done at B.O. Investments are

done at Central Office
Structure of new companies

 New companies have Board of Directors, one of whom is a
representative of customers
 They have two tier structure – Head Office and Branch office.
Some of them have three tier structure as they are
expanding their operations. Three tier structure consists of
head office, regional office and branch office.
 Branch offices of these new companies concentrate on
procuration of business and building up clientele.
 The technical work e.g. underwriting, policy issue,
administration of policy is done at Head Office. Gradually the
structures will change as they have more experienced staff
and more work. HDFC SL’s organizational structure consists
of corporate office, zonal office, regional office, branch office
and spoke location.
Structure of Postal Life Insurance

 Postal Life Insurance is a part of Central Govt
 There is a separate directorate looking after this business
 It is headed by ‘CGM’ reporting to Postal Services Board
 Every district postal head office has an officer to look after
PLI Sales and Claim payments
 Premiums are collected by all post offices, but accounting is
centralized with Director of Accounts at Kolkata
LIFE OFFICE ORGANISATION

DEPARTMENTS IN A LIFE OFFICE
The following departments are likely to exist in an insurance
office either at Head Office or Regional Offices or Branch Offices
as the case may be. Names of departments may ‘differ’ but
activities will be the same
 Marketing or Business Development Department-

concerned with agency force, market development and
business growth
 Underwriting Department – which will receive proposals,
scrutinize, underwrite, issue FPR and policy
 Operations Department – which will administer policy,
monitor premium payments, deal with lapses, revivals,
alterations, nomination, assignment, surrender, loan, claim
payments
 Finance & Accounts Department – to maintain books of
accounts
Following departments will be at the Head Office
Actuarial Department is unique in a Life office & plays vital role

which inter alia include:-
i) Studies mortality, interest, expense
experience,
ii) Does valuation,
iii) Determines surplus and bonus,
iv) Monitors adequacy of premium rates,
v) Sets underwriting standards,
vi) Studies mortality rates etc
Investment Department will invest funds as per law and regulations

to get optimum returns
Finance & Accounts Department will consolidate accounts for the

entire organization and prepare annual financial statements
HR Department, Training Department, Legal Department
Administration Department will exist in all organizations catering

either to the entire organization or that office

THE ROLE OF ACTUARY IN A LIFE OFFICE
 No Life insurer can start Life Insurance business in India

without an ‘Appointed Actuary’.
 Actuary is a specialized person in an insurance organization
who is a Fellow of Institute of Actuary, London or Actuarial
Society of India
 The role of Actuary covers the following
- He is a technical expert on insurance matters

- Studies the mortality of insuring public
- Evaluates the financial condition of the Insurance
Company
- Evolves insurance products
- Decides premium rates for each product at different
ages
- Sets underwriting policies and standards
- Decides bonus rates
- A good Actuary is a good economist, good statistician,
good security analyst
- Actuarial valuations done at annual intervals is the
responsibility of actuary
- Premium to be charged is certified by the Actuary
before the product is submitted to IRDA for approval
IRDA REGULATIONS ON DUTIES OF APPOINTED ACTUARY
 Every life insurer has to have an’ Appointed Actuary’. The

duties of Actuary include :
- Advise the management on product design,

pricing, wording of
- insurance contract, investment of funds,
reinsurance arrangements
- Ensure solvency of the insurer at all time
- Comply with the Act in regard to premium,
valuation of assets and
liabilities
- Certify actuarial report and other returns
- Certify the determination of mathematical
reserves

DEPARTMENTS IN A LIFE OFFICE
Marketing Department Actuarial Department Operations Department Investment

Finance Department
& Accounts
− Recruits Agents − Appoints Medical − Maintains policy − Accounts
 Invests funds in Govt.
− Creates Alternate Examiners records Income Securities,
Channels − Underwriters − Issues Premium − AccountsInfrastructure &
− Trains Agents & Proposals Notices Social Sector,
Management
Other − Issues FPR & Policy − Issues RPRS Expense Corporate Loans,
Intermediaries Documents − Does Policy servicing − AccountsBonds, Debentures,
− Sales Promotion − Launches New Plan − Redresses Customer’s Equity, & Money
Policy Outgo
− Advertisement − Determines Premium grievances − Prepares Market
Final Instruments
− Public Relations Rates − Settles Policy benefits 
Accounts Separate regulations
− Constructs Mortality − Prepares for
Tables Revenue− Non Linked
− Decides Terms & Account Business
Conditions of policy − Prepares−Profit
Linked Business
− Does Actuarial − Pension Business
& loss Account
Valuation − Prepares
 Prepares & submits
− Declares Surplus & Investment Returns
Balance Sheet
Bonuses
− Makes Reinsurance
Investment Department
arrangement
− Invest Funds as per
− Applies Solvency
IRDA Regulations
Margin Tests
− Invest Unit linked
− Ensures regulatory
Funds as per the
Compliance
fund composition
and objective
• HR Department
• Administration Dept.
• Legal Department
• Compliance Dept.

LIFE FUND
 In normal trading business excess of income over expenses is

called ‘profit’ which is distributed to shareholders. It is not so
in Life Insurance business.
 Life insurance contracts do not end in a year & continue for

long period & premiums are paid over a number of years.
 Profits if any can be determined when the contract comes to

an end.
 Liability of claims to accrue & to pay continues beyond each

accounting year & life insurers have to keep aside monies to
pay the claims.
 The practice of ‘Level Premium’ implies that ‘excess premium

collected’ in Initial years has to be kept / invested to cover
higher risks of future years till the risks arise.
 In Endowment contracts ‘saving portion of premium’ has to

be kept / invested to meet survival liabilities.
 Prudence and law requires all income from Life Insurance

business including investment income be kept aside in a fund
called ‘Life Fund’ to meet the liabilities of Life Insurance
Policies’.
 Life fund can be used to pay ‘claims’ and ‘expenses’ of

running Life Insurance business.
 Life Fund represents ‘reserves’ for Life Insurance Policies to

meet ‘Policy Liabilities’.
 Life Fund appears on the ‘Liability’ side of the ‘Balance Sheet’

of Life Insurance Company.
 Life Fund is maintained in respect of traditional life insurance

plans.
 For Unit linked insurance plans separate funds are

maintained such as Equity fund, Debt fund, Balanced fund,
Liquid fund etc.

ACTUARIAL VALUATION
 Premium is calculated based upon certain assumptions or
expectations of likely experience in future regarding
‘Mortality’, ‘Interest’ & ‘Expense’.
 Future experience may or may not be as per ‘assumptions’ /
‘expectations’.
 If future experience is the same as ‘assumed’, premium
charged would be adequate and Life Fund will be adequate to
meet liabilities
 If experience is ‘bad’ i.e. expenses are more, and / or
mortality is more and / Or interest rate earned is lower than
assumed (expected), the premium charged will be found
inadequate & business could run into difficulties.
 Insurers check the validity of assumptions periodically say,
annually. This is called ‘Actuarial Valuation’.
 In India earlier Insurance Act 1938 required this Valuation to
be done
at least once in ‘ 3 years’, LIC Act required valuation to be
done once in 2 years. Now as per IRDA Act it is required to
be done once every year at the end of 31st March.
Process of Actuarial Valuation:-
A technical professional called ‘Actuary’ does actuarial valuation. He

is either a ‘full time employee’ or a ‘Consultant’. Process followed is
as under:-
a) Estimate the liabilities in respect of business in force as at 31 st

March every year.
b) Estimate the amount of premium due to be received in future
which will add to the life fund to meet the liabilities.
c) Difference between ‘a’ & ‘b’ is the ‘Life Fund’ which the insurer
must have to remain solvent and pay its liabilities
Solvency Of Insurer:-
 If the actual ‘Life Fund’ is more than the ‘required Life Fund’,
the insurer is solvent.
 If the actual ‘Life Fund’ is less than required ‘Life Fund’, the
insurer is not solvent.
Separate Life Funds:-

 Life fund for Participating Policies is separate from Life Fund
for ‘Non Participating Policies’ & for Unit Linked Policies.
 Separate valuation done for each category of fund.
VALUATION SURPLUS
 If actuarial valuation reveals that actual ‘Life Fund’ is more

than the required fund the insurer is said to have ‘surplus’. The
insurer will keep aside some fund for special contingencies and
reserves and will declare the distributable surplus.
 Distributable surplus will be distributed among the

participating policy holders and the shareholders. Distributable
surplus under Without profit plans belongs to the shareholders
only.
 As per current law not more than 10% of ‘distributable

surplus’ under participating policies can be distributed to
‘shareholders’ as dividend and not less than 90% of the
distributable surplus is to be distributed to the With profit policy
holders as bonus.
 Surplus distributed to policyholders is not called ‘dividend’, it

is called ‘Bonus’.
 As per Life Insurance Act, 1956, LIC can distribute not more
than 5% of Surplus to Government of India (Only Shareholder) as
dividend & not less than 95% of surplus to with profit
policyholders as bonus.
TYPES OF BONUS
Only Participating Policyholders get bonus:-
 Distribution of surplus to policyholders is done through

declaration of
‘Bonus’.
 Only with profit / participating policyholders are entitled to
bonus.
 Without profit / non-participating policyholders pay slightly
lower
premium for the same cover because there is no ‘bonus
loading’ in
the premium.
Types of Bonus
i) Simple Reversionary Bonus: -

