CU-MCOM-SEM-III-Banking and Insurance

have the minimum prescribed rating by an independent credit rating agency as specified in the regulations. Legislation has specified the minimum capital requirements for an Insurance company. It further, prescribes that Insurance companies can capitalize their operations only through ordinary shares which have a single face value. Reinsurer General Insurance Corporation of India (GIC of India) is the sole National Reinsurer, providing Reinsurance to the Insurance companies in India. The Corporation’s Reinsurance programme has been designed to meet the objectives of optimising the retention within the country, ensuring adequate coverage for exposure and developing adequate capacities within the domestic market. It is also administering the Indian Motor Third Party Declined Risk Insurance Pool – a multilateral Reinsurance arrangement in respect of specified commercial vehicles where the policy issuing member insurers cede Insurance premium to the Declined Risk pool based on the underwriting policy approved by IRDAI. 5. Corporate Governance: In order to protect long- terms interests of policyholders, the IRDAI has outlined appropriate governance practices applicable to Insurance companies for maintenance of solvency, sound long-term investment policy and assumption of underwriting risks on a prudential basis from time to time. The IRDAI has issued comprehensive guidelines for adoption by Insurance companies on the governance responsibilities of the Board in the management of the Insurance functions. These guidelines are in addition to provisions of the Companies Act, 1956, Insurance Act, 1938 and other applicable laws. Corporate Governance Guidelines issued by IRDAI, requires insurers to have in place requisite control functions. The oversight of the control functions is vested with the Boards of the respective insurer. It lays down the structure, responsibilities and functions of Board of Directors and the senior management of the companies. Insurers are required to adopt sound prudent principles and practices for the governance of the company and should have the ability to quickly address issues of non-compliance or weak oversight and controls. The Guidelines mandated the insurers to constitute various committees viz., Audit Committee, Investment Committee, Risk Management Committee, Policyholder Protection Committee and Asset-Liability Management Committee. These committees play a critical role in strengthening the control environment in the company. 6. On and off-site Supervision: Onsite Inspections: 101 CU IDOL SELF LEARNING MATERIAL (SLM)

The Authority has the power to call for any information from entities related to insurance business – Insurance companies and the intermediaries, as may be required from time to time. Onsite inspection is normally carried out on an annual basis which includes inspection of corporate offices and branch offices of the companies. These inspections are conducted with view to check compliance with the provisions of Insurance Act, Rules and regulations framed thereunder. The inspection may be comprehensive to cover all areas, or may be targeted on one, or a combination of, key areas. When a market-wide event having an impact on the insurers occurs, the Supervisor obtains relevant information from the insurers, monitors developments and issues directions as it may consider necessary. Though there is no specific requirement, events of importance trigger such action. The supervisor reviews the “internal controls and checks” at the offices of Insurance companies, as part of on-site inspection. Off-site Inspection: The primary objective of off-site surveillance is to monitor the financial health of Insurance companies, identifying companies which show financial deterioration and would be a source for supervisory concerns. This acts as a trigger for timely remedial action. The off-site inspection conducted by analyzing periodic statements, returns, reports, policies and compliance certificates mandated under the directions issued by the Authority from time to time. The periodicity of these filings is generally annual, half-yearly, quarterly and monthly and are related to business performance, investment of funds, remuneration details, expenses of management, business statistics, auditor certificates related to various compliance requirements. The statutory and the internal auditors are required to audit all the areas of functioning of the Insurance companies. The particular area of focus is the preparation of accounts of the company to reflect the true and fair position of the company as at the Balance Sheet date. The auditors also examine compliance or otherwise with all statutory and regulatory requirements, and in particular whether the Insurance company has been compliant with the various directions issued by the supervisor. In addition, the Authority relies upon the certifications which form part of the Management Report. The Board is required to certify that the management has put in place an internal audit system commensurate with the size and nature of its business and that it is operating effectively. All Insurance companies are required to publish financial results and other information in the prescribed formats in newspapers and on their websites at periodic intervals. 102 CU IDOL SELF LEARNING MATERIAL (SLM)

7. Micro Insurance and Rural & Social Sector Obligations The IRDAI had issued micro Insurance regulations for the protection of low income people with affordable Insurance products to help cope with and recover from common risks with standardised popular Insurance products adhering to certain levels of cover, premium and benefit standards. These regulations have allowed Non-Governmental Organisations (NGOs), Self Help Groups (SHGs) and other permitted entities to act as agents to Insurance companies in marketing the micro-Insurance products and have also allowed both life and non-life insurers to promote combi-micro-Insurance products. The Regulations framed by the Authority on the obligations of the insurers towards rural and social sector stipulate targets to be fulfilled by insurers on an annual basis. In terms of these regulations, insurers are required to cover year wise prescribed targets (i) in terms of number of lives under social obligations; and (ii) in terms of percentage of policies to be underwritten and percentage of total gross premium income written direct by the life and non-life insurers respectively under rural obligations. 7.6 SUMMARY  Insurance is a form of risk management, primarily used to hedge against the risk of a contingent or an uncertain loss.  Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment.  An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance policy.  At some point, you will probably consider the purchase of life insurance to provide your family with additional economic security should you die unexpectedly.  Generally, life insurance provides for a fixed benefit at death.  The insurer considers the losses expected for the insurance pool and the potential for variation in order to charge premiums that, in total, will be sufficient to cover all of the projected claim payments for the insurance pool.  The risk of any unanticipated losses is transferred from the policyholder to the insurer who has the right to specify the rules and conditions for participating in the insurance pool.  Indian insurance companies offer a comprehensive range of insurance plans, a range that is growing as the economy matures and the wealth of the middle classes increases.  The Insurance Regulatory and Development Authority Act of 1999 brought about several crucial policy changes in the insurance sector of India. It led to the formation of the Insurance Regulatory and Development Authority (IRDA) in 2000. 103 CU IDOL SELF LEARNING MATERIAL (SLM)

 IRDA has the responsibility of protecting the interest of insurance policyholders.  The Authority takes up with the insurers any complaint received from the policyholders in connection with services provided by them under the insurance contract.  Economic activity and growth are greatly facilitated by the existence of the market in mobilizing the saving and allocating them among competing users.  Insurance as a part of the financial system provides valuable services to those affected by various risks or contingencies 7.7 KEYWORDS  Insurance Company: Any corporation is said to be an insurance company which is primarily Notes engaged in the business of furnishing insurance protection to the public.  Insurance Policy: The printed form, which serves as the contract between an insurer and an insured.  Insurance: It is contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company.  Insured: Insured is a person or organization covered by an insurance policy.  Insurer: Insurer is the party who promises to pay losses or benefits to the insured under the insurance contract 7.8 LEARNING ACTIVITIES 1. Case Study: Insurance Companies introduce Premium Payment Plans Limited premium payment policies seem to be the rage currently. Many insurance companies have already introduced limited premium payment products, while many more are on the anvil, according to industry sources. Conventional life insurance policies require investors to pay their premiums till the year of maturity, whereas in limited premium payment products, the premium is paid for a far shorter period of time. Of course, the amount paid would be far higher in the latter case than in the former. For investors, there is also the matter of falling value of the currency in the future years that needs to be kept in mind while shelving out such huge amounts. SBI Life Insurance announced a new limited premium payment product last week, named Sanjeevan Supreme. This product comes with the twin aspects of limited premium payment and money back. Investors pay a premium for a period of 6 to 10 years. In return, they get guaranteed money back in equal instalments at regular intervals and accumulated bonuses while remaining fully covered for life insurance during the policy term. The policy is open to persons from the age of 18 to 75. The sum assured (SA) begins from a minimum of ` 50,000 to a maximum of ` 5 crore. There are four options to the plan. Under Plan A, the term of the policy is 15 years. For the first 6 years of the policy, investors pay the premium. Then there is a 4-year period when 104 CU IDOL SELF LEARNING MATERIAL (SLM)

investors do not pay any premium (technically known as growth/deferment period). At the end of this period (6 years + 4 years = 10 years), investors will get 20% of the SA every year for 5 years. ________________________________________________________________________ _______________________________________________________________________ 2. Case Study: Inder Singh Chauhan had purchased a bus by taking a loan from Swami Financiers. The bus was being used as a private service vehicle, and not as a public transport one. It was insured under a comprehensive insurance policy issued by United India Insurance. The bus met with an accident, for which insurance was claimed. The insurance company appointed its surveyor, who assessed the loss at ` 1,26,500. However, the company deducted ` 33,125 from the assessed amount, on the ground that the driver did not have an endorsement on his licence to drive a transport vehicle. Even this amount was not paid to Chauhan, but was directly paid to the financier. Aggrieved, Chauhan filed a consumer complaint that ultimately reached the National Commission. It was held that once a person had a licence to drive a heavy goods carriage vehicle, it would mean that he/she was entitled to drive a transport vehicle, including a public service vehicle. Accordingly, the insurance company was directed to pay the balance amount, along with 12 per cent interest and costs of ` 5,000. The commission also ruled that the practice adopted by insurance companies of directly paying to the financier, without informing the insured or without his consent, cannot be justified. If the insurance policy is taken in the name of the vehicle purchaser, there is no question of paying the amount straightaway to the financier. Question: Discuss the decisions taken by the National Commission in a group of three members. ________________________________________________________________________ _______________________________________________________________________ 7.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. List down entities regulated by IRDAI: 2. Write a short note on Mutual Structure. 3. What are the primary functions of Insurance? 4. What is Asset-Liability Management? 5. What is Reinsurance? 105 CU IDOL SELF LEARNING MATERIAL (SLM)

