Reference Books: • Sethi, Jyotsna and Bhatia, Nishwan, “Elements of Banking and Insurance” • Emmett J.Vaughan and Therese Vaughan “Fundamentals of Risk and Insurance” • Agarwal, O.P “Banking and Insurance” • Periasamy,P; Veeraselvam,M., “Risk and Insurance Management”, Tata Mc Graw Hill 101 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 6: RULES AND REGULATION OF INSURANCE INDUSTRY Structure 6.0. Learning Objectives 6.1. Introduction 6.2. Rules and regulations of Insurance Industry. 6.3. Claim Settlement 6.4. Claim documents and forms and settlement procedure. 6.5. Summary 6.6. Keywords 6.7. Learning Activity 6.8. Unit End Questions 6.9. References 6.0 LEARNING OBJECTIVES After studying this unit, students will be able to: • Describe the Insurance regulation in India • State the Code of Conduct for Insurance business. • Explain the Procedure regarding settlement of policy Claims • Evaluate the Unfair practices. 6.1 INTRODUCTION The insurance sector was regulated by the Controller of Insurance until 1999, in accordance with the provisions of the Insurance Act 1938, but the IRDA believes that most of the provisions of this Act are no longer applicable in the current situation of the country. As a result, the Authority issued numerous regulations to help the country's insurance sector grow. As a result, the following relevant regulations will be discussed in the following chapters: – • Issuing licenses to companies who want to start an insurance company. • Insurance coverage approval. • Separate insurance intermediaries are appointed. 102 CU IDOL SELF LEARNING MATERIAL (SLM)
• Putting the insurance premium into a savings account. • Auditing and accounting • The Insurance Act's various important clauses. Principal Agencies were repealed by the Insurance Amendment Act of 1950. However, there were a lot of insurance firms, so there was a lot of competition. There were also claims of deceptive business practices. As a result, India's government agreed to nationalize the insurance industry. General insurance has a long tradition dating back to the western Industrial Revolution and the subsequent rise of sea-faring trade and commerce in the 17th century. It was brought to India as a result of the British occupation. General insurance in India dates back to the British establishment of Triton Insurance Company Ltd. in Calcutta in 1850. In 1999, the Insurance Regulatory and Development Authority (IRDA) was established as an independent body to regulate and grow the insurance industry, based on the recommendations of the Malhotra Committee report. There are currently 24 general insurance companies operating in India, including the ECGC and the Agriculture Insurance Corporation of India, as well as 23 life insurance companies. Aside from the IRDA Act and the Insurance Act of 1938, there are some common Acts/Regulations applicable to the General and Life Insurance Business in India, as well as some Acts created for specific Life Insurance/General Insurance requirements. The Insurance Regulatory and Development Authority of India regulates insurance firms, reinsurance companies, and insurance intermediaries in India (IRDAI). The Insurance Act of 1938 (the Insurance Act) and the Insurance Regulatory and Development Authority Act of 1999 are the primary pieces of legislation that govern the Indian insurance industry (the IRDA Act). The IRDAI has issued various regulations to regulate the licensing and operation of insurers, reinsurers, and insurance intermediaries, based on the powers given to it under the IRDA Act. The IRDAI has also issued the IRDAI (Registration and Operations of Branch Offices of Foreign Reinsurers Other Than Lloyd's) Regulations 2015 (the Branch Office Regulations), which govern the establishment and operation of foreign reinsurer branches in India, as well as notified regulations pertaining to Lloyd's entry into the Indian market. Despite the fact that the Insurance Laws (Amendment) Act 2015 (the Amendment Act), passed in March 2015, made several amendments to the Insurance Act and the insurance regulatory system in general, the IRDAI remains the primary insurance regulator. Appeals 103 CU IDOL SELF LEARNING MATERIAL (SLM)
from the IRDAI's orders and judgments can be brought before the Securities Appellate Tribunal (SAT). Following that, the SAT is told of the procedural rules for filing appeals from IRDAI orders or rulings. 6.2 RULES AND REGULATIONS OF INSURANCE INDUSTRY • The Insurance Regulatory and Development Authority IIRDAI) Act of 1999 established rules and regulations for the insurance industry. • In India, the insurance sector is governed by a complex collection of laws and regulations. The regulations define the types of securities in which insurers can invest and set a limit on their share of the total amount. Insurance firms must invest a minimum percentage of their invested assets in government securities, and there are limits on the amount that can be invested in authorized shares and other investments, which include unique equities and corporate bonds, as well as bank deposits, according to a comprehensive list. Approved investments are in businesses that have a long history of paying dividends. Other Investments are investments that do not meet these requirements. The goals of such a comprehensive collection of regulations are to preserve the real value of funds in the context of an uncertain market environment, as well as to assist insurers in meeting their obligations to policyholders at any given time. • Aside from that, in order to handle a company's investment portfolio, insurance investment practitioners should be familiar with fiscal, accounting, and regulatory structures. Conflict between these steps can lead to suboptimal economic investment decisions in some cases. As a result, investment strategy should establish appropriate investment targets for the fund that are consistent with the fund's overall objectives. The fund's strategic asset allocation approach, performance goals, and method for screening and, when appropriate, adjusting allocations in light of changing liabilities and market conditions should all be specified in the investment policy. It should also cover large tactical asset distribution, security selection, and trade execution decisions. The regulatory authority should have processes in place to review the investment strategy on a regular basis and determine if it is necessary to change the policy, its implementation procedures, the decision-making structure, and the obligations associated with its creation, 104 CU IDOL SELF LEARNING MATERIAL (SLM)
implementation, and review. A fund manager should only invest in assets whose risks he or she can legitimately classify, calculate, track, handle, regulate, and report on. The overall security, efficiency, liquidity, and profitability goals of the investment portfolio must be balanced with the predetermined policy objectives. However, due to a shortage of long-term fixed-income instruments, a scarcity of derivatives (such as interest rate swaps, ceilings, floors, and currency swaps), and relative illiquidity in bond and equity markets, insurance companies, especially in most emerging market economies like India, face many constraints in their investment management. Procedure of Granting of License to Companies to Start Insurance Business: No one may conduct insurance business without first obtaining a certificate from the Authority for a specific type of insurance business. An individual may, for example, begin life insurance, marine insurance, fire insurance, health insurance, and so on. A life insurance company, on the other hand, cannot be paired with any other form of insurance company. Those already in the insurance business, such as General Insurance Corp., National Insurance, New India Assurance, Oriental Insurance, and United India Insurance, must obtain a new certificate within three months of the Act's commencement date or before the date set by the government. Also insurers who were not required to register prior to the enactment of this Act would be required to obtain a registration certificate. The following steps must be taken in order to obtain a registration certificate: Any application for registration in the specified form (IRDA/R1) must include the following attachments: 1. A certified copy of Memorandum and Articles of association if the applicant is a company. 2. The name, address & the occupation of the directors of the company. 3. A statement of the class of insurance business proposed to be carried on. 4. A statement indicating the sources that will contribute the share capital. When IRDA receives the above documents, it will review them and, if appropriate, request additional information. For any details or clarification, the Authority may request that the Principal Officer appear in their office. If the Authority is satisfied with the information and 105 CU IDOL SELF LEARNING MATERIAL (SLM)