− The most common method of declaring bonus is
‘simple reversionary bonus’
− The amount of bonus is added to ‘Sum Assured’ as
soon as bonus is declared and is payable along with
Sum Assured.
− Reversionary bonus is declared as a percentage of
sum assured or per thousand sum assured.
TYPES OF BONUS
− If Sum Assured is Rs.50,000/- & bonus declared at

the end of the year is Rs.60 per thousand Sum
Assured or 6% Sum Assured, the Sum Assured under
the policy will immediately become 53,000/- If same
rate of bonus is declared next year, the Sum Assured
will become 56,000/-
ii) Compound Reversionary Bonus:-
− Another method of declaring bonus is ‘Compound

Reversionary Bonus’ where bonus paid not only on
‘basic Sum Assured’ but also on ‘Bonuses already
declared & vesting in the policy. In the above
example, the Sum Assured after second declaration
of bonus will become ‘56180’.
iii) Tontine Bonus:-
− No bonus is declared in the first few years

of the policy and higher amount of bonus is declared
from 5th / 6th year of the policy.
iv) Cash bonus:-
− Some insurers declare bonus which is payable in

‘Cash’ to the policyholder immediately on
declaration. Cash bonus is generally declared as
percentage of premium and not as a percentage
of sum assured.

v) Bonus to reduce subsequent premium:-
− Another method of distributing bonus is that

subsequent premium is reduced to the extent of
declared bonus.
vi) Terminal or Final additional bonus:-
− This is one time bonus payable as additional

amount along with maturity claims or death claims.
Terminal bonus is discretionary bonus which may or
may not be declared. It is distributed only if policy
has remained in force for a minimum specified no. of
years.
TYPES OF BONUS
vii) Interim Bonus:-
− Bonus is declared on policies in force on the date

of valuation.
− Valuation date is 31st March every year.
− Valuation results for valuation as at 31st March
are declared after a few months but not later than
30th Sept of that year.
− For example valuation results & bonus for policies
in force as at 31/03/2007 will be declared on or
before 30/09/2007 and will benefit holders of policies,
which were in force on 31/03/2007.
− Policies, which become claim after 31/03/2007 &
before declaration of bonus for valuation as at
31/03/2007 would not get the benefit of bonus
although they have a right to participate till the date
of claim.
− With a view to overcome this situation actuaries
declare ‘Interim Bonus’ payable on such policies,
which become claims between two valuations.
Interim Bonus may be higher, lower or equal to the
reversionary bonus declared depending upon
perception of future interest rates
viii) Guaranteed Additions:-
− Guaranteed additions are additions to the sum

assured at guaranteed rate at annual intervals.
Guaranteed additions may be for the entire policy
period or for lesser-specified period. The rate of
Guaranteed additions may be uniform through out
the policy period or it may vary. Guaranteed
Additions may be on simple basis i.e. on Sum
Assured or on compound basis i.e. on Sum Assured
+ Vested Guaranteed Additions. Guaranteed
Additions are sometimes on sum invested & not on
Sum Assured. Strictly speaking Guaranteed
Additions is not a form of bonus but additional sum
assured added to the policy at the annual intervals
Different bonus rates:-
 Contribution of ‘Surplus’ by policyholders

differ with ‘terms’, ‘plan’ and ‘age’ of policyholders.
 Actuary declares bonuses in such a way as to
be ‘fair’ with different classes of policyholders.
TYPES OF BONUS
 Generally bonus rates for ‘Whole Life Plans’

are higher as compared to Endowment Plan &
Endowment Plan rates are more as compared to Money
back Plan.
 Generally bonus rate for longer-term policies
are higher than the short-term policies.
Surpluses declared:-
 Surpluses declared annually by an insurance company,

in a way:-
- Reflects the profitability of the business.
- The quality of management of business.
- Actual bonus declared should be higher than ‘bonus
loading, otherwise quality of management should be below
mark.

ALTERATIONS / NOMINATIONS / ASSIGNMENT
 Insurers allow alteration during the policy contract period
 Some alterations are simple e.g. Change of address, change

of mode of payment or change of nomination which are
allowed
 Some alterations may be splitting a policy into two or more

polices. Such alterations don’t increase risk and may be
allowed
 Some alterations may affect ‘risk’ e.g. change in ‘Plan’ or

‘Term’ or both or increase in Sum Assured.
 Governing principle is that alterations are allowed if risk does

not increase. However, under Unit linked insurance plans,
increase in sum assured is allowed.
 Reduction in Sum Assured may be permitted. However,

under Unit linked policies reduction in sum assured is not
allowed.
 Deletion of Riders during the contract period may be

permitted
 Additions of Riders Benefit subsequent to issue of policy may

or may not be allowed
 Change of Trustee under MWP Act policy is allowed.
 Change of Beneficiary under MWP Act policy and under

Children plans of HDFC Standard Life not allowed.
NOMINATION
 Nominations make settlement of death claim
easy.
 As per Section 39 of the Insurance Act, holder

of policy on One’s Own Life can nominate a person to receive
policy monies in the event of death claim.
 Nomination can be made at proposal stage or

at any time during the currency of the policy.
 If there is no space in the policy for

endorsement, nomination can be done on a separate piece of
paper to be pasted in the policy document with signature of the
Life Assured at the edges of the paper attached to the policy
 On assignment, existing nomination gets

cancelled.
 Assignee, being not the Life Assured, can’t

make nomination
 When policy is reassigned to the Life assured,

he can make fresh nomination

 Assignment in favour of insurer for raising
policy loan does not cancel nomination
 A nominee can ‘receive’ policy monies he has

no right to the policy monies. He can give valid discharge to the
insurer but he has to hold money on behalf of those entitled to it
 When nominee is minor, appointee should be

appointed by the policyholder. Appointee must be ‘major’ and
‘sign’ agreeing to act as Appointee. Appointee can be changed
by the Life assured. Appointee has no role when nominee
becomes Major
 When nominee is minor and there is no

appointee, death claim is not paid to legal or natural guardian of
minor nominee. It is paid out to the legal heirs of the deceased
 When there are two or more nominees death

claim is paid to all ‘jointly’ or to the ‘survivor’ or ‘survivors’ of
them
 No specific share for each nominee may be

allowed.
 Nomination in succession or alternate

nominee is allowed. Alternate nominee can receive money if
original nominee is no NOMINATION
more.
 If nominee dies after death of Life Assured but

before receiving death claim money, policy money will be paid to
the legal heirs of the deceased policy holder
 Nomination does not become inoperative on

maturity of the policy where maturity claim is payable in
instalments and Life assured dies before receiving all
instalments. Balance instalments can be paid to nominee.
Nominee can’t commute future instalments payable. This can
apply in the case of Education Annuity Policy.
 Nomination made after issue of policy must be

registered with the insurer after giving ‘notice’ to the insurer.
Otherwise it is not effective.
 Under Joint Life policy, nomination can be

made by both the Lives assured. Nomination is effective only if
both die simultaneously in a common calamity and there is no
proof to establish who died first.
ASSIGNMENT
Life Insurance Policy a property: -

 A life insurance policy is a property. It
represents rights. It is an actionable claim as described in
Transfer of Property Act 1882
 A life insurance policy forms part of estate of
the Life Assured.
 It can be sold, mortgaged, charged, gifted or
bequeathed
 Section 130 & 131 of the Transfer of Property
Act, 1882 details the procedures for transfer of interests in the
policy.
Assignment & Procedure:-
 Assignment transfers the rights, title &
interest of assigner or to the assignee.
 Section 38 of the Insurance Act deals with
assignment of Life Insurance policies.
 Assignment can be done by endorsement on
the policy document or by a separate deed.
 Separate deeds have to be stamped. No
stamping required if assignment is done by endorsement on the
policy
 Assignment must be signed by the transferor
or by his duly authorized agent
 Signature must be attested by a witness
 Assignment is effective as soon as it is
executed
 It must be sent to the insurer along with a
notice of Assignment
 Person making assignment should have right
or title to the propertyASSIGNMENT
 The assignor must be major & competent to