Long Questions 1. Explain the concept of Insurance. 2. Write in detail about the Organisational Structure of Insurance companies. 3. Write a note on Primary & Secondary Functions of Insurance. 4. Explain in detail about the Regulations in Insurance. 5. Describe in detail about the role of Insurance in Financial Systems B. Multi-Choice Questions 1. Insurance is simply the equitable transfer of a risk of a loss, from one entity to another, in exchange for a …………………………… a. Discount b. Premium c. Cash d. Asset 2. These new insurance contracts allowed insurance to be separated from ……………………… a. Investment b. Returns c. Premium d. Tax 3. The first kind of formal insurance business was ………………………… insurance. a. Life b. Health c. Marine d. None of these 4. The insurance policy is the ……………………………. of the insurance company. a. Trend line b. Lifeline c. Guideline d. All of these 5. Life insurance provides for a fixed benefit at ………………………. 106 a. Age 60 b. Death c. Maturity CU IDOL SELF LEARNING MATERIAL (SLM)

d. None of these Answer 1 - b, 2 – a, 3 - c, 4 – c, 5 - b 7.10 REFERENCES  Risk Management and Insurance: Perspectives in A Global Economy by Harold D. Skipper, w. Jean Kwon, Blackwell Publishing & Wiley India  Risk Management & Insurance, James S. Trieschmann, Sandra G. Gustavson, South western, 1998 107 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 8. INSURANCE PRODUCTS Structure 8.0 Learning Objective 8.1 Introduction 8.2 Group Life Products 8.3 Rural Social Insurance 8.4 Liability Insurance 8.5 Motor Insurance 8.6 Fire Insurance 8.7 Marine Insurance 8.8 Summary 8.9 Keywords 8.10 Learning Activities 8.11 Unit End Questions 8.12 References 8.0 LEARNING OBJECTIVE After studying this unit, you will be able to:  Explain Group Life Products  Describe Rural Social Insurance  Describe Liability Insurance  Explain Motor & Fire Insurance 8.1 INTRODUCTION In previous unit you have studied about the concept of insurance, organisation structure, functions of Insurance companies. It also explained about the Regulations & Legislation of Insurance in depth and summarized the concept of insurance in an easier way. This unit will provide you the complete understanding of various products of insurance 108 CU IDOL SELF LEARNING MATERIAL (SLM)

products and how these products are used by people to avoid financial stress during uncertainty. 8.2 GROUP LIFE PRODUCTS Group life insurance is a type of life insurance in which a single contract covers an entire group of people. Typically, the policy owner is an employer or an entity such as a labour organization, and the policy covers the employees or members of the group. Group life insurance is often provided as part of a complete employee benefit package. In most cases, the cost of group coverage is far less than what the employees or members would pay for a similar amount of individual protection. So if you are offered group life insurance through your employer or another group, you should usually take it, especially if you have no other life insurance or if your personal coverage is inadequate. As the policy owner, the employer or other entity keeps the actual insurance policy, known as the master contract. All of those who are covered typically receive a certificate of insurance that serves as proof of insurance but is not actually the insurance policy. As with other types of life insurance, group life insurance allows you to choose your beneficiary. Term insurance is the most common form of group life insurance. Group term life is typically provided in the form of yearly renewable term insurance. When group term insurance is provided through your employer, the employer usually pays for most (and in some cases all) of the premiums. The amount of your coverage is typically equal to one or two times your annual salary. Group term coverage remains in force until your employment is terminated or until the specific term of coverage ends. You may have the option of converting your group coverage to an individual policy if you leave your employer. However, most people choose not to do this because these conversion premiums tend to be much higher than premiums for comparable policies available to individuals. Typically, only those who are otherwise uninsurable take advantage of this conversion option. Types of Group Insurance Schemes One-year renewable term assurance: Here the contract is for one-year renewable every year. In the event of death of any member of the group during the year, the agreed sum assured is paid. Group Gratuity Scheme: As per Gratuity Act 1972, an employer is legally bound to pay Gratuity for all employees who put in a minimum service of 5 years. Wherever the employer appoints not less than 10 people, the scale is at the rate of 15 days’ wages for every year service completed, 109 CU IDOL SELF LEARNING MATERIAL (SLM)

subject to a maximum of ` 3,50,000. The employer has to therefore make provision in advance. The methods may be:  Make payments as when it arises called as pay as you go method.  Can create an internal reserve equal to the actuarial valuation of the liability.  Set up a gratuity fund with trustees to manage.  Set up a fund and transfer the same to Insurance Company under a Group Gratuity scheme. Of the above methods, the first two methods are quite risky in the sense that the fund may be misused in terms of financial difficulties. The fourth method would be very prudent, since an Insurer has a huge portfolio and can diversify his investments and assure a guaranteed return. The Insurer has also qualified people to calculate the liability accurately. Group Gratuity linked with One Year Group Term Assurance (OYRTA) Under this provision, risk on the life of the members of the group is covered and in case of premature death, the gratuity paid will be notionally calculated and we would receive higher gratuity. The balance service of the deceased member is considered and gratuity calculated. Group Pension Scheme: The benefit of pension has the advantages of retaining the talented people with the organization; the employer is treated as a progressive and the tax advantages enjoyed by both the employer and the employee. The employer can find the same ways to provide for pension as discussed in the provision for Gratuity. But the Insurance Company can provide actuarial, legal and taxation help to the employer. Again by conjunction with OYRTA, the employee can be helped to get a higher pension in case of premature death. Group Savings Linked Insurance Scheme: Under this scheme, the benefits offered include both death cover as well as savings. A part of the contribution goes towards the cost of risk cover and in case of death of the employee; a certain fixed amount is paid. On surviving to superannuating age, savings portion with interest is paid. Employees Deposit Linked Insurance: All the employers have to provide for risk cover to those who come under PF Act. This provision can be arranged with an Insurance Company, whereby the Insurer will cover risk on the life of the employee to the extent of balance of PF account on the date of death or up to 62,500 whichever is lower. Social Security Scheme: As per Article 41 of Indian Constitution, the Central Government has to provide Social Security to vulnerable sections of the Society. Life Insurance is one of the ways by which such security can be provided. Now IRDA has also prescribed that 110 CU IDOL SELF LEARNING MATERIAL (SLM)

each Insurer has to compulsorily cover certain number of lives under such schemes. The scheme has to be financed either wholly by the Insurer or with nodal agencies. 8.3 RURAL SOCIAL INSURANCE Rural insurance is basically insurance that has been created for the rural public to insure their businesses such as poultry, cattle, farming, etc. Individuals can claim benefits in case of death of animals or loss of crop. An area with a low population density and in which at least 75% of the male population is involved in agriculture comes under the rural sector. Owing to the financial instability of people residing in rural areas and the possibility of failure of crops, death of cattle, etc. the government launched many schemes for the benefit of the rural sector. Such schemes are integrated with the Rural Development Programme and are funded by the State and Central governments. According to section 32B and section 32C of the Insurance Act, 1938, insurance companies are expected to provide certain percentages of businesses to people of the rural sector, social sector, unorganised sector, informal sector, economically vulnerable class, backward class, etc. as mentioned by the IRDAI (Insurance Regulatory and Development Authority of India). In order to further implement sections 32B and 32C, a regulation was issued that made it mandatory for insurance companies to underwrite business equal to at least 2% of the total gross premium for the first fiscal year, at least 3% of the total gross premium for the second fiscal year, and at least 5% of the total gross premium from the third fiscal year onwards in the rural sector. Plans Offered in the Current Market in India You must remember that the current plans offered in the market by various players are:  Term assurance  Endowment assurance  Whole Life Assurance Cash Flow or Money Back assurance  Health insurance plan, etc. Even the pension plans can also be opted. The premiums can be paid as (1) Single premium or (2) Regular premium (yearly etc.). The tax benefits are available under Section 80C, 80D and 10 (10D) of the Income Tax Act, 1961.The above mentioned plans are offered along with additional benefits offered known as Riders. The meaning of the term Riders and its details is further explained. Riders Rider is an extra benefit under the policy. Extra premium has to be paid to secure the extra 111 CU IDOL SELF LEARNING MATERIAL (SLM)

benefit. The rider benefit is available only on certain conditions to be decided by the insurer. Riders also enhance the value of the policy. Riders can be availed only if the premium for the basic benefit (sum assured) is being paid. Once the basic premium for the sum assured stops the rider benefit also stops. In some cases, the rider benefit ceases earlier to Date of Maturity (DOM) though the basic premium for the sum assured is continuing. The rider benefit shall not exceed the basic sum assured in case of critical illness or accident benefit. The common riders granted by the insurers are: 1. Term rider 2. (Double) Accident (death) Benefit 3. Accident disability benefit 4. Critical illness benefit 5. Major surgeries benefit 6. Premium waiver benefit 7. Dreaded diseases cover benefit 8. Guaranteed insurability benefit 9. Extended insurance benefit. Insurance for Women Prior to nationalization (1956), many private insurance companies would offer insurance to female lives with some extra premium or on restrictive conditions. However, after nationalization of life insurance, the terms under which life insurance is granted to female lives have been reviewed from time-to-time. At present, women who work and earn an income are treated at par with men. In other cases, a restrictive clause is imposed, only if the age of the female is up to 30 years and if she does not have an income attracting Income Tax. 8.4 LIABILITY INSURANCE Insurance is primarily concerned with risks that have a financially measurable outcome and impact. But no tall risks are capable of measurement in financial terms. However, this is a good point to stress how innovative some insurers are in that they are always looking for ways to provide new covers, which the customers want. The difficult part is to be 112 CU IDOL SELF LEARNING MATERIAL (SLM)