documents provided with the application form (IRDA/R1), the Authority may request a second application in the specified form (IRDA/ R2), along with the following documents: 1. Each insurance company must make a deposit in cash or approved securities, or a combination of cash and approved securities, as detailed below: - i)In the case of Life Insurance, an amount equal to 1% of his total gross premium written in India in any financial year beginning after March 31, 2000 and not exceeding rupees ten crores (Rs.10 crores). (ii) In the case of General Insurance, an amount equal to 3% of his total gross premium written in India in any financial year beginning after 31 March 2000, but not exceeding rupees ten crores (Rs.10 crores). (iii) A total of rupees twenty crores in the case of reinsurance company (Rs.20 crores). (iv) The sum to be deposited is Rs.1,00,000/- (Rs.1 lakh) only if the company is solely in marine insurance and relates exclusively to country craft or its cargo or both. (v) A certificate from the Reserve Bank of India confirming the deposit number. 2. A statement, backed up by an affidavit from the company's \"Principal Officer,\" that the company's equity capital has been met. For life or general insurance, the paid up equity, minus preliminary expenditures and registration costs, should be Rs.100 crores, and for reinsurance, Rs.200 crores. If an insurer is already doing business in the insurance industry, the paid-up capital must meet the Act's requirements within six months of its implementation. 3. A certified copy of the insurer's reported prospects and standard policy forms. 4. A statement of the guaranteed cost, benefits, and terms and conditions to be provided in accordance with insurance policies. 5. In the case of a company, an actuarial certificate stating that the prices are workable and sound. 6. The available forms, prospects, and statements to be submitted in the case of maritime accident & miscellaneous Insurance business other than workmen's compensation & motor vehicle Insurance. 7. For each class of company, a deposit of Rs. 50,000/- is needed. 106 CU IDOL SELF LEARNING MATERIAL (SLM)
8. A certified copy of the Memorandum of Understanding between the Indian promoter and the foreign promoter, including specifics of support comfort letters exchanged between the parties, if there is a foreign partner. 9. All other documents that the Authority requests after reviewing the application. 2A) If the authority is happy after receiving an application for registration that a) The applicant's financial position and general management character are sound. b) The applicant's capital structure and earning prospects will be sufficient, as well as the amount of business likely to be open. c) If the applicant is issued a certificate of registration, the general public will benefit. Refusal of Registration : • If the Authority denies the application, the applicant will be informed of the reason for the denial. • An applicant whose application has been denied can file an appeal with the Central Government within 30 days of receiving a copy of the decision. • The government's decision will be binding and will not be challenged in court. Cancellation of Registration : If any of the registration requirements are not met, the Authority has the authority to revoke the certificate of registration, either entirely or in part, if it applies to a specific class of insurance company. Renewal of Registration : • Every year, the registration must be renewed, and an application must be submitted to the Authority by December 31st of the previous year, along with the required fees, i.e., • (i) a quarter-percentage point of the premium paid, or Rs. 5 crores, whichever is less. • (ii) In each class of industry, it should not be less than Rs. 50,000. • (iii) In the case of facultative reinsurance approved in India, 1/4th of 1% of total premium will be considered for reinsurer firms. • (iv) Fees payable at the Reserve Bank of India 107 CU IDOL SELF LEARNING MATERIAL (SLM)
What are the requirements for formation and licensing of new insurance and reinsurance companies? An Indian insurance company is authorised to conduct insurance business in India under the Insurance Act. A public limited company established under the Companies Act 2013 (the Companies Act) that exclusively conducts life insurance, general insurance, health insurance, or reinsurance business is known as an Indian insurance company. The IRDA (Registration of Indian Insurance Companies) Regulations 2000 require any company wishing to conduct insurance business to apply for a certificate of registration from the IRDAI through a three- stage process (the Registration Regulations). A certificate for registration is required for each category of insurance business (i.e., life, general, stand-alone health and reinsurance). In addition, the Registration Regulations also set out the essential requirements that an applicant for registration is required to fulfil, including, but not limited to: • permissible foreign investment limits; • minimum capitalisation requirements; • minimum qualifications of the directors and principal officers; • planned infrastructure; and • general track record of conduct and performance of each of the Indian promoters and foreign investors in the business or profession they are engaged in. • The applicant must also provide adequate documentation in support of its application as prescribed under the Registration Regulations. In addition, as required by the Registration Regulations, the applicant must provide sufficient documentation to support its application. Furthermore, the Amendment Act allows international reinsurer branches and service companies to be formed under the Lloyd's India system. A foreign reinsurer must apply for registration of a foreign reinsurer branch, according to the Branch Office Regulations. The Branch Office Regulations define a foreign reinsurer's eligibility requirements, including credit rating, injection of minimum allocated capital into the foreign reinsurer branch, in-principle approval from the home country regulator, and determination to meet all of the foreign reinsurer branch's liabilities. 108 CU IDOL SELF LEARNING MATERIAL (SLM)
In addition, syndicates of Lloyd’s may participate under the Lloyd’s India framework (Syndicates of Lloyd’s India) through a service company set up in India in accordance with the IRDAI (Lloyd’s India) Regulations 2016 (the Lloyd’s India Regulations). The IRDAI published the IRDAI (Re-insurance) Regulations 2018 (Reinsurance Regulations), which consolidated the provisions regulating reinsurance in India into a single set of rules. What licences, authorisations or qualifications are required for insurance and reinsurance companies to conduct business? Other than registration under the Insurance Act and general company law, no additional licences, authorisations or qualifications are required for insurance and reinsurance companies to conduct business. Banks that intend to set up insurance joint ventures with equity contributions on a risk participation basis or make investments in insurance companies are required to obtain prior approval of the Reserve Bank of India before engaging in such business. What are the minimum qualification requirements for officers and directors of insurance and reinsurance companies? The Registration Regulations prescribe that the IRDAI will examine the following when considering granting registration to an insurance or reinsurance company: • the performance record of the directors and persons in the management of the promoter of the applicant and the applicant; • the level of actuarial and other professional expertise within the management of the applicant company; and • the academic and professional qualifications, professional experience, reputation and character of the directors and key persons, and whether any censure or disciplinary actions, dismissals and litigations have been instituted against them. What are the capital and surplus requirements for insurance and reinsurance companies? • Insurance companies must have a minimum paid-up equity capital of 1 billion rupees, whereas reinsurance companies must have a minimum paid-up equity capital of 2 billion rupees. The minimum allocated capital for international reinsurer subsidiaries is 1 billion rupees. In addition, Lloyd's India must be allotted a minimum of 1 billion rupees in assigned 109 CU IDOL SELF LEARNING MATERIAL (SLM)