contract
 Assignment of a part of policy is bad in law
 Assignment once made cannot be cancelled or
altered by the assignor unless the assignee reassigns the policy.
 Assignment can be of 2 types – Absolute or
conditional.
 In absolute assignment, title to the policy
passes on to the Assignee absolutely whereas under Conditional
assignment, title to the policy passes on from the Assignor to
Assignee conditionally. In both the cases the assignee can deal
with the policy without the consent of the assignor.
 In conditional assignment there are generally
two conditions i.e. the title in the policy reverts to the Assignor if
the assignee pre-deceases or the Assignor survives till maturity
date.
 If a policy is taken on the life of another, the
policyholder (title owner) is the proposer & not the Life Assured.
Life Assured can’t deal with the policy unless the policyholder
(Contract owner) assigns it in favour of Life Assured. In Children
Deferred Assurance Plan, the Life Assured can assign the policy
after the vesting date.
 Assignment can be for natural love & affection
or for valuable consideration. Assignment without natural love &
affection or without valuable consideration is invalid.
Given below is the comparison between Nomination &
Assignment
Nomination Assignment
i) Can be done before i) Can be done only after issue
issue of the policy by of the policy by endorsement
mention in the proposal on policy or by separate
form or by a letter giving deed
details or after issue of
the policy, by an
endorsement on the
policy.
ii) Cannot be done by a ii) Can be done also by
separate deed. separate deed on stamped
paper.
iii) The holder of a policy on iii) Proposer or life assured
his own life, i.e. the life (whosoever is the owner) or
assured, alone can make assignee can make
nomination. assignment
iv) It is effected where iv) It can be executed anywhere
Insurance Act 1938 in the world according to the
applies, or where similar law of that country, relating
enactments apply, viz. In to transfer of property
Pakistan & Sri Lanka
v) Life Assured retains full v) Life Assured loses control
control and can deal over the policy. Absolute
with the policy without assignee is the owner of the
the consent of the policy and can deal with it or
nominee.
NOMINATION without the consent of Life
ASSIGNMENT
Assured.
vi) No consideration is vi) Must be for a consideration
necessary or for natural love &
affection
vii) May be witnessed vii) Must be witnessed,
otherwise it will be
invalidated
viii) Nomination must be viii) Notice is required to enable
registered with insurer the assignee to acquire
after due Notice. priority over other assignees
ix) Nominee has no right to ix) Assignee has right to sue
sue under the policy under the policy
x) Nomination can be x) It cannot be cancelled by the
altered by the life assignor. The assignee has
assured during the to reassign the policy.
currency of the policy by
cancellation of
nomination or by a new
nomination or by an
assignment.
xi) Where nominee is a xi) When assignee is a minor,
minor, appointment of guardian is to be appointed
an appointee by the life to receive policy monies
assured only is required.
xii) Appointment of xii) Guardian cannot be
appointee can be a part appointed in the wording of
of wording of the the assignment
nomination
xiii) No vested interest in xiii) Assignee acquires interest in
favour of nominee is the policy
created
xiv) Nominees’ right is xiv) The assignee has legal right
limited to collecting to receive & use the policy
policy moneys on the moneys
death of the assured
xv) If nominee dies, xv) If an absolute assignee dies,
nobody’s rights are the right devolves upon
affected and legal heirs his/her heirs unless the
of nominee are not conditions of assignment
entitled to money provide for reversion on
death of assignee.
xvi) If the nominee dies after xvi) If the assignee dies after the
the life assured and life assured and before
before settlement of the settlement, the policy
claim, the policy moneys moneys would be payable to
would be payable to the the heirs of the assignee
heirs of the life assured
xvii) Creditors of the life xvii) Creditors of the life assured
assured can attach the cannot attach the policy
policy moneys moneys unless the
assignment is shown to have
been made to defraud the
creditors
CLAIM ADMINISTRATION
I Introduction:-
 A claim is a benefit payable under the

insurance policy contract
 A claim is a demand made upon the insurer to
redeem the promise made & to perform his part of the contract.
 Before settling the claim, the insurer satisfies
himself that all the conditions for settlement of claim are
complied with
Typically he checks the following: -
 Whether the contingency insured has

happened
 What obligations under the contract are to be
performed- e.g. payment of Sum Assured in instalment, amount
of bonus payable or waiver of premium etc.
 Whether the policy holder has performed his
part of the contract i.e. paid all the due premiums
 The insurer checks whether age is admitted,
any outstanding loan & interest, whether survival benefits if any
paid, whether Foreign Exchange Regulations applicable,
requirements if it is M.W.P.Act policy, Claim Investigation Report.
Police report if any.
 Who are the persons entitled to demand
performance of contract i.e. nominee or assignee or Income Tax
Notice or Prohibitory Orders of the court, Official Assignee’s
Notice, etc.
II Maturity Claims
 Under Endowment type plans, Sum Assured

becomes payable if the life assured is alive on the date of expiry
of the term of the policy. The date on which term of the policy is
over is the maturity date. Settlement of claim on the date of
maturity is called Maturity Claim.
 Amount payable on Maturity date is the Sum
Assured less outstanding loan & interest, outstanding premium if
any. Bonus amount is added if it is with profit policy.
Maturity Claim Intimations:-

 Based upon its records, insurer sends advance
intimations of maturity claims to the policy holders every month
after checking that there are no assignments, age is admitted
and premiums are paid (unless it is a paid-up policy)
 The policyholder is asked to return the
‘Discharge Voucher’ for maturity claim duly executed & the
original policy bond for cancellation.
Post dated Maturity Claim Cheques:-
 The insurer is expected to pay the maturity

claim on the date of maturity.
 If Discharge Voucher duly signed along with
policy bond are received in advance, the insurer generally sends
postdated cheques a few days before the maturity date so that
the cheque could be deposited in Bank A/c on the date of
maturity.
Settling Maturity Claim when policy is lost:-
 If original policy is reported lost, the insurer

satisfies himself that ‘loss of document’ is genuine & there is no
attempt to defraud. It could have been pledged for a loan.
 Duplicate policy is not issued for settling
maturity claim but requirement like ‘Indemnity Bond’ and
‘advertisement’ in newspaper etc. are generally called for as a
matter of precaution.
Maturity Claim under M.W.P.Act policies:-
 Claims under M.W.P. Act policy are paid to

named Trustees.
 If there is no trustee, Claim is paid to the
‘Official Trustee’
 If all the beneficiaries are major & competent
to contract, claim can be paid directly to them.
 The discharge voucher is signed by the
claimant and not by the policyholder.
Maturity Claims under Assigned Policies:-
 Maturity claim cheque is issued to the

Assignee if policy is absolutely assigned.
 If it is conditional assignment, policy reverts to
the L.A. on maturity date. Payment will be made to the L.A.

 It is prudent to check that assignee has no
outstanding claim against the policyholder.
Maturity claim payment in installments:-


 If the claim is to be paid in installments, claim
will be admitted on the date of maturity but paid over a few
years.
 Lets attempt a few examples on calculating
maturity claim amount
 Calculate Maturity Claim amount payable :
Some Example
Example 1
What will be Maturity Claim amount under Endt. Plan where S. A.
Rs. 1,00,000, Term is for 20 years All the 20 yearly premium paid
upto date. Vested Bonus is Rs. 1200 0/00 , Terminal Bonus is Rs.
150/00 S.A.
Solution :
Maturity amount is S.A. Rs. 1,00,000 + Vested Bonus of Rs. 1200 x

100 = 1,20,000 + Terminal Bonus of Rs. 15 x 100 = Rs. 1500
Total Maturity Claim Amount = 1,00,000 + 1,20,000 + 1500 =
2,21,500
Example 2
Calculate Maturity Claim with the following data
Ednt. 20 years, Mode yearly, S. A. 1,00,000, Premiums Paid : 5
years, Vested Bonus Rs. 20,000, Terminal Bonus@ Rs. Rs. 200/00
S.A. if 15 years premiums paid
Solution :
5
Maturity Claim amount is = x 1,00,000 + 20,000 i. e. 25,000
+ 20,000
20
= Rs. 45,000
IV Survival Benefit Claims: -
 Survival benefit claims are payable at periodical intervals during

the currency of the policy & before the date of maturity.