innovative and still make a profit. Insurance is a valuable risk-financing tool. Few organizations have the reserves or funds necessary to take on the risk themselves and pay the total costs following a loss. Purchasing insurance, however, is not risk management. A thorough and thoughtful risk management plan is the commitment to prevent harm. Risk management also addresses many risks that are not insurable, including brand integrity, potential loss of tax- exempt status for volunteer groups, public goodwill and continuing donor support. It is important to distinguish between pure and speculative risks; as through the use of commercial, personal, and liability insurance policies, insurance companies in the private sector generally insure only pure risks the outcome of which is either a loss or no loss situation. Speculative risks are not considered insurable, with some exceptions. Risk transfer is another technique for handling risk. Risks can be transferred by several methods, among which are the following: (a) Transfer of risk by contracts; (b) Hedging price risks; and (c) Conversion to Public Limited Company. Liability insurance covers such as Motor Third Party Liability Insurance, Workmen’s Compensation Policy, etc., offer cover against legal liabilities that may arise under the respective statutes — Motor Vehicles Act, The Workmen’s Compensation Act, etc. Some of the covers such as the foregoing (Motor Third Party and Workmen’s Compensation Policy) are compulsory by statute. Liability Insurance not compulsory by statute is also gaining popularity these days. Many industries insure against Public liability, which means the liability of the industry for any loss caused to the general public due to the operations of the industry. There are liability covers available for Products as well. General insurance contracts are based on indemnity of the loss incurred by the insured. Therefore, the losses will have to be measured accurately. The Surveyor and Loss Assessor, as we saw in one of the earlier Chapters, play a crucial role in assessing the extent of damages to arrive at the compensation. While assessing the loss on account of fire accident to a Car could be relative simple, it becomes complex in certain cases for example, Public Liability insurance. Therefore, it is important for the reader to appreciate how the framework around determination of liability in General insurance operates in India. 8.5 MOTOR INSURANCE In property insurance First party is the owner of property (Motor Vehicle), Second party is the Insurer and the Third party is say person on street. Normally in insurance loss or damage to the property of insured is covered. If your car gets damaged, its repair and replacement is covered. This is commonly called First party insurance. Third-party insurance is compulsory for all vehicle-owners as per the Motor Vehicles Act. It covers only your legal liability for the damage you may cause to a third party - bodily injury, death and damage to third party property - while using your vehicle. Recently, pursuant to 113 CU IDOL SELF LEARNING MATERIAL (SLM)

the Supreme Court decision, IRDAI has mandated all General Insurance Companies, to make it compulsory to provide long term third-party motor covers to curb the number of uninsured vehicles plying on the road. The top court, in a July 20, 2018 order, said that in the case of new vehicles third party insurance i.e., cars should at least be covered for three years and two-wheelers for five years, either as a separate insurance policy or as part of the comprehensive cover. The order will be effective from September 1. The court also asked the regulator to work with the police and online channels to push sale and renewal of the accident cover. The decision came after a Supreme Court-appointed committee on road safety found that only one in every three vehicles—among 18 crore plying on Indian roads—is insured. This leads to accident victims or their kin not getting any compensation. On the same lines, IRDAI has now recently mandated Insurance Companies to enhance the Compulsory Accident Cover from the existing `1,00,000 to at least not less than `15,00,000/- with the purpose of adding solace to the victims of road accidents, who are the owners of the vehicles. Certificate of Insurance The Motor Vehicles Act provides that the policy of insurance shall be of no effect unless and until a certificate of insurance in the form prescribed under the Rules of the Act is issued. The only evidence of the existence of a valid insurance as required by the Motor Vehicles Act acceptable to the police authorities and R.T.O. is a certificate of insurance issued by the insurers. The points covered under a certificate of insurance differ according to the type of vehicle insured. 8.6 LIFE INSURANCE The term fire in a fire insurance is interpreted in the literal and popular sense. There is fire when something burns. In other words, fire means visible flames or actual ignition. Simmering/ smouldering is not considered fire in Fire Insurance. Fire produces heat and light but either of them alone is not fire. Lightening is not a fire but if it ignites something, the damage may be due to fire. Under section 2(6A) Insurance Act 1938, the fire insurance business is defined as follows: “Fire insurance business means the business of effecting, otherwise than independently to some other class of business, contracts of insurance against loss by or incidental to fire or other occurrence customarily included among the risks insured against in fire insurance policies”. Example The following are the items which can be burnt/ damaged through fire:  Buildings  Electrical installation in buildings  Contents of buildings such as machinery, plant and equipment, accessories, etc. 114 CU IDOL SELF LEARNING MATERIAL (SLM)

 Goods (raw materials, in–process, semi–finished, finished, packing materials, etc.) in  factories, godowns etc.  Goods in the open  Furniture, fixture and fittings  Pipelines (including contents) located inside or outside the compound, etc. The owner of abovementioned properties can insure against fire damage through fire insurance policy which provides financial protection for property against loss or damage by fire. Insurance of property means insurance of buildings, machinery, stocks etc. against Fire and Allied Perils, Burglary Risks and so on. Goods in transit via Sea, Air, Railways, Roads and Courier can be insured under Marine Cargo Insurance. Hulls of ship and boats can be insured under Marine Hull Insurance. Further, there are specialized policies available such as Aviation Insurance Policy for insurance of planes and helicopters. Thus Property Insurance is a very vast category of General Insurance and the type of cover that you need depends upon the type of property you are seeking to cover. The types of losses covered by fire insurance are:  Goods spoiled or property damaged by water used to extinguish the fire.  Pulling down of adjacent premises by the fire brigade in order to prevent the progress of flame.  Breakage of goods in the process of their removal from the building where fire is raging e.g. damage caused by throwing furniture out of window.  Wages paid to persons employed for extinguishing fire. The types of losses not covered by a fire insurance policy are:  Loss due to fire caused by earthquake, invasion, act of foreign enemy, hostilities or war, civil strife, riots, mutiny, martial law, military rising or rebellion or insurrection.  Loss caused by subterranean (underground) fire. Loss caused by burning of property by order of any public authority.  Loss by theft during or after the occurrence of fire.  Loss or damage to property caused by its own fermentation or spontaneous combustion e.g. exploding of a bomb due to an inherent defect in it.  Loss or damage by lightening or explosion is not covered unless these cause actual ignition which spread into fire. 115 CU IDOL SELF LEARNING MATERIAL (SLM)

8.7 MARINE INSURANCE This is the oldest branch of Insurance and is closely linked to the practice of Bottomry which has been referred to in the ancient records of Babylonians and the code of Hammurabi way back in B.C.2250. Manufacturers of goods advanced their material to traders who gave them receipts for the materials and a rate of interest was agreed upon. If the trader was robbed during the journey, he would be freed from the debt but if he came back, he would pay both the value of the materials and the interest. The first known Marine Insurance agreement was executed in Genoa on 13/10/1347 and marine Insurance was legally regulated in 1369 there. A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the insured, in the manner and to the extent thereby agreed, against transit losses, that is to say losses incidental to transit. A contract of marine insurance may by its express terms or by usage of trade be extended so as to protect the insured against losses on inland waters or any land risk which may be incidental to any sea voyage. Figure.8.1: Marine Insurance A. Cargo insurance which provides insurance cover in respect of loss of or damage to goods during transit by rail, road, sea or air. Thus cargo insurance concerns the following: i. Export and import shipments by ocean-going vessels of all types, ii. Coastal shipments by steamers, sailing vessels, mechanized boats, etc., iii. Shipments by inland vessels or country craft, and iv. Consignments by rail, road, or air and articles sent by post. B. Hull insurance which is concerned with the insurance of ships (hull, machinery, etc.). This is a highly technical subject and is not dealt in this module. Kinds of Marine Insurance Policies You will find it interesting to note that there are various kinds of marine insurance policies, mentioned below, 1. Voyage Policy: As the name suggests, this policy covers a voyage. This is a policy in which the limits of the risks are determined by place of particular voyage. 116 CU IDOL SELF LEARNING MATERIAL (SLM)

Example: Madras to Singapore; Madras to London. Such policies are always used for goods insurance, sometimes for freight insurance, but only rarely nowadays for hull insurance. 2. Time Policy: This policy is designed to give cover for some specified period of time, say, for example 1st Jan, 2003 to noon, 1st Jan, 2004. Time policies are usual in the case of hull insurance, though there may be cases where an owner prefers to insure his vessel for each separate voyage under voyage policy. 3. Voyage and Time Policy or Mixed Policy: It is a combination of voyage and time policy. It is a policy, which covers the risk during a particular voyage for a specified period. Example: A ship may be insured for voyages between Madras to London for a period of one year. 4. Valued Policy: This policy specifies the agreed value of the subject matter insured, which is not necessarily the actual value. Such agreed value is referred to as the insured value. Example: A policy may be, say, for ` 10,000 on Hull and Machinery, etc. valued at ` 2,00,000 or for ` 7,000 on 100 cases of whisky valued at ` 7,000. Once a value has been agreed, it cannot be reopened unless there is proof of fraudulent intention. It remains binding on both the parties. These policies are not common nowadays. 5. Unvalued Policy/Open Policy: In the case of an unvalued Policy, the value of the subject matter insured is not specified at the time of effecting insurance. It is taken for a specified amount and the insurable value is ascertained in the case of loss. Here the insurer is liable Notes to pay only up to actual loss incurred to the policy amount. It is also known as open policy. 6. Floating Policy: A floating policy describes the insurance in general terms, leaving the names of the ship or ships to be defined by subsequent declaration. Such policy has the advantage of being a valid marine policy, in all respects fully complying with the requirements of the Marine Insurance Act. The declaration may be made by endorsement on the policy or in any other customary manner. Unless the policy otherwise provides, declaration must be made in the order of shipment. They must comprise all the consignments within the terms of the policy and values must be honestly stated. Errors and omissions however, may be rectified even after a loss has occurred, if made in good faith. When the total amount declared exhausts, the amount for which the policy was originally issued, it is said to be “run off” or “full declared”. The assured may then arrange for a new policy to be issued to succeed the one about to lapse, otherwise the cover terminates when the policy is fully declared. 117 CU IDOL SELF LEARNING MATERIAL (SLM)