money. Via their service companies in India, Lloyd's India Syndicates are expected to maintain an allocated capital of 50 million rupees. 6.3 CLAIM SETTLEMENT The settlement of a claim is the primary goal of life insurance, and policyholders have been waiting for it for a long time, in some cases practically their entire lives. It is the insurer's final duty under the insurance plan, since the policyholder has already fulfilled his obligation of paying the premium on a regular basis in accordance with the terms set out in the policy document's schedule. The policy document also specifies in the schedule the incident or incidents for which the insurer may reimburse a fixed sum of money if they occur (S.A.). In life insurance plans, there are three categories of claims: 1. Survival Benefit Claim 2. Maturity Benefit Claim 3. Death Benefit Claim Survival Benefit : Not all forms of policies provide for a survival benefit. It is payable in endowment or money back policies after a set period of time, such as 4 or 5 years, assuming the policy is in place and the policyholder is alive. The insurer notifies the policyholder when a premium is due and when a survival bonus is due, just as it notifies the policyholder when a premium is due. A discharge voucher with the amount payable is included with the letter of intimation of survival value. All the policyholder needs to do now is sign the discharge voucher and return it with the policy paper. The policy document is required for endorsement stating that the due survival benefit has been compensated. Under various types of policies, the survival advantage may take various forms. Maturity Claim: This is the final payment due under the agreement, according to the contract's terms. Any insurer is required to pay the amount due by the due date. As a result, notices of maturity claim and discharge vouchers are sent ahead of time with instructions to return them as soon as possible. If the life assured passes away after the maturity date but before the claim is paid, a common problem arises as to who is entitled to the money. The nominee is not entitled to the allegation since the policyholder lived before the maturity date. If the policy does not have a nomination, it is considered as a death claim in these circumstances. Before receiving a 110 CU IDOL SELF LEARNING MATERIAL (SLM)
legitimate discharge for payment of this maturity claim, the insurer may request a will or a succession certificate. Since the policyholder has relinquished his right to all benefits under the policy, the payment of maturity claim must be made to the appointed trustees if the policy was taken under the Married Women's Property Act. The policy money enjoys a protected position of being outside the reach of creditors and other creditors because of this relinquishment of right. A discounted maturity claim is one in which the maturity claim is demanded within one year of the maturity date. This amount is significantly less than the maturity claim. Death Claim: A death claim exists if the life guaranteed dies during the policy's duration. It is referred to as an early death claim if the death occurred within the first two years of the policy's inception, and it is referred to as a non-early death claim if the death occurred after two years. 6.4 CLAIM DOCUMENTS & FORMS AND SETTLEMENT PROCEDURE In this section, we'll go through the insurance forms that must be presented at the time of the final payout. The final payment may be for a maturity or death benefit claim. The documents required for payment of maturity claim: (i) Age proof, if age is not admitted. (ii) Original policy document for cancellation. (iii) In case assignment is executed on a separate paper, that document has to be surrendered. (iv) Discharge form duly executed. (v) Indemnity bond in case the policy document is lost or destroyed, duly executed by the policyholder and a surety of sound financial standing. The documents required for payment of a death claim : (i) An intimation of death by the nominee or a near relative. (ii) Proof of age if not already admitted. (iii) Proof of death. (iv) Doctor’s certificate who attended the deceased during his last illness. (v) Identity certificate from a reputable person who saw the body of the deceased life assured. (vi) Certificate of cremation or burial from a reputable person who attended the funeral. 111 CU IDOL SELF LEARNING MATERIAL (SLM)
(vii) An employer certificate if any, of the deceased. No more proof of title to the policy money is needed if the policy has been properly delegated or if the policy document contains a legitimate nomination. In other cases, a competent court of law is expected to provide satisfactory proof of title to the deceased's properties. e.g. (i) A probate of the will, if a will has been executed by the deceased life assured. (ii) A succession certificate if no will has been left. (iii) A certificate from the Administrator General, if the total amount of the estate left does not exceed Rs. 2,000/-. In case there is a rival claim court’s prohibitory order may be required to prevent the insurer from making the payment to the nominee as mentioned in the policy document. In case the life assured has disappeared : An individual who has vanished is assumed to be dead only if he has not been heard of for 7 years by those who would naturally have heard of him if he had been alive, according to Section 108 of the Indian Evidence Act of 1872. The complainant must produce a court order stating that the assured should be considered to be deceased. The legal heirs must continue to pay the premiums until a court order is obtained, failing which the policy will be considered as a paid-up policy. In case the premature death claim: In case of a premature death claim, i.e. a death within two years of the commencement of the policy, the insurer asks from claimant documents in order to eliminate the possibility of any suppression of a material fact at the time of submitting the proposal. (i) Hospital treatment details where the assured was hospitalized. (ii) Certified copies of postmortem report (iii) The police investigation report if death is due to an accident or unnatural cause. PROCEDURE OF CLAIM SETTLEMENT : Maturity Benefit : The settlement of a maturity claim occurs when the policyholder lives to the end of the policy's term and is entitled to receive the maturity value. The appointment has no impact since the policyholder is still alive. At the time of the proposal, age is usually disclosed. If it was not accepted for any reason, the age proof must be submitted before the maturity value 112 CU IDOL SELF LEARNING MATERIAL (SLM)
can be paid. The insurer sends the claim discharge voucher well in advance of the maturity date, which must be returned along with the policy document, properly signed and witnessed, for payment of the maturity value. Death Claim : The claim sum becomes payable to the candidate named in the policy document in the event of the policyholder's death at any point during the policy's term. The candidate or a close relative must notify the insurer of the policyholder's death, including the fact of death, the date of death, the cause of death, and the location of death, as well as the policy number. The insurer handles death claims differently depending on the policy's length. If the policyholder died within two years of the policy's inception, i.e., acceptance of risk that may vary from the policy's inception date if the policy has been dated back, it is considered a \"early or premature claim,\" and if the death occurred after two years of the policy's inception, it is considered a \"natural death claim.\" When a life assured dies after two years from the start of the risk, the insurer, upon being notified of the death of the policyholder, requests the age evidence, if not already admitted, the original policy record, and proof of death. A certificate from the municipal authority, in which cremation took place, or another local body, such as the death registry, may be used as evidence of death. The applicant is typically expected to fill out a claimant's declaration, which contains routine details about his title to the policy money as well as information about his death. Premature claim : A premature claim occurs when an individual dies within two years of the policy's start date, last revival date, or medical examination date. Before paying out on a premature claim, the insurer takes some precautions. It needs to ensure that it is a true event, that the right policyholder has died, and that the cause of death does not date back to when the policy began. To rule out any fraudulent motive, the length of the previous illness is critical. The various documents checked are the last medical attendants' certificate, hospital report, funeral certificate, employees' leave record, whether he was an employee of a reputable company, and so on. Ordinarily, a senior officer is delegated by the insurer to conduct an on- the-spot examination, by neighbors, friends, or a local doctor. 113 CU IDOL SELF LEARNING MATERIAL (SLM)