 Procedure for settlement is same as described for Maturity
Claims. Post-dated cheques are generally sent in advance.
 If policy bond is lost, duplicate policy bond is insisted upon and
endorsement for settlement of survival benefit is made on the
policy document. In maturity claim, duplicate policy bond is
dispensed with since there is no further obligation under the
policy contract.
 If policyholder dies after the ‘survival benefit due date’ but
before settlement of survival benefit by the insurer, the S.B
amount will not be paid to the nominee. It will be paid to the
legal heirs of policyholder. However death claim will be paid to
the nominee.
 Example :
 Calculate Maturity Claim if S.A. is Rs. 5,00,000 & Policy is for 20
years under Money Back Plan where S.B. of 1/5th , 1/5th, 1/5th
S.A. have been paid. Vested bonus is 8000/00 S.A. Terminal
Bonus is Nil.
Solution :
Maturity Claim is 2/5th of S.A. + 800 x 500 i. e.
Rs. 2,00,000 + 4,00,000 = Rs. 6,00,000
IV Death Claim: -
 If policyholder dies before the date of maturity, it is called

death claim.
 Procedure for settling a death claim is complex as
compared with maturity claims because of
- Circumstances leading to death to be studied
- Identities of claimants have to be established
Death Claim Intimation:-
- Unlike maturity claims action in insurer’s office for

death claim starts when intimation for death is received
from nominee, assignee, employer, agent or development
officer.
- Claim action can also be initiated without receiving
intimation and on the basis of obituary columns or
newspaper reports in case of accident or air crashes.
Requirements for settling death claim are:-

1) Detailed statement of the claimant
2) Policy Document
3) Deeds of assignments / reassignments.
4) Age proof if age is not admitted

5) Certificate of Death issued by appropriate authority
6) Legal evidence of title if policy has no assignment
or nomination
7) Form of discharge duly executed & witnessed.
Additional requirements for Early Death Claims:-
 If death takes place within 3 years of the policy or from

revival. It is called Early death claim & following additional
requirements may be called for to rule out the possibility of
fraud etc.
 Last Medical attendants’ statement regarding last illness
& treatment
 Hospital Report if the deceased was admitted in a hospital
 Statement from the person who attended the funeral &
had seen the dead body.
 Leave record from employer if the deceased was an
employee.
Unnatural death & further requirements:-
If death is unnatural such as accident, suicide, unknown cause,
there are further requirements as follows:-
a) FIR
b) Police Inquest Report
c) Panchanama
d) Chemical Analyser’s Report
e) Post mortem
CLAIM Report
ADMINISTRATION
f) Coroner’s Report.
Repudiation of Claim & Early Claim Investigations:-
 Normally it is expected that insured who is medically
examined & found ‘first class’ should not die soon after
insurance
 Early death may call for investigation to rule out the
possibility of ‘Suppression of material fact’ & fraud.
 Claim may not be paid & it may be repudiated if insurer
finds evidence to establish ‘suppression of material fact’ etc
so that in a court of law (if the claiminant approaches the
court), it can be established that facts suppressed were
material & were known to the proposer.
 It is the duty of the insurer not to pay fraudulent claims, to
prevent some one getting away with undue advantage at
the cost of other policy holders
 So they make claim investigation & enquiries in case of
early death claims.
 Two benefits of enquiries are:-
a) it may provide data to tighten underwriting
standards
b) it may point out ‘Agents’ or ‘areas’ prone to
early claims
Evidence of Title:-
 If there is no nomination or assignment, claimant has to
produce evidence of title which can be ‘Succession
Certificate’ or ‘Probate of Will’ from a competent court if the
policyholder has left a will.
 Strict evidence of title in the form of ‘Succession
Certificate’ may be waived if claim amount is not large;
there is no dispute among the legal heirs. Claim may be
settled on the basis of declaration, affidavits & indemnity
bond from legal heirs.
Claim Concession:-
1) Claim is paid for full sum assured if L.A. dies within
the Days of Grace after deducting unpaid premium for the
policy year current on the date of death.
2) Under Automatic Premium Advance System, death
claim is paid for full S.A. if death takes place during
‘Premium Advance Period’ after deducting premium
advanced as loan.
Proof of Death:-
Proof of death is a pre-requisite for settling death claim. Death

certificate issued by the Municipal office or local body is
acceptable proof of death.
Certificate of death from a local body may be dispensed with in
case of accidents or air crashes or death on high seas or
natural calamities where bodies are not found. In such cases
insurers rely on statement of carriers or other authorities with
relevant information. In case of defence personnel, a certificate
from the commanding officer of the unit is obtained.
Presumption of death:-
 Sometimes a person is reported missing and his

whereabouts are not known
 Indian Evidence Act stipulates that a person can be
presumed to be dead if he has not been heard of for 7
years
 Nominee has to produce decree of competent court
regarding presumption of death. It may be waived if insurer
is satisfied that L.A. could not have survived a fatal
accident
 Insurers as a matter of concession waive the premium
during the seven years if not paid.
Claim payment to Lunatics:-
Under Indian Lunacy Act, a lunatic cannot give a valid

discharge.

Court of Law can appoint a Guardian to manage the
property of a
lunatic who can give a valid discharge. If Lunatic has
recovered,
medical certificate is necessary
Court Orders:-
 Insurer does not have to contest the court orders & has to
respect the same
 It is for the claimant to contest the court orders.
 Sometimes moneys under M.W.P. Act policy are attached
against the debt of L.A. though it cannot be done.
 Claimant should approach the court to get the order of
attachment vacated.
 The insurer can present facts if called upon to do so.
Death before receiving Maturity Claim cheque:-

 If L.A. dies even one day before the maturity date, it is
treated as ‘death claim’ & nominee is paid the claim
amount.
 If L.A. dies after the maturity date but before receiving the
claim cheque, it is treated as ‘Maturity claim’ & claim
amount is not paid to the nominee but is paid to the legal
heirs of the deceased
Non-Resident claimants: -
 Payment of claim amount to non-residents is governed by
Foreign Exchange Control Regulations
HUF Policy claim: -
 If a policy is financed through HUF funds, Karta of HUF is
paid the claim
Law of limitations:-
 If claim is not lodged with in three years, it becomes time

barred
 If death intimation is received after 3 years from the date
of death, there is a ground for suspicion. Claim
investigation would be desirable to rule out the possibility
of fraud.
 Time barred plea can be taken to avoid a claim if reasons
for delayed intimation are not found satisfactory
Accident & Disability Benefit Claims: -

1) One has to look to the ‘definitions’ of word ‘Accident’,
‘Disability’ as given in the policy document since Riders have
‘definitions’
2) Riders also have ‘exclusions’ which have to be studied
carefully as detailed in policy document.
3) Rider benefits are not settled unless ‘Conclusive evidence’
is produced, eligibility conditions are satisfied and exclusions
do not apply.
4) Accidental death claim cannot be paid unless ‘accident’ is
proved as ‘defined’. Presumption of death is not sufficient for
settling an ‘accidental death benefit’ though it is considered
sufficient for settling a basic insurance claim.
5) Conditions for accidental death claim generally are
- Accident must be caused by outward, visible,
violent means & not self-inflicted.
- Death must be directly caused as a result of
accidental injuries
- Death must occur within 120 days or such other
specified period from the date of accident.
6) General exclusions for accidental death claim are:-
a) Intentional self-injury
Attempted suicide
Insanity
Immorality
Intoxication
b) Accident caused while engaged in civil aviation or
aeronautics,
other than as a passenger
c) Injuries resulting from riots, civil commotion etc
VI IRDA Regulations on Claim Matters: -
IRDA Regulations on claim matters are as under: -
 All requirements for death claim to be called at one time

and not piece meal
 After receiving requirements, decision to admit or
repudiate claim to be taken within 30 days.
 Claim investigation wherever required to be completed
within 6 months.
 Interest of 2 % over and above Bank rate to be paid on
claim amount for delays in settling death claim.
 Saving Bank Rate of interest is payable if insurer is ready
to pay but the claimant is not ready to collect the claim
amount.

PROTECTION OF POLICYHOLDERS’ INTERESTS
IRDA (PROTECTION OF POLICYHOLDERS’ INTERESTS)

REGULATION, 2002
Protection of Policyholders’ Interests Regulations is the first of its

kind in the history of Insurance in our country. The Regulations were
issued in Oct. 2002 by IRDA with a view to protect the interests of
the policyholders. The regulations apply at stages – Sales stage,
Proposer stage, Policy issue stage, Policy servicing stage and Claims
stage. The main features of these regulations are as under:
1. Rider Benefits
The allowable Rider or Riders on the product shall be clearly spelt

out both with regard to their scope and benefits.
Rider premium under all riders together is restricted to 30% of

basic premium under life insurance plans. However, under term
insurance plan, for health rider, rider premium can be up to
100% of basic premium of term assured plan.
2. Proposal For Insurance
(a) Where the proposal and other connected papers are not filled
in by the Prospect, he should certify at the end of the proposal
form that the contents of the form and documents have been
fully explained to him and that he has fully understood the
significance of the proposed contract.
(b) A proposal for life or general insurance (except for marine
insurance) must be evidenced by a written document. It is the
duty of the insurer to furnish to the insured free of charge a
copy of the proposal form within 30 days of acceptance of the
proposal.
(c) Forms and documents may be made available in languages
recognized under the Constitution of India.
(d) Proposal form for life insurance may prominently state therein
the provisions and requirements of Section 45 and Section 41
of the Insurance Act 1938.
(e) The Insurer shall draw the attention of the proposer to the
benefit of nomination and encourage him to avail the facility.
(f) The insurer with speed and efficiency shall process proposals
and all decisions thereof shall be communicated by it in writing
within a reasonable period not exceeding 15 days from receipt
of the proposals by the insurer.