7. Wagering Policy: This policy is issued without there being any insurable interest, or a 8. policy bearing evidence that the insured is willing to dispense with any proof of interest. If a policy contains such words as “Policy Proof of Interest” (PPI) or “Interest or No Interest”, it is a wagering or honour policy. Under section 4 of the Marine Insurance Act, such policies are void in law but such policies continue to be common. 9. Construction or Builders Risk Policy: This is designed to cover the risks incidental to the buildings of a vessel, usually giving cover from the time of laying the keel until completion of trails and handing over to owners. In the case of a very large vessel, the period may extend over several years. 10. Blanket/Open Cover Policy: In order to arrange their marine insurance in advance and to be assured to cover at all times, and also to avoid the effects of possible rapidly fluctuating rates, it is the practice of regular importers and exporters to avail “Blanket Insurance”. One good way, and the most popular one of achieving this is by means of “Open Cover”. An open cover is an agreement between the assured and his underwriters under which the former agrees to declare, and the latter to accept, all shipments coming within the scope of the open cover during some stipulated period of time. 11. Port Risk Policy: This is to cover a ship or cargo during a period in port against the risks peculiar to a port as distinguished from voyage risks. This kind of policy is probably very rarely used nowadays. 8.8 SUMMARY  Life insurance is protection against financial loss resulting from insured Individual’s death.  A life insurance contract is an aleatory contract. It is based on the possibility of a chance occurrence and, in all likelihood, one side will benefit more than the other.  If insurance is affected on say for example smuggled goods, and the insurer comes to know after some time of signing the contract, he may avoid the contract.  A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the insured, in the manner and to the extent thereby agreed, against transit losses, that is to say losses incidental to transit.  A marine policy may be assigned either before or after a loss. Assignment may be through endorsement or in other customary manner.  The insurance of motor vehicles against damage is not made compulsory, but the insurance of third party liability arising out of the use of motor vehicles in public 118 CU IDOL SELF LEARNING MATERIAL (SLM)

places is made compulsory. No motor vehicle can play in a public place without such insurance.  The liability in respect of death of or bodily injury to any passenger of a public service vehicle in a public place, the amount of liability incurred is unlimited. 8.9 KEYWORDS  Motor Insurance: Motor insurance is the insurance which consumers can purchase for cars, trucks, and other vehicles.  Proposal Form: The proposal form elicits all information necessary for rating and underwriting.  Mortality Rate: A mortality rate refers to the number of deaths in a specified population during a known period of time.  Rider: It is a provision of an insurance policy that is purchased separately from the basic policy and that provides additional benefits at additional cost.  Transit Clause or Warehouse-to-Warehouse Clause: This clause provides with respect to goods, for the risk to attach “from the loading thereof aboard the said ship” and for the insurance to continue until the goods are discharged and safely landed at the port of discharge. 8.10 LEARNING ACTIVITIES 1. Case Study Marine Insurance Market Set for Shake-up The marine insurance market is heading for a shake-up in the wake of the Costa Concordia disaster as underwriter’s reconsider whether they want to provide cover for ever-larger vessels, according to industry executives. Insurers say the incident has highlighted the risks of a recent scale revolution not only in passenger liners but also in the more numerous container ships and carriers of dry-bulk commodities such as iron ore and coal. As underwriters come to terms with one of the costliest marine accidents, some insurers are questioning whether they still want to provide cover in a fiercely competitive market from which many struggle to turn a profit. “The question is, are these huge vessels still manageable?” said Dieter Berg, senior executive manager for marine at Munich Re, the world’s biggest reinsurance company by gross written premiums and among the many insurance groups exposed to the Costa Concordia. “Imagine an accident involving a cruise ship with 8,000 people and a tanker in the dead of night in the middle of the ocean.” He added: “It’s a big shock for the market. The alarm clocks of marine insurers are ringing at the moment.” So-called hull insurance, which covers physical damage to vessels, has failed overall to produce an underwriting 119 CU IDOL SELF LEARNING MATERIAL (SLM)

profit for 15 consecutive years, according to the International Union of Marine Insurance. Cargo insurance has fared better but it too suffered an overall underwriting loss in 2010. Analysts estimate that once environmental damage and injuries are included, losses from the Costa Concordia could amount to as much as $1bn. In absolute terms, that would make the sunken cruise ship the biggest ever marine loss. Duncan Southcott, head of marine UK at Allianz, Europe’s biggest insurer by market capitalization, said the increasing size of ships “must be a concern ... This is the first example of one of these very large [passenger] vessels gone wrong”. Two senior underwriters, who declined to be named, said insurers were hopeful of pushing through price increases of up to 20 per cent following the accident. However, brokers said the competitive nature of the marine insurance market made a significant rise in premiums unlikely. Losses from the Costa Concordia are spread widely among several insurance and reinsurance companies including Generali, RSA Insurance Group and XL Group. “Will this one loss have an impact? It might be the straw that breaks the camel’s back for some people – we may see some capacity withdraw,” said Marcus Baker, chairman of the marine practice at Marsh, the broker. But he added that the cruise industry was still relatively safe. “The number of injuries and incidents has historically been low. Relatively speaking the risks have been seen by many underwriters to be quite good.” Questions: 1. What is the prime reason for the marine insurance market shake-up? Discuss. 2. Discuss the factors affecting premiums in marine insurance market. ________________________________________________________________________ _______________________________________________________________________ 2. Activity: Visit any two insurance companies to understand about the life insurance schemes which they offer and compare features of two policies to understand the similar & unique features Offered. ________________________________________________________________________ _______________________________________________________________________ 8.11 UNIT END QUESTIONS A. Descriptive Questions 120 Short Questions CU IDOL SELF LEARNING MATERIAL (SLM)

1. What is Rider? 2. Write a short note on Social Security Scheme. 3. What is Floating Policy? 4. What are the types of losses covered by fire insurance? 5. List down few example of the items which can be burnt/ damaged through fire. Long Questions 1. Explain Liability Insurance & Motor Insurance 2. Describe Life Insurance. 3. Explain in detail about Marine Insurance and kinds of Marine Insurance. 4. Explain Group Life Insurance in detail. 5. Write in detail about Rural Insurance B. Multi-Choice Questions 1. Insurance is simply the equitable transfer of a risk of a loss, from one entity to another, in exchange for a …………………………… a. Discount b. Premium c. Cash d. Asset 2. These new insurance contracts allowed insurance to be separated from ……………………… a. Investment b. Returns c. Premium d. Tax 3. The first kind of formal insurance business was ………………………… insurance. a. Life b. Health c. Marine d. None of these 4. The insurance policy is the ……………………………. of the insurance company. a. Trend line b. Lifeline c. Guideline 121 CU IDOL SELF LEARNING MATERIAL (SLM)

d. All of these 5. Life insurance provides for a fixed benefit at ………………………. a. Age 60 b. Death c. Maturity d. None of these Answers 1 - b, 2 – a, 3 - c, 4 – c, 5 - b 8.12 REFERENCES  Risk Management and Insurance: Perspectives in A Global Economy by Harold D. Skipper, w. Jean Kwon, Blackwell Publishing & Wiley India  Risk Management & Insurance, James S. Trieschmann, Sandra G. Gustavson, South western, 1998 122 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 9. RISK MANAGEMENT Structure 9.0 Learning Objective 9.1 Introduction 9.2 Meaning 9.3 Role of Insurance in Financial Planning 9.4 Summary 9.5 Keywords 9.6 Learning Activities 9.7 Unit End Questions 9.8 References 9.0 LEARNING OBJECTIVE After studying this unit, you will be able to:  Explain meaning of Risk Management  Describe Role of Insurance in Financial Planning (Individual)  Describe Role of Insurance in Financial Planning (Business)  Describe Role of Insurance in Financial Planning (Society) 9.1 INTRODUCTION You will find it interesting to note that insurance is a part of financial system. Financial system may be defined as set of institutions, instruments and markets, which gather savings and channel them to their most efficient use. The system consists of individuals (savers), intermediaries, markets and users of savings. Economic activity and growth are greatly facilitated by the existence of the market in mobilizing the saving and allocating them among competing users. An economy needs institutions that impartially enforce property rights and contracts. Economic growth of a country depends on the existence of a well-functioning financial infrastructure. It is essential that the financial infrastructure be developed sufficiently so that the market operates in an efficient manner. 123 CU IDOL SELF LEARNING MATERIAL (SLM)