The insurer would like to check whether the statement contained in the declaration of good health provided at the time of revival is right, as the revival of the policy is a de novo contract of insurance. The argument can be dismissed if such a statement is found to be false in relation to a material fact. Life insurance is a contract of absolute good faith, and it must be upheld not only at the time of the proposal, but also at the time of the policy's renewal, if it occurs. In the event that there is a competing claimant for the insurance funds, the insurer may obtain a legal discharge by paying the candidate. The rival claimant will take the dispute to arbitration, which may order the payment to be halted before the case is eventually resolved. If no nomination is made under the scheme, the insurer must wait for a legitimate title to be established by a will or probate as a letter of administration or a succession certificate. It will take a long time for the court to issue such a certificate, and the family will suffer in the meantime. As a result, a good agent would make certain that the nomination or assignment is legitimate. The policy money is paid to the assignee if there is an assignment. If the policy is reassigned, a new nominee is required since the current nomination is nullified by the assignment. However, if the insurer has a nomination in place for a loan, the nomination is said to be unaffected, according to the insurer's assertion. If the premature death was caused by an accident, a criminal investigation report must be obtained in place of the attending physician's certificate. Suicide, if it occurs within one year of the onset of the risk, relieves the insurer of responsibility for the claim payout. Suicide proclivity is a moral hazard that is unlikely to last for more than a year. If the policyholder vanishes and is not seen or heard from for seven years by those who would have known him if he had been alive, he is considered dead under Section 108 of the Indian Evidence Act of 1872. It is, however, possible to keep the policy in place during this period by paying the required premiums on time. Claim concession : A death claim is usually payable as long as the policy is held in place by paying the necessary premiums. In other terms, if insurance payments are halted and the grace period ends, the policy is considered lapsed or paid up, depending on whether the premium has been paid for less than 3 years or 3 years and more. No demand is payable under a lapsed scheme. Only the paid-up amount of a paid-up policy is reimbursable. However, if the programme has been in force for three years or more, certain businesses give the following concessions on claim payment: 114 CU IDOL SELF LEARNING MATERIAL (SLM)
1. If a policy's premiums have been charged for at least three years and the life insured died within six months of the first overdue payment, the insurer pays the full sum assured rather than the paid up value, and only the unpaid premiums for the policy year are excluded from the claim amount. 2. This concession is applied for a period of twelve months, and if the life assured dies within one year of the due date of the first unpaid premium, the full amount assured is charged, given the premiums have been paid for a minimum of five years, subject to deduction of the unpaid premiums for the policy year. Ex Gratia claim : Nothing is charged in the event of death if a policy has not accrued paid-up value and say concession laws are not applicable. Some insurers, on the other hand, loosen the rules in favour of the claimant. If the premiums have been paid for more than two years and the death occurs within three months of the first unpaid premium, the full sum assured, plus any bonuses, is payable; if the death occurs after three months but within six months, half the sum assured is paid; and if the death occurs within one year of the first unpaid premium, the notional paid up value is paid. The outstanding premium plus interest for the policy year of death is deducted from the claim in the first condition, while no deduction is made in the other two. CLAIM SETTLEMENT OPTIONS: The majority of cases are settled in a single payment. This lump sum payment will be required for immediate needs in the case of a small sum guaranteed. (However, where the amount assured is high, paying it in instalments will be a valuable help to family maintenance.) It's shocking that the complainant, the lawyer, or the insurer don't pay enough attention to this part of the settlement choices. Since the settlement options currently available are not attractive in terms of interest rates, most plaintiffs are unlikely to choose them. Lump sum transfers are more likely to be spent much more quickly, leaving the family with little security. In the absence of a breadwinner, the family may lack the foresight and willingness to consider capital protection, rate of return, liquidity, and ease of money management. Many insurance firms around the world are making it easier for claimants to handle their claims by providing a variety of options. Life insurance is a form of capital development, whereas annuities are a form of capital distribution. As a result, life insurance firms may turn this money into annuity payments 115 CU IDOL SELF LEARNING MATERIAL (SLM)
based on the claimant's needs. An agent would be wise to counsel the widow in this regard and assist her in purchasing a suitable annuity policy with the claim sum so that the family can live comfortably for a long time. As mentioned in the chapter on \"Life Insurance Products,\" different forms of annuities are available. Let it be noted that a lump-sum payment does not provide cover against the beneficiary's creditors, while annuity payments do. Receiving fixed payments in instalments could be more appealing to beneficiaries who are inexperienced in the art of money management. Procedure for filing a claim on a life insurance policy: (i) A life insurance policy must specify the primary documentation that must be submitted by an applicant in order to make a claim. (ii) A life insurance provider must process a claim as soon as possible after obtaining it. To the extent practicable, any questions or requests for additional documents should be made all at once, rather than piecemeal, within 15 days of receiving the claim. (iii) Within 30 days of receipt of all relevant papers and clarifications needed, a claim under a life insurance policy must be paid or disputed, with all relevant reasons given. However, if the circumstances of a claim require an investigation, the insurance agent must begin and conclude the investigation as soon as possible. If the insurance provider believes the circumstances of a claim warrant an investigation, it must begin and conclude the investigation as soon as possible, but no later than 6 months after the claim is filed. (iv) According to the provisions of Section 47 of the Act, if a claim is ready for payment but payment cannot be made for any reason relating to the payee's proper identification, the life insurer shall hold the amount for the payee's benefit and such an amount shall earn interest at the rate applicable to a savings bank account with a scheduled bank (effective from 30 days following the submission of all papers and information). (v) If the insurer delays in processing a claim for reasons other than those listed in sub regulation (4), the life insurance provider must pay interest on the claim sum at a rate that is 2% higher than the bank rate in effect at the beginning of the financial year in which the claim is checked. 6.5 SUMMARY • Claim payment refers to payments made by the insurer to the policyholder or his nominee when an incident specified in the policy document's schedule occurs. Survival value is 116 CU IDOL SELF LEARNING MATERIAL (SLM)
paid to the policyholder on a regular basis in money back contracts. This amount is tax- free and can be used to fulfil upcoming obligations. • A maturity claim is a payout made at the end of the policy's term, and it is the happiest time for the policyholder since he gets the whole amount plus some additions after years of premium payments. • A death claim payout is the true fulfilment of life insurance's intent, since no other investment instrument can perform such a miracle. • The payment of the survival value or maturity assertion is fairly straightforward. Unless there is some wrongdoing involved, the process for filing a death claim is also painless. No life insurance firm can afford to cause complications in the payment of a death claim unless it does so at its own risk. In such occasions, a successful agent comes to the widow's assistance. Procedure for Claims Settlement: • Notification of death: The policy's beneficiary must notify the business of the insured's death. It is necessary to include the date of death, the cause of death, and the policy number. • Death certificate: On receiving the notice of death, the insurance company will send a claim form. The claimant should fill the form carefully and then submit it. The following documents should be attached to the form; • Death certificate. • Police report in case of unnatural death • Original policy • Identity certificate • Proof of life: In case the policy is not nominated in the name of the claimant, he will have to obtain a certificate of title of property of the deceased from a court of law. • Payment: When all the legal formalities are completed, the insurance company will send a discharge form to the claimant. The from should be duly filled in, duly stamped and returned to the insurance company. After the scrutiny of the discharge form, the insurance company will send the cheque to the claimant through registered post. 6.6 KEYWORDS 117 CU IDOL SELF LEARNING MATERIAL (SLM)