3. Grievance Redressal Procedure
A proper Grievance Redressal Mechanism should be in place with

every Insurer and the information in respect of Insurance
Ombudsman shall be communicated to the policyholder along
with the policy document.
4. Policy Document
A Life Insurance Policy shall inter alia, clearly state the following
details:
(a) Name of the plan, its terms and conditions
(b) With or without profit
(c) Basis of participation such as Cash Bonus, Deferred Bonus,
Simple or Compound Reversionary Bonus
(d) Contingencies upon which the benefits are payable
(e) Riders attached to the policy
(f) Date of commencement of Risk
(g) Premiums payable periodically, days of grace, date of last
payment of premium, non forfeiture regulations etc
(h) Age, whether admitted
(i) Requirements for conversion into paid-up, surrender, non-
forfeiture and revival of lapsed policies
(j) Contingencies excluded from the scope of cover both for the
main policy and the Riders
(k) Provisions for nomination, assignment, loan on security of the
policy and interest payable thereon
(l) Any special clauses or conditions such as First Pregnancy
Clause, Suicide Clause etc
(m) Address of the insurer for communications to be sent
(n) Documents normally required to be submitted by a claimant in
support of a claim under the policy
5. Option For The Insured To Return The Policy
While forwarding the policy to the insured, the insurer shall

inform by a letter that the insured has a period of 15 days from
the date of receipt of the policy document to review the terms
and conditions thereof and where he disagrees to any of those
terms or conditions, he has the option to return the policy stating
reasons for his objections when he shall be entitled to refund of
the premium subject to the following deductions:
(a) Proportionate risk premium for the period on cover
(b) Expenses incurred by the insurer on medical examination of
the life assured
(c) Stamp Duty charges

6. Policyholders’ Servicing
An insurer shall respond within 10 days of receipt of any

communication from its
policyholders in all matters such as:
(a) Recording the change of address;
(b) Noting new nomination or change of nomination;
(c) Noting on assignment on the policy;
(d) Providing information on the current status of a policy
indicating matters such
as accrued bonus, surrender value and entitlement to a loan;
(e) Processing papers and disbursal of a loan on scrutiny of
the policy
7. Claims Procedure
(a) A life insurance company shall process the claim without delay.
Any queries or requirements shall be raised all at once and not
in a piece-meal manner, within 15 days of receipt of the claim.
(b) A claim shall be paid or disbursed giving all relevant reasons,

within 30 days of all relevant papers and clarifications required.
However, where the circumstances of a claim warrant an
investigation, insurer should complete such investigations at the
earliest and in any case not later than 6 months from the time of
lodging the claim.
(c) If for any reason, a claim cannot be made for want of proper
identification of the payee, the insurer shall hold the amount for
the benefit of the payee and such amount shall earn interest at
the rate applicable to Savings Bank Account with a Scheduled
Bank effective from 30 days following the submission of all
papers and information.
(d) Where the delay is on the part of the insurer in processing a

claim, it shall pay interest on the claim amount at a rate, which
is 2% above the Bank Rate prevalent at the beginning of the
financial year in which the claim is reviewed by it.

RURAL & SOCIAL SECTORS OBLIGATIONS
LEGAL PROVISIONS: -
 IRDA Act 1999 has added two new sections i.e. Section
32 B & 32 C to Insurance Act 1938
 In terms of Section 32B, every Life Insurer & general
insurer has to transact a certain percentage of
business in rural & social sector as may be specified by
IRDA
 As per Section 32C, every insurer has to discharge its
obligations as required u/s 32B to provide Life
insurance or general insurance policies to persons
− Residing in rural sector
− Workers in the unorganised/informal sector
− Or for economically vulnerable
− Or backward classes of society
− Or other category of persons as specified in
Regulation
made by IRDA & this will include ‘Insurance for
crops’
IRDA Regulations:-
 IRDA made regulations in terms of above

provisions & these were notified in Official Gazette on
19.07.2000
 These were amended in Oct 2002 & notified on
16.10.2002 & the same are as under:-
DEFINITIONS OF RURAL SECTORS:-
Rural Sector is defined as under:-
 A place as per latest census with population of less

than 5000
− Density of population less than 400 per square

kilometre
− More than 25% of male working population
engaged in agricultural pursuits
Note; this Definition has been revised recently in terms of which any
place not named in the list of notified urban centres, towns, cities
will form part of Rural Sector.

RURAL & SOCIAL SECTORS OBLIGATIONS
DEFINITION OF SOCIAL SECTORS: -
Social Sector includes
- Unorganised Sector
- Informal sector
- Economically vulnerable or backward class
- Other category of persons both in rural &
urban area
OBLIGATIONS OF INSURER IN THE RURAL SECTOR: -
 Insurers generally avoid insurance protection

to such category of persons because of difficulties to
‘approach’ & ‘limited scope’
 They need insurance cover more than other
segments of society
 Insurers who stared business in 2000 or later
have to write following percentage of policies as per IRDA
Regulations
 In the first year at least 5% of total policies while

 In the second financial year 9% of total policies while
 In the third financial year 12% of total policies while
 In the fourth financial year 14% of total policies while
 In the fifth financial year 16% of total policies while
OBLIGATIONS OF INSURER IN THE SOCIAL SECTOR: -
In the social sector, obligations of Life insurer are in term of

‘number of lives’ & not number of policies. These are as
under:-
 5000 lives in the first financial year [proportionate if first financial

year is not for full 12 months]
 7500 lives in the 2nd financial year
 10000 lives in the 3rd financial year
 15000 lives in the 4th financial year
 20000 lives in the 5th financial year
Note: - IRDA can revise these obligations once in 5 years
CONNECTIVITY IN ACTIVITIES OF A LIFE OFFICE
Marketing Proposal Proposal

Agency Securing Filling, Scrutiny &
/Alternate Business Collecting first Underwriting,
Channel Product / Sales premium, Calling
Recruitment, Launch Collecting requirements,
Training & Documents, Acceptance of
Licensing Arranging Risk
Medical
Examination
Preparation Adjustment of First

of Final Premium
Accounts Issue of First Premium
Receipt
Product Payment of commission
pricing,
Accounting Actuarial
of all Valuation,
Incomes & Surplus,
Outgoes / Bonus
Expenses Rates,
Solvency Investment Statutory Issue of policy
Margins of Funds Compliance document (Free
Returns Look Period)
Payment of
Benefits –
Survival,
Surrender,
Paid-up,
Maturity,
Death Receipt of Adjustment of Renewal Premium
Installment Top-up renewal Notices
amounts & premium &
its issue of RPR
Requests for accounting
policy
alterations,
changes in
Nomination /
Assignment,
Loans,
Revivals 63 | P a g e Thursday, 22 October 2009
Accounts and Reporting Standards for Insurance Industry
• Regulation of Investments
(1) Life Business: Without prejudice to Section 27 or Section

27A of the Act, - Every insurer carrying on the business of life-
insurance shall invest and at all times keep invested his
controlled fund in the following manner:
S.N Type of Investment Percentage

o
i) Government Securities 25%,
ii) Government Securities or other approved securities (including Not less than
(I) above) 50%,
iii) Approved Investments as specified in Schedule I
a) Infrastructure and Social Sector Not less than
Explanation: For the purpose of this requirement, 15%
Infrastructure and Social Sector shall have the meaning as
given in regulation 2(h) of Insurance Regulatory and
Development Authority (Registration of Indian Insurance
Companies) Regulations, 2000 and as defined in the
Insurance Regulatory and Development Authority (Obligations
of Insurers to Rural and Social Sector) Regulations, 2000
respectively
b) Others to be governed by Exposure/ Prudential Norms Not exceeding
specified in Regulation 5 20%
iv) Other than in Approved Investments to be governed by Not exceeding
Exposure/ Prudential Norms specified in Regulation 5 15%
(2) Pension and General Annuity Business: Every insurer shall

invest and at all times keep invested assets of Pension Business,
General Annuity Business and Group Business in the following
manner:-
S.No Type of Investment Percentage

i) Government securities, being not less than 20%
Ii) Government Securities or other approved securities inclusive 40%
of (i) above, being not less than
iii) Balance to be invested in Approved Investments as specified Not exceeding
in Schedule I and to be governed by Exposure/ Prudential 60%
Norms specified in Regulation 5
Note: For the purposes of this sub-regulation:

a) No unapproved investments shall be made.
b) All investments shall be made in graded securities and the grading
shall not be less than of ‘very strong’ rating by a reputed and
independent rating agency (e.g. AA of Standard and Poor).
c) Every insurer shall invest assets in securities which are actively
traded in any Stock Exchange in India and which are attributable to
segregated funds, in respect of linked business.
Investment Regulation
• Regulation of Investments
(1) General Business

Every life insurer is required to invest its Controlled Fund as per
statutory framework laid down vide section 27A of Insurance Act
1938 and IRDA Regulations on investment.
a) The present statutory framework for investment of Controlled
Fund pertaining to Individual Life Insurance Business and
Group & Superannuation Business is as under:
1. In Govt. Securities … Not less than 25%
2. In Govt. Securities or other approved Securities

(Including 1 above) … Not less than 50%
3. In Infrastructure and Social Sector… Not less than 15%
4. Others as per exposure norms … Not more than
35%
Note: Unapproved Investments not to exceed 15% of the

Controlled Fund
• All unapproved Investment are to be made as per unanimous

recommendation of the Investment Committee of Life
Insurance Company.
• Any investment which does not fall in the category of