9.2 MEANING Businesses face decisions about risk nearly every day. From equipment purchases to new hires to acquisitions and closures, each business decision carries an element of risk. The key aspect of making the right business decisions comes from determining the balance between risk and reward. Companies that expose themselves to high risks with minimal rewards can gamble themselves right out of business. At the other extreme, firms that play it too safe can miss out on growth opportunities they need to survive and thrive in a competitive marketplace. Risk is inherent or a facet of every human endeavour or aspect of life. From the moment we get up in the morning, drive or take public transportation to get to school or to work until we get back into our beds (and perhaps even afterwards), we are exposed to risks of different degrees. What makes the study of risk fascinating is that while some of this-risk bearing may not be completely voluntary, we seek out some risks on our own (speeding on the highways or gambling, for instance) and enjoy them. While some of these risks may seem trivial, others make a significant difference in the way we live our lives. On a loftier note, it can be argued that every major advance in human civilization, from the caveman’s invention of tools to gene therapy, has been made possible because someone was willing to take a risk and challenge the status quo. Risk is the potential of loss (an undesirable outcome, however not necessarily so) resulting from a given action, activity and/or inaction. The notion implies that a choice having an influence on the outcome sometimes exists (or existed). Potential losses themselves may also be called \"risks\". Any human endeavour carries some risk, but some are much riskier than others. Risk can be defined in seven different ways  The probability of something happening multiplied by the resulting cost or benefit if it does.  The probability or threat of quantifiable damage, injury, liability, loss, or any other negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through pre-emptive action. 9.3 ROLE OF INSURANCE IN FINANCIAL PLANNING Individual 1. Helping to smooth out fluctuations in consumption of individuals. When consuming, human beings aim at maximizing satisfaction (utility); however, in the event of scenarios like drought, resources end up being scarce and this will end up affecting utility. Therefore, in the event that an individual undertakes an agricultural insurance policy, he will be compensated for losses made under such circumstances hence smoothing out fluctuations in consumption 124 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Protecting individuals from future uncertain occurrences. By definition, insurance service acts as a hedge for individuals against risks that may occur in the future mostly brought about by factors that are uncontrollable; for example, theft, fire or burglary among others. 3. Creating peace of mind to those insured. 4. Insurance provides security and safety against loss on a particular event. In such a case, insurance acts as a fall back for individuals in case of an eventuality of loss for as long as it is within the terms of contract. 5. Insurance eliminates dependency especially under life insurance; for example, in case of death of a spouse. Life insurance policies usually come with benefits like meeting all expenses for the insured at death as well as catering for the estate of the deceased there by eliminating dependency. 6. Life insurance encourages saving; since an individual is obliged to remit a given sum of money (premium) over a given period of time i.e., over 5 years and cannot access these funds until the contract elapses. 7. Life insurance policies provide profitable investment like the endowment policies. This can be evidenced by the fact that individuals are able to get returns (interest) on the sum assured when such policies are undertaken. Business 1. Ensuring that businesses thrive for example, the existence of insurance like credit life insurance may explain the growth in the banking industry since it has helped to reduce on risk exposure in banks like default risks. 2. Insurance businesses have a great influence on the existence of business within the financial system. The existence of insurance determines whether businesses will thrive or not. For example, with agricultural insurance, agricultural sector will be able to contribute more to economic growth in terms of GDP as opposed to when there is no agricultural insurance. 3. Business efficiency is increased with insurance especially since the owner is free from bother of losses. For businesses, insurance acts as security against loss from occurrence of a given event; therefore, in case of loss, the company is compensated and this enables it to continue in operation even under such eventualities hence enhancing efficiency in business operations. 4. Enhancement of credit to businesses. Any business thrives on availability of funds, therefore the financial system of any economy should ensure that funds are available and this may be made possible if financial institutions that have the surplus funds are assured 125 CU IDOL SELF LEARNING MATERIAL (SLM)

of safety of their funds. The existence of credit insurance gives such institutions leverage to be able to access credit more easily hence thriving of businesses. 5. Welfare of employees is assured with insurance being the responsibility of employer. This is usually so for policies like workman’s compensation, health insurance where the employer provides insurance services for their employee. 6. Insurance frees cash flows which would otherwise be put aside to cater for the unforeseen eventualities. The need for cash in any business may be driven by precautionary, speculative or transaction purposes. Therefore, when businesses take on insurance, cash flows that would be set aside for precautionary purposes can be instead be used for further investment thereby generating more profit for business. 7. Insurance creates an asset/investment as opposed to a liability in the balance sheet of an organization. Society- 1.Wealth of society is protected; for example, life insurance provides for loss of life; and the loss/damage of property by fire or accident can be well indemnified by property insurance. 2. Insurance business helps in the overall economic growth through its contribution to all sectors within the financial system. For example, the existence of credit insurance will enable more financial institutions to extend credit to businesses thus growth in sectors like agriculture, industrial, education among others which in turn boosts economic growth. 3. Insurance provides sources of investment income by extracting money in supply to the amount of premium collected from policies undertaken and investing this money in avenues like financial securities such as treasury bills, unit trusts, real estate among others. 4. The insurance industry creates jobs for insurance professionals. 9.4 SUMMARY  The concept of probability is the central tenet of risk, and the business of risk measurement involves estimating the probability of loss.  Scenario analysis involves using a set of predetermined changes in market prices or scenarios to test the performance of the current portfolio or exposure.  The most commonly used measure of market risk is value at risk, a systematic methodology based on statistical estimates. 126 CU IDOL SELF LEARNING MATERIAL (SLM)

 As the costs of computation decline and user sophistication increases, the number and variety of risk management tools has increased substantially. More rigorous measurements of risk will likely become commonplace.  Foreign exchange hedging using derivatives replaces exposure to foreign exchange rates with exposure to foreign exchange counterparties.  There are a number of ways to reduce exchange rate exposure that do not involve the use of derivatives. However, they typically involve renegotiating or changing process and as a result, they may take time and organizational resources to implement.  Forwards and futures lock in an exchange rate for a particular delivery date. Option buyers obtain protection from adverse exchange rate changes, while option sellers accept risk in exchange for receipt of option premium. 9.5 KEYWORDS  Risk Management: Risk Management is the identification, assessment, and prioritisation of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events.  Beta: It is a measure of the systematic risk of a security that cannot be avoided through diversification.  Correlation: It is a statistical measure that indicates the relationship between series of number representing anything from cash flows to test data.  Portfolio: It is a collection of securities.  Systematic Risk: Variability in a security is total returns that are directly associated with overall movements in the general market or economy is called systematic risk. 9.6 LEARNING ACTIVITIES 1. An investor holds two equity shares X and Y in equal proportion with the following risks and return characteristics: Return of Security X = 24 %; Return of Security Y = 19 % Standard Deviation of X = 28% Standard Deviation of Y = 23 % 127 CU IDOL SELF LEARNING MATERIAL (SLM)

The return of these securities has a positive correlation of 0.6. You are required to calculate the portfolio return and risk. Further suppose that the investor wants to reduce the portfolio risk to 15 per cent. How much should the correlative coefficient be to bring the particular risk to the desired level? ________________________________________________________________________ ________________________________________________________________________ 2. Case Study: Wipro Company has asked the investors to invest in their securities & while making an offer, they have provided you with the following information. For a period of 10 years, company has provided you with the rate of return on security & return on the market portfolio of its securities as: You as an investor have decided to invest in the securities of the company. The anticipated return with the associated probabilities is as: ________________________________________________________________________ ________________________________________________________________________ 9.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Explain how the range is used in sensitivity analysis? 128 CU IDOL SELF LEARNING MATERIAL (SLM)

2. What relationship exists between the size of the standard deviation and the degree of asset risk? 3. When is coefficient of variation preferred over the standard deviation for comparing asset risk? 4. What is an efficient portfolio? How can the return and standard deviation of a portfolio be determined? 5. Why is the correlation between asset returns important? How does diversification allow risky assets to be combined so that the risk of the portfolio is less than the risk of the individual assets in it? Long Questions 1. Explain Risk Management in Insurance in detail. 2. Explain Role of Insurance in Financial Planning (Individual). 3. Explain Role of Insurance in Financial Planning (Business). 4. Explain Role of Insurance in Financial Planning (Society). B. Multi-Choice Questions 1. Insurance is best suited to risk with a. high frequency and low loss severity. b. low frequency and high loss severity. c. minimum frequency and no loss severity. d. high frequency and high loss severity. 2. The measures aimed at avoiding, eliminating or reducing the chances of loss production is covered by ______________. a. Risk Control b. Risk Retention c. Risk Avoidance d. Risk Financing 3. The risk manager may be able to identify the new ventures involved in ______________. a. Pure risk. b. Group Risk. 129 CU IDOL SELF LEARNING MATERIAL (SLM)

c. Speculative risk. d. Particular risk. 4. An instrument by which a pure risk is transferred by a party other than insurer is_____________. a. Insurance b. Retention. c. Non Insurance Transfer. d. Reinsurance. 5. Uncertain events are broadly classified as ______________. a. Predictable and Unpredictable. b. Possible and Impossible c. Natural and Artificial. d. Rare and Continuous Answers: 1 - b, 2 – a, 3 - a, 4 – c, 5 - a 9.8 REFERENCES  Risk Management and Insurance: Perspectives in A Global Economy by Harold D. Skipper, w. Jean Kwon, Blackwell Publishing & Wiley India  Risk Management & Insurance, James S. Trieschmann, Sandra G. Gustavson, South western, 1998 130 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 10. PENSION PRODUCTS Structure 10.0 Learning Objective 10.1 Introduction 10.2 Need for Retirement Planning 10.3 Pension Schemes in India 10.4 Summary 10.5 Keywords 10.6 Learning Activities 10.7 Unit End Questions 10.8 References 10.0 LEARNING OBJECTIVE After studying this unit, you will be able to:  Explain Need for Retirement Planning  Describe Benefits of Retirement Planning  List down Pension Schemes in India  Describe Role of Insurance in Financial Planning (Society) 10.1 INTRODUCTION You will find it interesting to note that insurance is a part of financial system. Financial system may be defined as set of institutions, instruments and markets, which gather savings and channel them to their most efficient use. The system consists of individuals (savers), intermediaries, markets and users of savings. Economic activity and growth are greatly facilitated by the existence of the market in mobilizing the saving and allocating them among competing users. An economy needs institutions that impartially enforce property rights and contracts. Economic growth of a country depends on the existence of a well-functioning financial infrastructure. It is essential that the financial infrastructure be developed sufficiently so that the market operates in an efficient manner. 131 CU IDOL SELF LEARNING MATERIAL (SLM)