• Indemnity bond - in case the policy document is lost or destroyed, duly executed by the policyholder and a surety of sound financial standing • Claim Settlement - is a formal request to an insurance company asking for a payment based on the terms of the insurance policy. • Survival benefit - It is payable in endowment or money back policies after a set period of time, such as 4 or 5 years, assuming the policy is in place and the policyholder is alive • Maturity Benefit - The settlement of a maturity claim occurs when the policyholder lives to the end of the policy's term and is entitled to receive the maturity value • Death Benefit - payable to the candidate named in the policy document in the event of the policyholder's death at any point during the policy's term • Health Insurance - is a type of insurance that covers the whole or a part of the risk of a person incurring medical expenses • Unit Linked Insurance - is a product offered by insurance companies that, unlike pure insurance policy, gives investors both insurance and investment under a single integrated plan • Ex Gratia claim - Nothing is charged in the event of death if a policy has not accrued paid-up value and say concession laws are not applicable 6.7 LEARNING ACTIVITY 1. Ask your family or friends if they have ever had to contact their life insurer for any of the above points. If yes, ask them how the company went about addressing their request and how quick and friendly the company’s service was. ___________________________________________________________________________ ____________________________________________________________________ 6.8 UNIT END QUESTIONS A. Descriptive Questions 118 Short Questions 1. When the maturity claim is payable? CU IDOL SELF LEARNING MATERIAL (SLM)
2. When the death claim is payable? 3. What is the meaning of age not admitted? 4. What is succession certificate? 5. What is a premature claim? 6. What is an Ex-Gratia Claim? Long Questions 1. What are the provisions framed for settlement of claims under IRDA Policyholders’ Protection Regulations? Explain? 2. List the various types of claims that can be made under life insurance. Explain? 3. What are the documents required for settlement of death claim? Describe in detail? 4. What are the documents required for settlement of maturity claims? Explain in Detail? 5. What are the claim settlement options available to the insurers? Explain in detail B. Multiple Choice Questions 1. What is meant by a claim under an insurance policy? a. Any demand made by the policyholder on the insurer. b. A demand to fulfill the policyholder’s obligations. c. A demand to fulfill the insurer’s obligations. d. All of these. 2. Which one of the following statement is correct? a. A request for a loan is considered as a claim. b. A request for surrender of the policy is considered a claim. c. Both the statements above are correct. d. Both the statements above are wrong. 3. Which one of the following statement is correct? 119 CU IDOL SELF LEARNING MATERIAL (SLM)
a. A claim will be paid as soon as the death of the insured is confirmed. b. An insurer makes enquiries to establish that death took place. c. Both the statements above are correct. d. Both the statements above are wrong. 4. Which one of the following statement is correct? a. A death claim within two years of commencement is treated as an early claim. b. A death claim within two years of revival is treated as an early claim. c. Both the statements above are correct. d. Both the statements above are wrong. 5. Which one of the following statement is correct? a. The insurer waits for a demand before taking action in maturity claim cases. b. The insurer takes action in a death claim case after a demand is made on it. c. Both the statements above are correct. d. Both the statements above are wrong. 6. Which one of the following statement is correct? a. Maturity claims are paid to policyholders. b. Maturity claims are paid to assignees. c. Both the statements above are correct. d. Both the statements above are wrong. 7. Which one of the following statement is correct? 120 a. The death claim is settled in favour of the nominee in MWP Act cases. b. The death claim is settled in favour of the trustee in MWP Act cases. CU IDOL SELF LEARNING MATERIAL (SLM)
c. Both the statements above are correct. d. Both the statements above are wrong. 8. Which one of the following statement is correct? a. Maturity proceeds are paid to the nominee, if the policyholder dies earlier. b. Maturity proceeds are paid to the heirs, if the policyholder dies earlier. c. Both the statements above are correct. d. Both the statements above are wrong. 9. Which one of the following statement is correct? a. No claim is paid unless the original policy is produced. b. Claim can be paid even without the original policy, if it is lost. c. Both the statements above are correct. d. Both the statements above are wrong. 10. Which one of the following statement is correct? 121 a. Claims may be paid on the basis of indemnity, if title is not established. b. Claims may be paid on the basis of indemnity, if original policy is lost. c. Both the statements above are correct. d. Both the statements above are wrong. Answers 1-d 2-c 3-c 4-c 5-d 6-c 7-a 8-c 9-b 10-b 6.9 REFERENCES Text Books: • IC – 38 – Insurance Institute of India. Reference Books: CU IDOL SELF LEARNING MATERIAL (SLM)
• Sethi, Jyotsna and Bhatia, Nishwan, “Elements of Banking and Insurance” • Emmett J.Vaughan and Therese Vaughan “Fundamentals of Risk and Insurance” • Agarwal, O.P “Banking and Insurance” • Periasamy,P; Veeraselvam,M., “Risk and Insurance Management”, Tata Mc Graw Hill 122 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 7: UNDERWRITING Structure 7.0. Learning Objectives 7.1. Introduction 7.2. Definition - Underwriting 7.3. Purpose of Underwriting 7.4. Process of Underwriting 7.5. Financial , Medical and Non – Medical Underwriting. 7.6. Summary 7.7. Keywords 7.8. Learning Activity 7.9. Unit End Questions 7.10. References 7.0 LEARNING OBJECTIVES After studying this unit, students will be able to: • Explain the process of underwriting • Explain the various sources from where information is collected for underwriting. • Analyze moral and physical hazards. • Explain the difference between financial, medical and non-medical underwriting. • Explain the concept of human life value and its role in underwriting • Describe the process of pricing a policy. • Determine the process of calculating premiums. • Describe the process of calculating bonuses. • Explain the concept of liens. • Describe the role of the agent in underwriting. 123 CU IDOL SELF LEARNING MATERIAL (SLM)
7.1 INTRODUCTION Underwriting is the name given to the procedure of: • assessing the risk which people bring to the pool. • deciding whether or not to accept the risk, or how much to accept. • determining the terms, conditions and scope of the cover to be offered. • calculating a suitable premium Underwriters are in charge of determining the people the insurance provider will insure from among those who send applications, as well as the price it will insure them for depending on their risk profile. As we've seen, the insurance industry is built on the concept of risk sharing. In compliance with the contract terms and conditions, the insurance provider assumes the risks of the individual insured. As a result, underwriters must be extra cautious when selecting individuals to be insured from a group of proposers, as well as when determining a fair price based on the risk that each person poses to the pool. Failure to do so by an underwriter can jeopardize an insurance company's financial stability. In this chapter, we'll look at the details that an underwriter needs to accurately assess the risk posed by a proposer. Their risk assessment will affect the premium that will be paid, and we'll look at how pricing is done and how the premium is measured later. But first, let's take a quick look at the method of insurance underwriting as a whole. • Insurance underwriters assess the risks of insuring people and property and determine a risk's price. • In investment banking, underwriters guarantee a minimum share price for a company considering an initial public offering (initial public offering). • Underwriters in commercial banking measure the risk of lending to individuals or lenders and charge interest to cover the expense of taking on that risk. • Insurance underwriters take on the possibility of a probable occurrence and charge premiums in exchange for a guarantee to compensate the customer if damage or loss occurs. 7.2 DEFINITION - UNDERWRITING Insurance underwriting is the process of evaluating a company's risk in insuring a home, car, driver, or an individual's health or life. It determines whether it would be profitable for 124 CU IDOL SELF LEARNING MATERIAL (SLM)