Approved Investment as defined in the Act is treated as
unapproved.
b) Investment Regulations for Unit Linked Insurance

Business
• The investment regulations mentioned in (a) above relate to

traditional life insurance business
• There are no statutory prescriptions for investment of Unit

Linked Funds the broad guidelines are as under:-
- All funds to invested as per the objectives as stated in

the Unit Linked Insurance Scheme

- Prudent man approach & All investments in marketable
securities
- Not more than 25% of the funds can be invested in

unapproved category of investment
ess: Without prejudice to Section 27 or Section 27B of the Act, -
Every insurer carrying on the business of general insurance shall
invest and at all times keep invested his total assets in the
manner set out below:
S Type of Investment Percentage
.
N
o
i) Central Government Securities being not less 20%
than
ii) State Government securities and other Guaranteed 30%
securities including (i) above being not less than
iii Housing and Loans to State Government for 5%
) Housing and Fire Fighting equipment, being not
less than
iv Investments in Approved Investments as specified in Schedule II
)
a) Infrastructure and Social Sector Not less than
Explanation: For the purpose of this requirement, 10%
Infrastructure and Social Sector shall have the
meaning as given in regulation 2(h) of Insurance
Regulatory and Development Authority
(Registration of Indian Insurance Companies)
Regulations, 2000 and as defined in the Insurance
Regulatory and Development Authority (Obligations
of Insurers to Rural and Social Sector) Regulations,
2000 respectively
b) Others to be governed by Exposure/ Prudential Not exceeding
Norms specified in Regulation 5 30%
v) Other than in Approved Investments to be governed Not exceeding
by Exposure/ Prudential Norms specified in 25%
Regulation 5
Note:
All investments shall be made in graded securities and the grading
shall not be less than of ‘very strong’ rating by a reputed and
independent rating agency (e.g. AA of Standard and Poor).
(2) Reinsurance Business: Every reinsurer carrying on

reinsurance business in India shall invest and at all times keep
invested his total assets in the same manner as set out in sub-

regulation (1), until such time separate regulations in this behalf are
made by the Authority.
• EXPOSURE/ PRUDENTIAL NORMS
Without prejudice to anything contained in Sections

27A and 27B of the Act, every insurer shall limit his
investments based Investment Regulation
on the following exposure norms:
Exposure Norms
Type of Limit for Limit for the Limit for the

Investment Investee entire industr
Compan group to y
y which the sector
investee to
company which
belongs the
investe
e
compa
ny
belong
s
(a) Equity/ (i) As on any (i) As on any Not exceeding
Preference date date 15% of
Shares/ Not exceeding Not exceeding the total
Convertible 20% of 15% of the capital
portion of the total total employe
Debentures at capital capital d* in all
face value. employed employed* such
(b) Debentures - *. of the compani
(face value) group es.
including private companies.
placed NCD and (ii) During the (ii) During the
Non convertible year year
portion of Not exceeding Not exceeding
Convertible 5% of estimated 10% of estimated
Debentures. annual accretion annual accretion
(c) Short/ Medium/ of funds. of funds.
Long Term Loans
and any other
direct financial
assistance.

* Total capital employed means total of equity shares, preference
shares, debentures, long/ medium/ short term loans
(excluding public deposits), free reserves but excluding
revaluation reserves, of the investee company as shown in
its last audited balance sheet.
B) Exposure Norms for Investment in Public Financial

Institutions
Equity Share and Preference Not exceeding 15% in general of the paid up
Shares (at their face value). equity/ preference capital of the institution or
the existing holding % level, if higher.
Investment in Equity Capital, Not exceeding 10% of the capital employed
Bonds, Debentures, Term by an institution as per the last audited
Loans. Balance Sheet.
Total Investment vis-à-vis Net Not exceeding 60% of Net Worth of the
Worth of the Company. institution.
Total Investment in a Financial 7.5% of annual accretions.
Year.
Total Investments in all the Annual aggregate financial assistance to all
Financial Institutions. Development Financial Institutions put
together in a single year shall not exceed
20% of the estimated annual accretions for
Investment
the year. Regulation
C) Prudential Norms
The prudential norms for various instruments shall be as under:

i) Debentures:
Norms for Fully Convertible Debentures and Partly
Convertible Debentures:
Investment decisions are related to attractiveness of equity
shares to be received as a result of conversion. Due consideration is
also given to the factors, viz
a) rate of interest at the time of subscription to said debentures,
b) appreciation and
c) dividend income likely to be received from the equity shares.
Similar considerations also apply for Non-Convertible (NC)
Debentures with detachable warrants attached to it.
Norms for Non-Convertible Debentures and Non-Convertible
Debentures with warrants attached:
1. Eligibility Amount
a) Working Capital 20% of the current assets, loans and
Debentures advance minus outstanding amount of
existing working capital NC Debentures.
b) Project Finance As appraised by the Investment Committee
c) Normal Capital As assessed by the Investment Committee

Expenditure
Asset Cover (as specified in Schedule III):
First pari passu charge on fixed assets of the company

offered as security with a minimum of 1.25 times including
proposed borrowings (excluding revaluation of assets).
Debt Equity Ratio (as specified in Schedule III):

Not to exceed 2:1 including the proposed NC Debenture
issue. However, in case of capital intensive project debentures,
higher ratio upto 4:1 may be considered.
Interest Cover (as specified in Schedule III):

Not less than 2 times for the latest year or on the basis of
the average of the immediately preceding three years after
including the interest on the proposed debentures at the applicable
rate.
Dividend Pay-out:
Minimum dividend of 10% in each of the two years out of
the immediately preceding three years including the latest year.
ii) Term Deposits and Loans with Non Banking
Companies:
The insurer needs to place the deposits with a view to cater to
working capital needs of the corporate sector. The placement of the
deposit are to be decided after evaluating financial and non-
financial aspects of the performance parameters of the companies.
The analysis need to include study of financial position, track
record and other features such as quality of management, future
prospects and market potential for the company's products. Credit
rating of borrower should be uniformly maintained at a position
which is indicative of a very strong financial position being not less
than AA of Standard and Poor or equivalent rating of any other
reputed and independent rating agency.
The maximum amount of Short Term Deposit that may be
placed with any company is restricted to Rs 2 crores or 10% of net
worth whichever is less.The various norms/ parameters for the
placement of term loans are as under:
Particulars Limits
Unsecured borrowing as a Not to exceed 25% of net worth including the
% of net worth. proposed loan, subject to networth of the
borrowing company being not less than Rs. 15
crores.

Interest Cover. Atleast 2.5 times including interest on proposed
loans.
Debt/ Equity Ratio. Not to exceed 2:1.
Current Ratio. Not less than 1.33:1.
Dividend Record. Atleast 10% for the last 5 years or 15% and above
for 3 out of 5 years.
Listing Equity shares of the Company shall be listed on
any recognised stock exchange and the price
should continuously been quoting above par
atleast for 12 months prior to the date of sanction
of loan.
Collateral Security Cheques shall be obtained for principal and
interest amount. Personal guarantee of promoters
and pledge of shares may be taken.
Infrastructure and Social Sector:
In the case of projects/ works in the infrastructure and social
sector undertaken by a person other than a company, the
norms indicated in the table above shall have to be met to
the extent applicable.
iii) Guidelines on subscription to Preference Shares:

a) Companies whose preference shares are selected for investment
should have sound financial position and steady income earning
capacity.
b) The dividend payable on the preference shares should be
cumulative.
c) The preference shares shall be redeemable.
d) Preference capital after proposed issue shall not exceed 100% of
equity capital.
e) Dividend should have been paid on Regulation
Investment equity shares for two years
out of immediately preceding three years.
f) Preference dividend should have been paid for 3 years or 3 out of
4 or 5 years including latest 2 years if the preference shares are
issued earlier.
g) Non-dividend paying preference shares should not be considered
for investment.
h) Dividend cover on the basis of average profit of last 3 to5 years
should be 3 times.
• Returns to be submitted by the Insurer:

Every insurer shall submit to the Authority the following
returns within such time, at such intervals and verified / certified in
such manner as indicated there against. These returns shall be in
addition to those prescribed in Insurance Rules, 1939.
The Authority may, by any general or special order, modify or
relax any requirement relating to the above.
• Power to Call for additional information

The Authority may, by general or special order, require from
the insurers such other information in such manner, intervals and
time limit as may be specified therein.
• Duty to Report extraordinary events affecting the

investment portfolio
Every insurer shall report to the Authority forthwith, the effect
or the probable effect of any event coming to his knowledge, which
could have an adverse impact on the investment portfolio held by
him.
• Constitution of Investment Committee

Every insurer shall constitute an Investment Committee which shall
consist of a minimum of two non-executive directors of the Insurer,
the Principal Officer, Chiefs of Finance and Investment divisions, and
wherever appointed actuary is present, the Appointed Actuary. The
decisions taken by the Investment Committee shall be properly
recorded and be open to inspection by the officers of the Authority