10.2 NEED FOR RETIREMENT PLANNING Planning for retirement doesn't mean that you can focus solely on your savings. A mixture of financial and personal planning includes retirement planning. During retirement, personal preparation decides one's happiness. Financial planning, on the other hand, helps to budget revenue and expenditures based on a personal schedule. The question of 'how does one want to spend their retirement?' is mainly personal planning. 'It will help in assessing financial needs to have an understanding of how retirement should be. For instance, during their retirement, some would want to travel the world, while others might like to learn a course or two, or volunteer at an NGO. The possibilities for retirement are infinite. However, the first step towards retirement planning is to have an idea of how one will like to spend their retirement. The needs and desires in the lifestyle will assist in estimating the finances. Financial preparation would, thus, help to build a retirement fund. The reasons why retirement planning is key are below: • One cannot work forever. • The average life expectancy is increasing. • Higher complications, e.g., medical emergencies. • Best time to fulfil life aspirations. • Relying on one source of income is risky, e.g., pension. • Do not depend on children. • Contribute to the family even during retirement. • Start planning early and diversify investments. Therefore, to lead a peaceful and uncompromised life during retirement, it is essential to start planning and investing towards it. Benefits of Planning Retirement Stress-free life This is the most significant outcome of retirement planning. Retirement planning helps to lead a peaceful and stress-free life. With having investments that earn regular income during retirement leads to a worry-free life. Retirement is the age where one has to relax and reap the benefits of all the hard work. Money works for you In the younger days, everyone runs after their 9-5 jobs. Everyone works to earn money and have a good living. However, retirement days are the days where one cannot work any 132 CU IDOL SELF LEARNING MATERIAL (SLM)

longer. Therefore, it is the time when the money one earned should do all the work. To achieve this, one has to start their investments towards retirement at a very young age. Starting small also helps in generating significant returns in the future. Hence a retirement fund should be a well-diversified portfolio, that’ll have the capacity to generate returns during retirement. Tax benefits Retirement planning also helps in tax saving. For example, investments in PPF and NSC qualify for tax exemption under Section 80C of the Income Tax Act. These are long term investments suitable for retirement. There are a variety of investment options available for retirement planning at the same time also qualify for tax saving. Cost-saving Planning for retirement at a young age will help in reducing the cost. For example, in an insurance policy the premium amount to be paid will be lesser when the policyholder is younger. While getting insurance during retirement becomes costly. Inflation beating returns Investing in retirement will help in earning inflation-beating returns. Holding money in a bank savings account will not generate high returns. In other words, the interest earned will not be enough to lead an uncompromised retirement. Therefore, proper investment planning will help one to generate significant returns in the long term. Also, it is important to start investing early. This helps in averaging out the impact of market volatility. 10.3 PENSION SCHEMES IN INDIA India has a long tradition of old age income support system. The concept of old age security in India dates back to the 3rd century B.C. According to Sukraniti, a king had to pay half of the wages for people who had completed forty years of service (Gayithri, 2006). Practices of civil service pension were evident way back in 1881 when the retirement benefits were provided by the Royal Commission on Civil establishments during the British colonial rule. The Government of India Acts of 1919 and 1935 made further provisions. These schemes were later consolidated and expanded to provide retirement benefits to the entire public sector working population. Post-independence, several provident funds were also set up to extend coverage among the private sector workers (Goswami, 2001). Schemes The Indian old age security system can be classified as follows, 1) Civil Service Schemes 133 CU IDOL SELF LEARNING MATERIAL (SLM)

2) Employee’s Provident Fund Organization Schemes (EPFO) 3) Occupational Pension Schemes 4) Public Provident Fund 5) National Old Age Pension Scheme 6) National Pension Scheme 7) Micro-pensions and Other Alternatives 1. Civil Service Pension Schemes Central and state government employees receive pension under these schemes. The pension payments under these schemes were defined benefits and were related to final salary. They were paid out of current revenues of respective central and state governments. Recently these schemes are changing from DB scheme to a DC scheme for the new entrants (New Pension System) whereas the old scheme still provides pensions for employees who joined the civil service prior to 2004 and the armed forces. 2. Employee’s Provident Fund Organization Schemes (EPFO) The Employees’ Provident Fund (EPF) came into existence on November 15, 1951. It was replaced by the Employees’ Provident Funds Act, 19525 The Act and Schemes are framed and managed by a tri-partite Board known as the Central Board of Trustees, Employees' Provident Fund, consisting of representatives of Government (both Central and State), employers and employees. The Board manages a contributory provident fund, pension scheme and an insurance scheme for the workforce engaged in the organized sector in India. It is one of the world’s largest organizations in terms of clients and the volume of financial transactions undertaken by it. The Board is assisted by the EPFO and operates following three schemes: - a) Employees' Provident Fund Scheme (EPFS), 1952 which is a mandatory saving scheme for old age/ contingencies. b) Employees' Pension Scheme (EPS), 1995 which provides pension to members, widows, widower, children, orphans, physically disabled members and dependent parents or nominee. c) Employees' Deposit Linked Insurance Scheme (EDLIS), 1976 which makes provision for insurance benefits to beneficiaries of members who died in harness. 134 CU IDOL SELF LEARNING MATERIAL (SLM)

The EPFO compulsorily covers formal sector workers with monthly earnings of Rs.6,500 or less at firms with 20 or more members in defined industries. 3. Occupational Pension Schemes The public sector enterprises have similar type of pension arrangements like civil servants. These systems are now changing and most of them have become contributory. The private sector enterprises also provide pensions and contribute in these types of schemes. Nevertheless the mode of payment of pensions varies from enterprise to enterprise. The enterprises sometimes manage the fund themselves and sometimes jointly with pension providing companies. 4. Public Provident Fund The Public Provident Fund (PPF) initiated in 1968, stands as a voluntary tax-advantaged DC saving option using personalized accounts. This scheme has been open to all citizens (except non-resident Indians) but since it uses income tax rebates as incentives for customers, it has mainly attracted formal sector workers, who pay income taxes. The minimum contribution is Rs 500/- per annum and the maximum contribution is Rs.1, 00,000/- per annum. Withdrawals are allowed from the sixth year and a subscriber is entitled to withdraw the entire fund after the expiry of a period of fifteen years. Also loan facilities are available from third financial year up to fifth financial year. 5. National Old Age Pension Scheme The Indira Gandhi National Old Age Pension Scheme (NOAPS) was launched in 1995 for persons below poverty line (BPL) who were aged 65 and above. The pension amount consists of Rs. 200 per month from the central government plus a contribution by the state, varying state-wise, according to discretion of the State Government. Nevertheless, in 2011 the eligibility age was reduced to 60 years and the GOI’s contribution was increased to Rs. 500 per month for persons above 80 years. 6. National Pension Scheme National Pension Scheme (NPS) has evolved over the years, after 2003. NPS was made operational from December 22, 2003 for all new recruits of central government employees (except for the armed forces) joining service on or after January1, 2004. The NPS originated based on the Old Age Social and Income Security project (GOI, 2000), Report of the Working Group (GOI, 2001) and Report of the High Level Expert Group (GOI, 2002) commissioned by the Central Government. These reports led to the setting up of a Pension Fund Regulatory and Development Authority (PFRDA) in October 2003 and introduction of a PFRDA bill in Parliament in 2005. An extension of the NPS occurred on May 1, 2009 when this scheme was extended to all citizens of India. On December 1, 2010, the voluntary pillar was introduced. In order to widen the coverage, another scheme 135 CU IDOL SELF LEARNING MATERIAL (SLM)

called NPS-Lite was introduced. These schemes are all contributory schemes with individual retirement accounts and do not provide a guarantee of pension. As of May 7, 2013, only 4,90,988 individuals have subscribed to the scheme, of which more than fifty percent are civil servants for which the scheme is mandatory. To encourage people from unorganized sector to open a pension account, government has started a new initiative, swavalamban, under which government contributes Rs. 1000 per annum for each NPS account in 2010-11 to 2012-13. 7. Micro-pensions and Other Alternatives Micro-pensions are provided by microfinance institutions. Micro-pensions have gained considerable relevance in India in recent years with the development of MFI’s and NGO’s. Micro-pensions adhere to the needs of very specific individual groups or local communities in exchange of low contributions and low premium. In terms of coverage, one of the most successful examples is Self-Employed Women’s Association (SEWA). In 2009, 50,000 self-employed women were enrolled in SEWA’s micro-pension scheme. Nevertheless, micro-pensions are targeted to specific groups and can certainly be regarded as a measure to reach certain economically disadvantaged groups but not the masses. Other alternatives are long-term saving options offered by banks, and pension schemes offered by insurance companies that provide the investor with a choice of funds. Coverage and Size Pensions in India are largely financed through current revenues (in the government sector) or employer and/or employee participation (in the organized sector). This has restricted the coverage to about 24 percent of the working population, 7 majorities of which belong to the organized sector workers. The vast workforce in the unorganized sector is denied access to formal channels of old age economic support. It is estimated that about 8.2 percent of Indian population was above 60 years in 2011. 10.4 SUMMARY  Pension plans address the risk of living too long. In the age of medical advancement where the mortality rates have declined and life span has increased significantly, it is important that the individual saves enough to meet his financial needs during the age when his earning capacity diminishes.  In the Indian context, with the growth of the Indian economy, the nuclear family system is fast spreading and therefore old aged parents are left to fend for themselves. In order to mitigate the risk of not being able to meet financial needs during such old age, the savings and pension plans are effective tools.  Deferred Annuity Plans. Under the deferred annuity plan, the policyholder contributes a small amount on a monthly/quarterly/ annual basis and on maturity, 136 CU IDOL SELF LEARNING MATERIAL (SLM)