an insurance company to take a chance on providing insurance coverage to an individual or business. Underwriting: it's the foundation of the whole insurance industry. That is why it's so important for underwriters to make the right decisions. It is up to them, and nobody else, to ensure that a correct level of risk is entering the industry and that this risk is matched by the right premium 7.3 PURPOSE OF UNDERWRITING It is easy to apply for a life insurance policy. It can only take a few minutes to apply for a job, particularly if it is done online. Your insurance application is then submitted to the underwriting process after you have provided your basic information and provided the correct information. This procedure decides whether you are eligible for coverage, how much coverage you are eligible for, and how much it will cost. The underwriter, who reviews your claim on behalf of or for the life insurance firm, examines your health and financial records to determine if you are qualified for the rate you were quoted. Underwriters use mortality statistics determined by actuaries to establish underwriting guidelines. Underwriting is a process that all insurance products go through. The underwriter for life insurance considers details such as your health and family records, as well as knowledge about your hobbies and financial abilities. Underwriting is divided into two parts: 1) Financial underwriting – It assists the underwriter in determining if the sum you're purchasing is appropriate for your family and needs. 2) Medical underwriting – Here, underwriters evaluate factors that can influence your mortality to assess how much of a risk you are to insure. What exactly is underwriting? : Underwriting is the process of evaluating a life insurance claim to decide if a policy should be offered or whether modifications to the policy should be made based on the applicant's risk profile. For the insurance provider involved in the issuing of an insurance policy to the individual in question, the procedure aids in the selection of risks. The organization's risk managers are underwriters. They assist the company in keeping real experience within the mortality assumption used in determining premium rates, allowing it to sell insurance coverage at reasonable rates, retain equity between policyholders, and protect as many lives as possible. 125 CU IDOL SELF LEARNING MATERIAL (SLM)
7.4 PROCESS OF UNDERWRITING The process of insurance underwriting: An underwriter is responsible for the classification, analysis and selection of the risks presented to them. Different companies have different guidelines as to how risks are classified and priced. Each company develops its own criteria and guidelines for the selection of risk, and the underwriter works within these with the aim of ensuring that the company continues to operate efficiently. The process of insurance underwriting is as follows: Fig 7.1 The process of insurance underwriting: The first step in insurance underwriting is to look over all of the details available about the proposer. For life insurance, significant information includes a person’s age, profession, salary, personal activities, own health and family health background, in addition to the report of the agent on all these aspects. The underwriter considers this data before deciding whether or not to approve or reject the proposal. This is a specialized method in which an insurance underwriter must review all relevant evidence to assess a proposer's true motives for taking out insurance. The information is then examined by the insurance underwriter to assess the likelihood that the insurer would have to pay a claim depending on the circumstances. 126 CU IDOL SELF LEARNING MATERIAL (SLM)
The underwriter calculates the maximum possible loss in this process (MPL). The maximum amount of damage that can occur if a specific incident happens is referred to as MPL. The underwriter would then determine whether to approve the risk at standard rates, accept the risk with adjusted or special terms (e.g., a higher premium), accept the risk with a lien, delay, or reject the risk as falling outside of the company's reasonable risk parameters. The organization must also be protected from adverse selection by the underwriter. This is a term used to describe a case in which an insurance provider admits an excessive number of proposers who pose a higher risk to the pool. The principle of adverse selection is founded on the idea that people who fear being exposed to risk are more likely to choose to buy life insurance than those who believe they are at low risk. If a company is subjected to adverse selection, it can find itself paying out more claims than anticipated. This clearly has a negative impact on the company's growth. Example: Rakesh Sharma has recently being diagnosed with diabetes. He is only 38 years old. Rakesh is very keen to get insurance cover and is willing pay a high premium. Rakesh Sharma’s main intention in taking out an insurance plan is to transfer the cost of the medical expenses that are likely to occur in the near future to the insurance company. Also, in case he dies, the claim from the life insurance company should be sufficient for his family to maintain a decent lifestyle. If people like Rakesh Sharma are selected by the insurance company in large numbers, this could lead to adverse selection. The potentially huge medical expenses that may arise will have to be borne by the insurance company. The underwriter may choose to reject Rakesh Sharma’s proposal on the basis that he brings too high a risk to the pool. However, rejection is not the only solution available to the underwriter. The underwriter can chose to: • accept the proposal at ordinary rates; • accept the proposal with extra premium; • accept the proposal with a lien; • accept the proposal with modified terms; • accept the proposal with a specific/modified clause; • postpone the decision for a certain period; or • reject the proposal. 127 CU IDOL SELF LEARNING MATERIAL (SLM)
Example: Hiten Patel applies for an insurance policy from an insurance company. In his proposal form, he declares that he is undergoing treatment for a heart-related problem. He also states that he has been operated on for the same problem before. The insurance underwriter in this case will have to collect the information about the nature of the illness, treatment available, operation and recovery procedure. Based on the information, the underwriter will decide about the risk associated with Hiten. The underwriter may charge him a higher premium or exclude health issues related to his heart from the cover provided Once the decision has been taken to accept a risk, the underwriter will classify it into a risk group. Each risk group has a rating based on company guidelines, with those risks presenting a higher risk being classified in a high risk group and being charged a higher rate. The risk group is very important as this is used to decide what premium the proposer will have to pay. The underwriter can change/modify the rating before arriving at the final premium. If the premium and terms offered by the underwriter are accepted by the proposer, the policy can now be issued to the proposer, customized if necessary, to take account of the risk presented by that proposer Obtaining the required information: The underwriter can collect the information about the proposer from several sources. Much of this is obtainable from the specific documentation that the underwriter requires, for example, the proposal form. Fig 7.2 Obtaining the required information: Proposal: The proposal form, filled in and signed by the proposer, is the most important source of preliminary information to the insurance underwriter. 128 CU IDOL SELF LEARNING MATERIAL (SLM)