S. Form Short description Periodici Time limit for Verified/ Certified

N No as ty of submission by
o returns
1 Form 1 Statement of Yearly Within 30 days Principal Officer/
investment and from the date of Chief
income on Board approval (Investment)
investment of audited
accounts.
2 Form 2 Statement of down Quarterl Within 21 days of Principal Officer/
graded y the end of each Chief
investments. quarter. (Investment)
3 Form 3 Statement of Quarterl Within 21 days of Principal Officer/

A Investment of y the end of each Chief
Controlled Fund quarter. (Investment)
(Life) – Compliance
Report
4 Form 3 Statement of Quarterl Within 21 days of Principal Officer/
B Investment of Total y the end of each Chief
Assets (General) – quarter. (Investment)
Compliance Report
5 Form 4 Prudential Yearly Within 30 days Principal Officer/
Investment Norms from the date of Chief
– Compliance Board approval (Investment)
72 | P a g eReport of Thursday,audited
22 October 2009
accounts.
Capital Structure, Minimum Requirements & Solvency Margins
1. Interpretation.--In this Schedule, --
“valuation date”, in relation to an actuarial investigation, means the

date to which the investigation relates.
“universal life contracts” means those contracts that are presented in

an unbundled form. The contracts where policyholders have an
option to invest in units of insurer’s segregated fund(s) shall be
treated as “linked business”; and others shall be treated as “non-
linked business”.
“segregated funds” means funds earmarked in respect of linked

business.
Method of Determination of Mathematical Reserves.—(1)

Mathematical Reserves shall be determined separately for each
contract by a prospective method of valuation in accordance with
sub-paras (2) to (4)..
(2) The valuation method shall take into account all prospective
contingencies under which any premiums (by the policyholder) or
benefits (to the policyholder/beneficiary) may be payable under the
policy, as determined by the policy conditions. The level of benefits
shall take into account the reasonable expectations of policyholders
(with regard to bonuses, including terminal bonuses, if any) and any
established practices of an insurer for payment of benefits.
(3) The valuation method shall take into account the cost of any options
that may be available to the policyholder under the terms of the
contract.
(4) The determination of the amount of liability under each policy shall
be based on prudent assumptions of all relevant parameters. The
value of each such parameter shall be based on the insurer’s
expected experience and shall include an appropriate margin for
adverse deviations (hereinafter referred to as MAD) that may result
in an increase in the amount of mathematical reserves.
(5) (i) The amount of mathematical reserve in respect of a policy,
determined in accordance with sub-para (4), may be negative
(called “negative reserves”) or less than the guaranteed surrender
value available (called “guaranteed surrender value deficiency
reserves”) at the valuation date.
The appointed actuary shall, for the purpose of section 35 of the
Act, use the amount of such mathematical reserves without any
modification;
The appointed actuary shall, for the purpose of sections 13, 49, 64V
and 64VA of the Act, set the amount of such mathematical reserve
to zero, in case of such negative reserve, or to the guaranteed
surrender value, in case of such guaranteed surrender value
deficiency reserves, as the case may be.

(6) The valuation method shall be called “Gross Premium Method’.

(7) If in the opinion of the appointed actuary, a method of valuation
other than the Gross Premium Method of valuation is to be adopted,
then, other approximations (e.g. retrospective method) may be
used.
Provided that the amount of calculated reserve is expected to be
atleast equal to the amount that shall be produced by the
application of Gross Premium Method.
(8) The method of calculation of the amount of liabilities and the
assumptions for the valuation parameters shall not be subject to
arbitrary discontinuities from one year to the next.
(9) The determination of the amount of mathematical reserves shall
take into account the nature and term of the assets representing
those liabilities and the value placed upon them and shall include
prudent provision against the effects of possible future changes in
the value of assets on the ability of the insurer to meet its
obligations arising under policies as they arise.
3. Policy Cash Flows.--- The gross premium method of valuation shall

discount the following future policy cash flows at an appropriate
rate of interest,---
(a) premiums payable, if any, benefits payable, if any, on death;
benefits payable, if any, on survival; benefits payable, if any, on
voluntary termination of contract, and the following, if any, :-
(ii) basic benefits,
(iii) rider benefits,
(iv) bonuses that have already been vested as at the valuation
date,
(v) bonuses as a result of the valuation at the valuation date, and
(vi) future bonuses (one year after valuation date) including
terminal bonuses (consistent with the valuation rate of
interest);
(b) commission and remuneration payable, if any, in respect of a policy
(This shall be based on the current practice of the insurer). No
allowance shall be made for non-payment of commissions in respect
of the orphaned policies;
(c) policy maintenance expenses, if any, in respect
of a policy, as provided under sub-para (4) of
para 5;
(d) allocation of profit to shareholders, if any, where there is a specified
relationship between profits attributable to shareholders and the
bonus rates declared for policyholders.
Provided that allowance must be made for tax, if any.
4. Policy Options. –Where a policy provides built-in options, that
may be exercised by the policyholder, such as conversion or
addition of coverage at future date(s) without any evidence of good
health, annuity rate guarantees at maturity of contract, etc., the
costs of such options shall be estimated and treated as special cash
flows in calculating the mathematical reserves.
5. Valuation Parameters.—(1) The valuation parameters shall

constitute the bases on which the future policy cash flows shall be
computed and discounted. Each parameter shall have to be
appropriate to the block of business to be valued. An appointed
actuary shall take into consideration the following,--
(a) The value(s) of the parameter shall be based on the

insurer’s experience study, where available. If reliable
experience study is not available, the value(s) can be based
on the industry study, if available and appropriate. If neither is
available, the values may be based on the bases used for
pricing the product. In establishing the expected level of any
parameter, any likely deterioration in the experience shall be
taken into account;
(b) The expected level, as determined in clause (a) of this sub-

para, shall be adjusted by an appropriate Margin for Adverse
Deviations (MAD), the level of MAD being dependent on the
degree of confidence in the expected level, and such MAD in
each parameter shall be based on the Guidance Notes issued
by the Actuarial Society of India, with the concurrence of the
Authority
(c) The values used for the various valuation parameters

should be consistent among themselves.
(2) Mortality rates to be used shall be by reference to a

published table, unless the insurer has constructed a separate
table based on his own experience:
Provided that such published table shall be made available to

the insurance industry by the Actuarial Society of India, with the
concurrence of the Authority.
Provided further that such rates determined by reference to a

published table shall not be less than hundred per cent. of that
published table.

published table may be less than hundred per cent. of that
published table if the appointed actuary can justify a lower per
cent.
(3) Morbidity rates to be used shall be by reference to a

published table, unless the insurer has constructed a separate
table based on his own experience:
Provided that such published table shall be made available to
the insurance industry by the Actuarial Society of India, with the
concurrence of the Authority:

published table shall not be less than hundred per cent. of that
published table.

published table may be less than hundred per cent. of that
published table if the appointed actuary can justify a lower per
cent. Structure, Minimum Requirements & Solvency Margins
Capital
(4) Policy maintenance expenses shall depend on the
manner, in which they are analysed by the insurer, viz., fixed
expenses and variable expenses. The variable expenses shall be
related to sum assured or premiums or benefits. The fixed
expenses may be related to sum assured or premiums or
benefits or per policy expenses. All expenses shall be increased
in future years for inflation, the rate of inflation assumed should
be consistent with the valuation rate of interest.
(5) Valuation rates of interest, to be used by appointed

actuary -
(a) shall be not higher than the rates of interest, for
the calculation of the present value of policy cash flows
referred to in para 4, determined from prudent assessment of
the yields from existing assets attributable to blocks of life
insurance business, and the yields which the insurer is
expected to obtain from the sums invested in the future, and
such assessment shall take into account ---
(i) the composition of assets supporting the

liabilities, expected cash flows from the investments
on hand, the cash flows from the block of policies to
be valued, the likely future investment conditions and
the reinvestment and disinvestment strategy to be
employed in dealing with the future net cash flows;
(ii) the risks associated with investment in

regard to receipt of income on such investment or
repayment of principal;
(iii) the expenses associated with the

investment functions of the insurer;
1. shall not be higher than, for the calculation of present
value of policy cash flows in respect of a particular category
of contracts, the yields on assets maintained for the
purpose of such category of contacts;

ii. in respect of non-participating business, shall
recognise the risk of decline in the future
interest rates;
1. in respect of participating business , shall be based on
the assumption (with regard to future investment
conditions), that the scale of future bonuses used in the
valuation is consistent with the valuation rate of interest,
and
2. in respect of single premium business, shall take into
account the effect of changes in the risk-free interest rates.
(6) Other parameters may be taken into account, depending