the sum assured is used to buy a pension plan (immediate annuities) that will provide a monthly income throughout retirement. These plans are best when bought at a young age as the corpus depends upon the period of accumulation 10.5 KEYWORDS  PPF - (Public Provident Fund) Public Provident Fund (PPF) is a tax-free saving scheme regulated by the Indian Government. It is a long-term investment scheme with a lock-in period of 15 years.  EPFO- Employees’ Provident Fund Organization scheme is a collection of funds contributed by the employer and his employee regularly on a monthly basis.  NOAPS - National Old Age Pension Scheme- The scheme is implemented as part of the National Social Assistance Program (NSAP) of the Ministry of Rural Development, Government of India. It is a non-contributory scheme and provides a monthly income for citizens or to refugees above 60 years, who have no other source of income.  NSC (National Savings Certificate)- is an Indian Government savings bond, primarily used for small savings and income tax saving investments in India.  PFRDA (Regulatory and Development Authority) was established through a resolution by the Government of India to promote, develop and regulate pension sector in India. 10.6 LEARNING ACTIVITIES 1. Identify a List of 10 top pension policies. ________________________________________________________________________ ________________________________________________________________________ 2. Visit a Pension Service Provider & understand the process involved in Onboarding the customer. ________________________________________________________________________ ________________________________________________________________________ 137 CU IDOL SELF LEARNING MATERIAL (SLM)

10.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. List the classification of Indian old age security system 2. List the reasons why retirement planning is key 3. What is Civil Service Pension Scheme? 4. What is Public Provident Fund? 5. What is Nation Pension Scheme? Long Questions 1. What are the needs for retirement planning? 2. Discuss in detail about the Pension Schemes in India. 3. Discuss in detail about various pension products. B. Multi-Choice Questions 1. ________came into existence on November 15, 1951. EPF a. PPF b. EPF c. EPS d. NPS 2. NOAPS) was launched in 1995 for persons below poverty line (BPL) who were aged ______and above. a. 65 b. 60 c. 50 d. 55 3. Investments in PPF and NSC qualify for tax exemption under Section ________of the Income Tax Act. a. 80D b. 80CC c. 80C 138 CU IDOL SELF LEARNING MATERIAL (SLM)

d. None of these 4. The minimum contribution in PPF is Rs _______ per annum and the maximum contribution is Rs__________per annum. a. 500, 50,000 b. 1000, 100,000 c. 1000, 50,000 d. 500, 1,00,000 5. In 2009, 50,000 self-employed women were enrolled in SEWA’s ________ scheme a. National Pension b. Micro-pension c. NSC d. None of these Answers: 1 - b, 2 – a, 3 - c, 4 – d, 5 - b 10.8 REFERENCES  Risk Management and Insurance: Perspectives in A Global Economy by Harold D. Skipper, w. Jean Kwon, Blackwell Publishing & Wiley India  Risk Management & Insurance, James S. Trieschmann, Sandra G. Gustavson, South western, 1998 139 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 11. PENSION REFORMS IN ORGANIZED SECTOR Structure 11.0 Learning Objective 11.1 Introduction 11.2 Taxation of pension products. 11.3 Summary 11.4 Keywords 11.5 Learning Activities 11.6 Unit End Questions 11.7 References 11.0 LEARNING OBJECTIVE After studying this unit, you will be able to:  Explain Need for Retirement Planning  Describe Benefits of Retirement Planning  List down Pension Schemes in India  Describe Role of Insurance in Financial Planning (Society) 11.1 INTRODUCTION The debate on the pension system reforms is intensifying in India. The ongoing financial sector reforms have made significant progress in the spheres of banking, capital and currency markets and now provides an opportunity to revamp the hitherto untouched sectors like insurance and pension. While insurance sector reform is already underway, the effect of which to a certain extent is expected to percolate to the private pension market - a comprehensive policy for pension system restructuring is yet to be undertaken. A variety of problems plague the pension system in India. The gradual collapse of the traditional old age support mechanisms and the rise in elderly population highlights the need for strengthening the formal channels of retirement savings. 140 CU IDOL SELF LEARNING MATERIAL (SLM)

The imperative, more proximate reasons for pension reform are also well known - skewed coverage of the existing benefit schemes favouring organized workforce while informal employment is on the rise, worsening financial situation of government pension schemes against a background of rising system expenditure, unfair treatment of private sector workers vis-à-vis public sector employees, an under developed private annuity market, and finally the need to increase the domestic rate of savings through higher contractual savings. Major retirement savings schemes like provident and pension funds predominantly cover workers in the organized sector, constituting only about 10 percent of the aggregate workforce. The majority of workers, around 90 percent of the working population are engaged in the unorganized sector and have no access to any formal system of old age economic security. This skewed coverage is further shrinking as informal workforce is growing while the size of formal workforce has remained more or less stagnant. 11.2 TAXATION OF PENSION PRODUCTS To discuss the tax treatment of the pension received, comprehensively, the employees have been divided in two types: 1. Government and 2. Non-government. Even the pension received can be of two types: 1. Commuted and 2. Uncommuted pension Uncommuted pension is the periodical payment of pension. For instance, X gets monthly pension of Rs. 2,000/-. It is taxable as salary under section 15 in the hands of a government as well as a non-government employee. Commuted pension is a lump sum payment in lieu of periodical payment. For instance, after his retirement, X gets 25 percent of his pension commuted for Rs. 60,000/- (after commutation he will get the remaining 75% i.e. Rs. 1,500/- by way of monthly pension). In this case, Rs. 60,000/- is commuted pension which X has received in lieu of 25% of his monthly pension. The taxability of the commuted pension is dependent upon the status of the employee and whether or not such employee has received gratuity. 141 CU IDOL SELF LEARNING MATERIAL (SLM)

If such commuted pension is received by a government employee (i.e. employee of the Central Government, State Government, Local Authority and Statutory Corporation) who may or may not have received gratuity, then such commuted pension would be completely exempt from tax. If such commuted pension is received by a non-government employee: 1. who has received gratuity – 1/3rd of the pension which he is normally entitled to receive, would be exempt from tax 2. Who has not received gratuity – 1/2 of the pension which he is normally entitled to receive is exempt from tax If the payment in commutation of pension received by an employee exceeds the aforesaid limits, such excess pension received is liable to tax in the assessment year relevant to the previous year in which it is due or paid. Pension received from ex-Employer For the employees who receive pension from their ex-employer is fully taxable under the head salaries. So, it is not only the active employees whose salaries are taxed under the head Salaries but also the pension receive by ex-employees is also taxed under the same head. Like Salaried employees, the pensioners are also entitled to the benefit of standard deduction available up to fifty thousand rupees every year which has been introduced from this year, against the pension received by them. You are entitled to commute certain portion of your pension and receive the present value of such commuted value of pension at the time of your retirement. For government employees and those working with government companies the entire value of commute pension is exempt. However, for other employees commuted value of 1/3 of pension is exempt in case the employee receives any gratuity. In case the employee does not receive any gratuity, he can commute pension up to 50% of the pension and claim the same as exempt. Pension received under superannuation policy or employee pension scheme In case your employer had contributed towards superannuation fund or ha purchased superannuation policy for you, the pension received by your from the insurance company is taxable under the head Salary as it is received as a result of your employment. Even for the 1/3 of the commuted portion of pension receivable under the superannuation is fully exempt. Likewise, the pension received by you under the EPS based on your contribution towards EPF is fully taxable in your hand. Since this pension is received as a result of your employment, you are entitled to claim standard deduction as discussed above. 142 CU IDOL SELF LEARNING MATERIAL (SLM)

Family pension Pension received by the dependent of an employee is called family pension and is fully taxable in the hands of the dependent recipient/s. However, as the pension is not received due to services rendered by the dependent the same is taxable under the head “Income from Other Source”. However, the dependent person who receives the pension is entitled to claim a deduction of 1/3 of the pension received subject to a maximum of fifteen thousand rupees against the deduction of forty thousand rupees available to retired employees. Please note pension received by family members of Armed Forces is exempt. Annuity Received from Insurance Company on The Annuity Policy Purchased by You In order to ensure that you receive a certain sum at a fixed period, you can buy an annuity plan from an insurance company which in turn will pay the agreed amount at the agreed interval which is annuity but loosely called pension. The amount of pension received under an annuity plan is fully taxable under the head “income from other Sources.” Since this amount does not have any co-relation with any employment, you are not entitled to claim standard deduction against this amount. Annuity received from annuity policy purchased on maturity OF NPS account. The employees who have opted for NPS instead of EPF account have to mandatorily buy an annuity plan from an Indian insurance company for 40% of the accumulated corpus. The pension received by these employees should be taxable under the head Salaries but since the employee can continue to contribute to his NPS account even after he leaves his employment or even when he turns self-employed, it is doubtful whether in such situation the annuity received will become taxable under the head Salaries or it should be taxable under the head “Income from other Sources”. Likewise, even a self-employed person can also contribute towards the NPS account and receive pension. Presently the income tax law does not have any clear cut provision as to the head under which the annuity received for annuity policy bough on retirement should be taxed. In my opinion for the salaried the pension should be taxable under the head Salaries and should also be entitled for standard deduction up to Fifty thousand rupees. But Since the law is silent on this aspect it is risky to offer it under the head Salaries for claiming the standard deduction. Additionally, salaried and self-employed both can contribute additional fifty thousand to claim deduction under Section 80 CCD(1B) so the head under which the pension received will become taxable and whether one will be entitled to claim standard deduction is a grey area and clarificatory amendment of the law is needed to clear the clouds. 143 CU IDOL SELF LEARNING MATERIAL (SLM)