The proposal contains the following information: Medical examination report: The insurance provider or a licenced doctor may conduct a full medical examination of the proposer. This is intended to minimise the risk of the organisation making an adverse decision, which is where a large number of unhealthy people are chosen over healthier people. The test could be conducted because the amount insured or the proposer's responses to the health questions indicate that the underwriter needs more detail about the risk before deciding to consider it. It could be the insurer's policy to request a medical evaluation report for any proposed hazards of a particular nature. Some insurers categorise proposers based on their era. The number of medical exams needed for those in the youngest age bracket would be limited, gradually rising until those in the oldest age bracket are expected to have a thorough medical examination. Insurance agent : Insurance agent: Since the insurance agent has prior contact with the proposer, he or she is in a strong position to assess their risk profile. The agent has the ability to evaluate the proposer's answers and ascertain their truthfulness, and the underwriter may request the assistance of the insurance agent at any time about the proposer. Agent’s Confidential Report: 129 CU IDOL SELF LEARNING MATERIAL (SLM)
Agent's Confidential Report: The insurance agent must file an \"Agent's Confidential Report.\" If the requisite amount of insurance coverage is standard, the insurer may prepare a report based on the proposer's financial situation, number of dependents, lifestyle, habits, and hobbies. If the minimum insurance coverage is greater than average, the agent must prepare a more comprehensive report. The information for this study was gathered from the proposer's relatives, colleagues, and neighbours. These reports are often referred to as a \"Moral Hazard Report\" and are expected to be prepared by senior insurance company employees (such as the Unit Manager or Sales Manager). There are several specialised inspection companies that can perform the inspection for the insurer these days. These firms compile and present a report on the applicant's work experience, financial situation, and creditworthiness. Additional information: If the amount of insurance coverage needed is greater than normal or the proposer's risk profile is high, the underwriter requests additional details. Additional information on the proposer's medical report may be requested if the amount of insurance coverage required by the proposer is comparatively high. To assess the risk involved in the proposal, special reports from senior officials and the insurance agent on the proposer's income, profession, lifestyle, behaviours, and so on will be needed. Report from tax authorities : Information from income tax authorities and tax consultants about a proposer's income tax history, tax deduction report, and so on may be referred to by the underwriter. This will allow the underwriter to see whether the proposer has any unpaid tax obligations or has ever defaulted on them. Moral and physical hazard: It is divided into two types: • physical hazard; and • moral hazard Physical hazard: Physical hazards refer to the physical characteristics of the risk associated with the life insured. Age : 130 CU IDOL SELF LEARNING MATERIAL (SLM)
The age of an individual is an important hazard when determining the risk associated with the life insured. The higher the age of the proposer, the higher will be the probability of their natural death. Occupation : The proposer’s occupation can increase the chance of their death. Certain jobs carry more risk to health, of death or of injury, than others and would be considered less attractive by the insurance company than less risky occupations. The hazards of different occupations can be considered on the following criteria: Example The proposer’s occupation may be classified as hazardous if they work in any of these: coal mines, ferrous metallurgical industries, chemical industries, explosives factories, or if their work involves: climbing poles, working at heights, working with high voltage electricity etc. Gender: Some companies charge a differential rate for females based on their profile, background etc. Residence: The security of a proposer’s home is an important physical hazard. If the neighbourhood where the individual lives is considered to be an unsafe, violent and dangerous area, then the risk to individual life increases. Habits: Habits such as drinking, smoking and the use of tobacco are considered to be hazardous to health. They can increase the risk that a proposer will die early or suffer a serious illness. Hobbies: If the individual indulges in dangerous hobbies, such as bungee jumping, car racing, mountain climbing, sky diving, scuba diving etc. then the risk to the individual’s life increases. These kinds of adventurous sports are less attractive to the insurance company. Physical characteristics: The physical characteristics of a person are used to determine the health of the proposer. Data regarding their height, weight, size etc. can determine how healthy the individual is. 131 CU IDOL SELF LEARNING MATERIAL (SLM)
Example Ravi’s height is 153 cm and his weight is nearly 80 kg. This shows that he could be overweight. This increases the chance of him developing heart disease and other ailments, such as diabetes and high blood pressure. Medical condition: When carried out, a complete heath check-up of the proposer will check their blood pressure and pulse to determine their medical fitness. A blood and urine sample is also taken to check if the proposer has developed certain diseases. Physical handicap: Physically handicapped persons are also considered to present an increased physical hazard as their disability may increase their risk of an early death. Medical history of the family: Certain illnesses, such as diabetes, a tendency to suffer from heart disease and some cancers are hereditary in nature. If a family member suffers from such an illness, then the chances that the proposer may also suffer from it increases. Personal history: The personal history of the individual with respect to their health records, habits, lifestyle, credit history etc. are also important criteria. Moral hazard : Moral hazard is more difficult to describe than physical hazard since it involves the proposer's conduct, attitude, and/or intentions. It's also difficult to reduce or eliminate poor moral hazard. The following examples illustrate the nature of moral hazard in relation to life insurance: • reckless or careless attitude to health and personal safety; • previous history of dishonesty (perhaps criminal activity that is revealed by checking court records); and • previous claims history if it reveals a history of fraudulent/frequent claims, bankruptcy or other financial difficulty. Fraud and moral hazard: Fraud and moral hazard: One type of moral hazard that life insurance underwriters should pay special attention to is the intent to commit fraud. 132 CU IDOL SELF LEARNING MATERIAL (SLM)
Underwriters would be on the lookout for life insurance proposals that exhibit such features that, in their opinion, could indicate fraudulent intent based on their expertise and experience. Such instances are as follows: • The proposer is seeking cover for a significant sum at a later point of their lifecycle. • The premium is purchased by a single person with no dependents. • The insurance package covers a family member that does not work (because the death of a non-earning member does not affect the livelihood of the dependants). • Where the policy's candidate is not one of the insured's dependants. • Where the proposer is looking for protection for a sum that is far greater than their profits. • If the individual's previous insurance rates have been significantly higher than their ability to pay based on their income. • Where the medical examination takes place somewhere other than where you live. • If the underwriter is concerned about some aspect of the agent-proposer relationship. The information in section B is used by underwriters to determine the circumstances faced by the proposer. 7.5 FINANCIAL, MEDICAL AND NON-MEDICAL UNDERWRITING Financial underwriting: Underwriters will closely examine the financial dimensions of a proposed risk for reasons other than detecting any fraudulent motive. Financial underwriting, as we'll see, works to limit the amount of life insurance an individual can buy. The 'Human Life Value' (HLV) definition can be used to determine how much life insurance an individual is liable for. The HLV principle attempts to quantify a person's economic worth in monetary terms. HLV is discussed in greater depth in Section E of this chapter. Financial underwriting ensures that the insured individual is eligible for a sum of insurance that does not surpass their insurable interest. Financial underwriting takes into account an individual's personal and family income. If a person requests a sum insured that is well in excess of their profits, an underwriter must determine if the amount of insurance coverage requested exceeds the insurable interest. 133 CU IDOL SELF LEARNING MATERIAL (SLM)