on the type of policy. In establishing the values of such
parameters, the considerations set out in this Schedule shall be
taken into account.
6. Applicability to Reinsurance.—(1) This Schedule shall also
apply to the valuation of business in the books of reinsurers.
(2) As regards the business ceded by insurers, this Schedule shall be
applicable to the net sums at risk retained by the insurer.
(3) Reinsurance arrangement with an element of borrowing in the form
of deposit or credit of any kind from insurer’s reinsurers without the
prior approval of the Authority shall not be treated as credit for
reinsurance for the purpose of determination of required solvency
margin.
7. Additional Requirements for Linked Business.—(1) Reserves

in respect of linked business shall consist of two components,
namely, unit reserves and general fund reserves.
(2) Unit reserves shall be calculated in respect of the units allocated
to the policies in force at the valuation date using unit values at the
valuation date.
(3) General fund reserves (non-unit reserves) shall be determined
using a prospective valuation method set out in this Schedule,
which shall take into account of the following, namely:-
premiums, if any, payable in future;
death benefits, if any, provided by the general fund (over and above
the value of units);
management charges paid to the general fund;
guarantees, if any, relating to surrender values or minimum death and
maturity benefits;
fund growth rates and management charges. (The values of these
parameters, along with others, shall be determined in accordance with
para 5);
negative reserves, if any, shall be dealt with in accordance with sub-
para (5) of para 2
8. Additional Requirements for Provisions.--- The appointed

actuary shall make aggregate provisions in respect of the following,
where it is not possible to calculate mathematical reserves for each
policy, in the determination of mathematical reserves:-
(a) Policies in respect of which extra premiums have been charged
on account of underwriting of under-average lives that are
subject to extra risks such as occupation hazard, over-weight,
under-weight, smoking history, health, climatic or geographical
conditions;
Lapses policies not included in the valuation but under which a
liability exists or may arise; Options available under individual and
group insurance policies;
Guarantees available to individual and group insurance policies;
The rates of exchange at which benefits in respect of policies issued
in foreign currencies have been converted into Indian Rupees
and what provision has been made for possible increase of
mathematical reserves arising from future variations in rates of
exchange;
9. Statement of Liabilities-- An insurer shall furnish a statement

of liabilities in accordance with the Insurance Regulatory and
Development Authority (Actuarial Report and Abstract)
Regulations, 2000.
Role and Responsibilities of an Appointed Actuary
Powers of Appointed Actuary.--(1) An appointed actuary shall have

access to all information or documents in possession, or under control,
of the insurer if such access is necessary for the proper and effective
performance of the functions and duties of the appointed actuary.
(2) The appointed actuary may seek any information for the purpose of
sub-regulation (1) of this regulation from any officer or employee of the
insurer.
(3) The appointed actuary shall be entitled, --
(a) to attend all meetings of the management including the directors of

the insurer;
(b) to speak and discuss on any matter, at such meeting,--

(i) that relates to the actuarial advice given to the directors;
(ii) that may affect the solvency of the insurer;
(iii) that may affect the ability of the insurer to meet the
reasonable expectations of policyholders; or
(iv) on which actuarial advice is necessary;
(c) to attend,--
(i) any meeting of the shareholders or the policyholders of the
insurer; or

(ii) any other meeting of members of the insurer at which the
insurer's annual accounts or financial statements are to be
considered or at which any matter in connection with the
appointed actuary's duties is discussed.
8. Duties and obligations.-- In particular and without prejudice to

the generality of the foregoing matters, and in the interests of the
insurance industry and the policyholders, the duties and obligations of
an appointed actuary of an insurer shall include:--
(a) rendering actuarial advice to the management of the insurer, in
particular in the areas of product design and pricing, insurance
contract wording, investments and reinsurance;
(b) ensuring the solvency of the insurer at all times;
(c) complying with the provisions of the section 64V of the Act in regard
to certification of the assets and liabilities that have been valued in
the manner required under the said section;
(d) complying with the provisions of the section 64 VA of the Act in
regard to maintenance of required solvency margin in the manner
required under the said section;
(e) drawing the attention of management of the insurer, to any matter
on which he or she thinks that action is required to be taken by the
insurer to avoid--
(i) any contravention of the Act; or
(ii) prejudice to the interests of policyholders;
(f) complying with
Role theResponsibilities
and Authority's directions
of an from time toActuary
Appointed time;
(g) in the case of the insurer carrying on life insurance business,--

(i) to certify the actuarial report and abstract and other returns
as required under section 13 of the Act;
(ii) to comply with the provisions of section 21 of the Act in
regard to further information required by the Authority;
(iii) to comply with the provisions of section 40-B of the Act in
regard to the bases of premium;
(iv) to comply with the provisions of the section 112 of the Act in
regard to recommendation of interim bonus or bonuses payable
by life insurer to policyholders whose policies mature for
payment by reason of death or otherwise during the inter-
valuation period;
(v) to ensure that all the requisite records have been made
available to him or her for the purpose of conducting actuarial
valuation of liabilities and assets of the insurer;
(vi) to ensure that the premium rates of the insurance products
are fair;
(vii) to certify that the mathematical reserves have been
determined taking into account the guidance notes issued by the
Actuarial Society of India and any directions given by the
Authority;
(viii) to ensure that the policyholders' reasonable expectations
have been considered in the matter of valuation of liabilities and
distribution of surplus to the participating policyholders who are
entitled for a share of surplus;
(ix) to submit the actuarial advice in the interests of the
insurance industry and the policyholders;
(h) informing the Authority in writing of his or her opinion, within a

reasonable time, whether,--
(i) the insurer has contravened the Act or any other Acts;
(ii) the contravention is of such a nature that it may affect
significantly the interests of the owners or beneficiaries of
policies issued by the insurer;
(iii) the directors of the insurer have failed to take such action as
is reasonably necessary to enable him to exercise his or her
duties and obligations under this regulation; or
(iv) an officer or employee of the insurer has engaged in
conduct calculated to prevent him or her exercising his or her
duties and obligations under this regulation.
9. Absolute Privilege of Appointed Actuary.--(1) An appointed

actuary shall enjoy absolute privilege to make any statement, oral or
written, for the purpose of the performance of his functions as
appointed actuary. This is in addition to any other privilege conferred
upon an appointed actuary under any other Regulations.
(2) Any provision of the letter of appointment of the appointed actuary,

which restricts or prevents his duties, obligations and privileges under
these regulations, shall be of no effect.

Life Insurance Basics - Deepak Chaturvedi

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Life Insurance Basics - Deepak Chaturvedi

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Life Insurance

1|Page Thursday, 22 October 2009

Speculative • Uncertainty is probability of happening / not happening of an

2|Page Thursday, 22 October 2009

 Control means reducing/minimizing the chances of loss

“Life insurance business” means the business of effecting contracts

a) The granting of disability and double or triple indemnity

The above definition contains certain special features, such as the

In 2006, IRDA has expanded the scope of life insurance business to

PROBABILITY THEORY &

 Insurance business is conducted by following the theory of

 In reality events assigned 0 probability may in rare

 The commonsense notion that the probability is meaningful

5|Page Thursday, 22 October 2009

Dual application of the Law of large numbers

The requirement of a large number has dual application:

a) To estimate the underlying probability accurately, the

b) Once the estimate of the probability has been worked out

PROBABILITY THEORY &

In insurance many persons exposed to same risk share the loss

Once the probability of an insured event happening is reasonably

6|Page Thursday, 22 October 2009

What is a Material Fact?

Facts which need not be disclosed: -

− Facts of common knowledge which everyone is supposed to

Duty to disclose continues:-

 In life insurance contract ‘Duty to disclose’ facts continues till

8|Page Thursday, 22 October 2009

Conditions for Breach are that misrepresentation or non-

In life insurance the proposer makes a declaration as under:-

The above ‘declaration’ turns ‘representations’ made in the

PRINCIPLE OF UTMOST GOOD FAITH

 While an insurer can cancel contract based upon above

 Section 45 states that a policy cannot be called in question

9|Page Thursday, 22 October 2009

Utmost good faith principle applies to both the parties to the

Duty of full disclosure applies to the ‘Proposer’ & the ‘Insurer’

Examples of untrue statement by the insurer or his agent could

i) Making untraced statement about features & benefits of

PRINCIPLE OF INSURABLE INTEREST

Definition of Insurable interest: -

10 | P a g e Thursday, 22 October 2009

The question of insurable interest will arise when a Life

Who all have insurable interest?

PRINCIPLE OF INSURABLE INTEREST

11 | P a g e Thursday, 22 October 2009

When should insurable interest exist?

 In a Life insurance contract, insurable interest must exist at

Proof of Insurable Interest

 Not required if insurance is on

 Required in all other cases (When the proposal is on the life

12 | P a g e Thursday, 22 October 2009

Linkage between ‘Indemnity’ & ‘Insurable interest’: -

 Insurer insures the interest of the insured in the subject

Problems & Methods of settling claims:-

 General insurance claims involve ‘assessment of loss’

 General insurance claims may be paid in the four ways:-

 In life insurance as ‘definite amount’ is paid as

 Life Insurance is not a contract of Indemnity

13 | P a g e Thursday, 22 October 2009

 Just as physical assets are financial value, human life also

 Financial value of a physical asset is determined based