11.3 SUMMARY  In recent years, growing realization about these deficiencies has prompted the government to take reformatory steps to overcome these problems. However, most of these reforms are initiated in a piecemeal manner.  The failure of such ad-hoc initiatives suggests that there are no shortcuts to address these problems.  The policy makers, therefore, need to take a fresh view and develop new mechanisms to rejuvenate the pension system.  A mix of policies like austerity on benefit promises, reliance on greater funding, relaxation of investment norms, encouraging private participation, enhancing system efficiency and developing regulatory capacity could help avert the looming pension crisis and promote better economic security for the aged.  The benefit of such a pension regime is also likely to foster aggregate rate of savings and accelerate capital market development. 11.4 KEYWORDS  NPS (National Pension Scheme)- is a voluntary and long-term investment plan for retirement.  EPF (Employee Provident Fund)- is a collection of funds contributed by the employer and his employee regularly on a monthly basis.  Money Market are the Government, banks and private companies, while the main investors are banks, insurance companies and pension and provident funds.  Capital Market are the Government, banks and private companies, while the main investors are pension and provident funds and insurance companies.  Maturity: An agreed date when an endowment policy ends and the proceeds, including any Notes bonuses, are payable. 11.5 LEARNING ACTIVITIES 1. Find out the changes in pension laws between 2014-2020. 144 CU IDOL SELF LEARNING MATERIAL (SLM)

________________________________________________________________________ ________________________________________________________________________ 2. Take feedbacks on present pension reforms from retired government officers to understand what are their likes & dislikes in the present pension reforms. (Sample size 5- 10). ________________________________________________________________________ ________________________________________________________________________ 11.6 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is family pension? 2. What does Pension Reform Means? 3. What is uncommuted pension? 4. What is NPS? Long Questions 1. Discuss the tax treatment of the pension received. 2. Explain Commuted Pension in detail. 3. Discuss the two types of Pension Received. B. Multi-Choice Questions 1. Income Tax Act was passed in the year _________. a. 1947 b. 1950 c. 1961 d. 1991 2. Which one of the following taxes is not levied by the State Government? a. Entertainment tax b. VAT c. Professional tax d. None of these 145 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Pension is _______________ under the salary head. a. Fully taxable b. Partially taxable c. Not taxable d. None of these 4. Deduction can be claimed for amount deposited under Suganya Samridhi Account under___. a. 80 CC b. 80 C c. 80 DD d. 80 D 5. Abbreviation of NPS a. National Payment Scheme b. National People Scheme c. National Pension Scheme d. National Pension Sector Answers: 1 - c, 2 – d, 3 - a, 4 – b, 5 - c 11.7 REFERENCES  Risk Management and Insurance: Perspectives in A Global Economy by Harold D. Skipper, w. Jean Kwon, Blackwell Publishing & Wiley India  Risk Management & Insurance, James S. Trieschmann, Sandra G. Gustavson, South western, 1998 146 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 12. ROLE OF FINTECH STRUCTURE 12.0 Learning Objective 12.1 Introduction 12.2 Role of FINTECH in insurance sector 12.3 Summary 12.4 Keywords 12.5 Learning Activities 12.6 Unit End Questions 12.7 References 12.0 LEARNING OBJECTIVE After studying this unit, you will be able to:  State the What is Fintech  Describe Role of Fintech in Insurance Sector  Describe Fintech Developments in Insurance sector  Explain how does fintech benefits Insurers 12.1 INTRODUCTION In recent years fintech innovations and technologies have reshaped the provision of financial services and it continues to do so. It has created new opportunities as well as posed new challenges for the insurance industry. Since the emergence of fintech the insurance industry is undergoing a systematic change in its business operations. Fintech developments in the insurance sector have impacted the insurance sector greatly. The surge of fintech diversity in customer behaviours and advanced technologies has impacted the insurance industry. It is essential to be pointed out that Insurance (Insur-tech) and other technology start-ups work continuously to redefine and upgrade the customer experience. 12.2 ROLE OF FINTECH IN INSURANCE SECTOR What Is Fintech? 147 CU IDOL SELF LEARNING MATERIAL (SLM)

Fintech is a combination of two words- “Financial and Technology”. It applies to any emerging technology that provides the customers or financial institutions to deliver financial services in a new and faster way compared to the traditional model. Fintech is beneficial in a way that it allows a person to make quick lending decision, allows the investor to do research, choose stocks and check their portfolio performance in real-time. Fintech developments have caused a massive change in the way companies do business. What are the emerging fintech developments in the insurance sector? Fintech development pertains to the different emerging technologies and business models that have played a vital role in the transformation of the insurance sector and it is still transforming.  Emerging technologies that include digital platforms, big data, data analytics, machine learning, Artificial Intelligence (AI), etc.  Business models include Peer to Peer Lending (P2P), usage-based, and on-demand insurance. The innovations in the insurance industries can be attributed to technological growth and the evolving expectations of the customers. The creators of these innovations are incumbent insurance companies and new technology firms or companies called insur-tech. How do Fintech developments impact insurance businesses?  Efficiency improvements;  Costs reductions;  Improvement in Assessment of risk;  Great customer experience;  Huge financial inclusion. It must be noted that the innovations may also have a negative effect on consumers and may affect the financial stability of the insurance markets. Hence in order to identify the impact of these innovations in fintech, the IAIS (International Association of Insurance supervisors) reviewed the following potential scenarios that can disrupt the insurance business models. 1. Incumbent insurers maintain their customer relationship successfully and leverage technology firms to their advantage. 2. The value chain of insurance becomes fragmented due to the new tech players enter the market thus weakening the traditional customer relationship. 3. Incumbent and traditional insurers are overtaken completely by big tech companies. 148 CU IDOL SELF LEARNING MATERIAL (SLM)

These above-mentioned scenarios were analysed and the main findings from it are specified in brief below. Competitiveness may decrease in the long term because the fintech developments would create a competitive advantage for technology firms and the insurers who have difficulty in adapting to the new technological environment may suffer from pressure on profit margins. Comparability may decrease, however the extent differs from one scenario to the other. It may decrease due to the increase in the customization of products. Interconnectedness is expected to increase specifically owing to the limited number of tech platforms that support big data storage and processing. Regulatory oversight may decrease specifically due to the increase in the number of unregulated players providing technological services in the different areas of the insurance value chain. There may be an increase in the conduct of businesses risk owing to the disproportionately increased focus on the forms objectives instead of consumers mainly through a provision of bespoke products with less insurance coverage. Data ownership may be subjected to increased risk of unauthorized access and use or transfer of personal data. Business model viability may also decrease assuming that the efficacy of insurers back- office processes and systems help the insurers to work with less premiums on a large scale. Such less premiums may endanger the sustainability of the business models initially until there is an accommodation between risk and financial return. How Fintech developments are making insurance more affordable? The fintech industry is growing day by day and the growth is sustainable. In the operations of large scale sectors insurance businesses have been caught lingering in meeting the capabilities for the sets of people but the fintech has been assisting the insurance industry in this. It is assisting in making a strong insurance industry that has the capacity to innovate and operate with sustainability. What Are the Benefits for Insurers by Partnering with Insur-Tech Enterprises? By partnering with Insur-tech enterprises, the insurers can offer the following:  Enriched Connectivity: Artificial Intelligence solutions may avoid friction at many points in a customer journey. 149 CU IDOL SELF LEARNING MATERIAL (SLM)

 Personalized product offerings: Artificial Intelligence for Insurtech can help and offer targeted products to the customers.  End to End automation: Customers are willing to leave manual processing claims behind. Potential impact of innovations in the insurance business Fintech innovations have the potential to deliver a wide range of benefits - in particular, efficiency improvements, cost reductions, improved risk assessment, superior customer experience and greater financial inclusion. However, some of these innovations could also have negative implications for consumers and the financial stability of insurance markets. To identify the potential impact of these innovations, the IAIS considered the following three scenarios to assess the extent to which new technology firms could disrupt the insurance business model: Scenario 1: Incumbent insurers successfully maintain their customer relationships and leverage technology firms to their own advantage. Scenario 2: The insurance value chain becomes fragmented as new technology-enabled players enter the market. The traditional customer relationship weakens. Scenario 3: Incumbent and traditional insurers are completely overtaken by \"big tech\" companies - such as Google, Amazon, Facebook or Apple - that provide insurance to fulfil emerging consumer needs. Challenges for insurance supervisors Fintech developments are potentially disruptive and may have a significant impact on the insurance market. However, it is currently too uncertain an area to adequately assess and understand the extent to which these potential developments could affect the insurance market and its supervision. Some of the other challenges that insurance supervisors may face in the near future in relation to fintech innovations are listed below:  Supervisors need to understand how innovations work and are applied in order to adequately assess risks arising from new product and business models.  Supervisors need to consider the risks of new innovations against the benefits for policyholders and the insurance sector as a whole and consider how to create a proper environment to foster innovation - for example, through regulatory sandboxes or innovation hubs - while safeguarding policyholders' interests.  Supervisors and policymakers need to evaluate and, where appropriate, adjust their prudential regulation framework in order to capture new risks (such as the use of 150 CU IDOL SELF LEARNING MATERIAL (SLM)