The term \"insurable interest\" refers to the fact that the amount of life insurance sought has a solid basis. The higher the amount insured, the more justification an underwriter would demand. This usually means that every proposer's insurance policy is limited at a certain level, over which they have no real reason for coverage. Financial underwriting considers a person's salary, age, and net worth, among other things. There are two types of insurance plans available from insurance companies: one that needs medical underwriting and one that does not. Medical underwriting: Medical underwriting is where the underwriter actually researches the health and medical history of the individual in a detailed and accurate way by checking the medical records of the proposer for the past few years and insisting on a medical check-up. This medical check- up can be either general or more comprehensive depending upon the age of the proposer, their medical history and the amount of insurance cover they are asking for. If the proposer is found to be in perfect health, then they would be considered as low risk by the underwriter. Non-medical underwriting : As the name suggests, under this category no medical examination is required for insurance to be agreed. The medical assessment of the proposer can be both a time consuming and expensive exercise. Also, in many cases (mostly with proposers living in rural areas), specialised medical services would not be available so it can be difficult for a proposer to obtain a medical report from a qualified doctor. In non-medical underwriting, instead of a medical report the insurance is based on the physical characteristics of the individual, such as age, height, weight etc. as revealed by the proposal form. The proposal form is usually more detailed for this kind of insurance. All proposals are checked by agents, field officers and branch officials. In addition, a high- ranking official may be called upon to submit a special report. If the proposer is in regular employment, then the leave records of the employee can be assessed for insurance. If a personal statement or the family history reveals the existence of a medical condition(s), then a medical examination may be requested. Non-medical insurance underwriting carries more risk to the insurer as proposers may have a medical condition that would have been revealed by a medical examination, but which does not come to light in the proposer’s answers on the proposal form. The chances of adverse 134 CU IDOL SELF LEARNING MATERIAL (SLM)
selection may be greater with this method of underwriting and, as a consequence, these policies may be priced at a higher rate. Safeguards adopted in non-medical business Since the risk of adverse selection is higher when it comes to medical underwriting, insurance providers take the following precautions: • a restriction on selection (female lives); • putting limits on the sum insured; • a restriction on maximum entry age. • a restriction on the maximum term for which the policy can be issued. • a restriction on the maximum age at maturity. • a restriction on the types of insurance plans allowed. • restrictions on high-risk plans. • limiting cover to certain categories of lives (based on education, social and economic background); • restricting the class of lives eligible (to individuals employed in reputable organisations, who have undergone a medical exam at the time of recruitment, for whom leave records are maintained, and they have completed at least one year of service etc.); and • requiring a moral hazard report from an officer of the insurer. HLV (Human Life Value): The primary purpose of life insurance is to cover the insured's family in the event that the insured passes away suddenly. It accomplishes this by paying out the policy's insured sum in the event of a disaster. But how big should this insurance policy be? What is the value of the insured's life? What is human life value? When you ask someone how much their life is worth, they would unquestionably respond that human life is precious and that no amount of money can replace the value of a human being. However, insurance firms and their brokers will have different perspectives. To determine the amount of insurance coverage that an individual can purchase, a monetary value for human life must be assigned. This is referred to as the importance of a human life 135 CU IDOL SELF LEARNING MATERIAL (SLM)
(HLV). A human being, like real estate, equities/shares, or commodities, is an asset with the ability to produce profits. The insurance industry uses human life value (HLV) to determine a person's economic value, or how much he or she is worth in monetary terms. HLV is a yardstick used in life insurance to decide how much coverage an individual should have. If the right insurance is in place, the family would not suffer any financial loss if the individual passes away today. Emotional loss, of course, cannot be accounted for. The insurance provider would pay the person's family a lump sum to compensate for the life insured's future income; the income they would have received if they had lived. How much life insurance should one have? Many people are unaware that, despite having a variety of insurance plans, they can be grossly underinsured if the amount of coverage offered by the individual policies is insufficient. So, what is the proper amount of life insurance coverage for an individual? We will find a response by examining the various approaches to determining the worth of human life (HLV). A person's HLV should be equal to the amount of life insurance coverage they have. Income replacement method : This method considers a person's possible income earning opportunities over the remaining years of their working life, ensuring that their family is not financially disadvantaged in the event of their untimely death. This is a two-step process: 136 CU IDOL SELF LEARNING MATERIAL (SLM)
Simple method Alternatively, there is a simpler method to calculate HLV than using the income replacement method. 137 CU IDOL SELF LEARNING MATERIAL (SLM)
This method will ensure that the family will continue to receive Rs. 3 lakhs per annum as long as Bank FD rates stay at 8%. This method assumes that the annual salary will remain constant at Rs. 4,00,000 throughout, and does not take into consideration any expected increases in salary. It also assumes that Bank FD rates will remain constant at 8% throughout, and does not take into consideration the increase or decrease in interest rates. Liens In certain situations, the underwriter may believe that the risk associated with an individual will diminish over time. The underwriter will approve the proposal with a lien in such cases. The lien is operable on a decreasing basis for the duration of the risk, which is expected to diminish over time. A lien is commonly used to avoid charging a high premium for a high- risk situation. Simply put, if the insurance provider classifies the proposer as high risk because their physical attributes do not meet the minimum criteria set by the insurance company, the proposer will be charged a high premium. The proposer, on the other hand, has the choice of requesting a lien. When the lien is granted, the insurance provider will be liable to pay only a portion of the amount insured for a set period of time if anything happens to the proposer. If the insured passes away during the lien time, the insurance provider is not obligated to pay the full amount insured. The guidelines for liens which are normally followed by insurance companies are: • the lien should diminish by an equal amount over a specific period of time; and • if the term of the policy is a multiple of three, then the lien operable is one third of the term of the policy. Insurance firms have different rules on when they should apply a lien. In general, a corporation will issue a lien if it believes the applicant poses an additional risk because their physical features do not meet the company's regular ones. The agent’s role in underwriting : The role of the agent in underwriting: Since agents have direct communication with the proposer, they play an important role in the underwriting process and are referred to as \"primary underwriters.\" • The agent must ensure that the proposer has filled out the proposal form absolutely. They must also ensure that the proposer has answered all of the questions truthfully, since the 138 CU IDOL SELF LEARNING MATERIAL (SLM)
proposal type is the foundation upon which the proposal can be approved or rejected. If the agent is assisting with the completion of the form, they should complete it completely and accurately. In any case, the answers given should not be regarded as biased. The respondents' responses should be reported as accurately as practicable, with any elements of misinformation or inaccurate data prevented. • The agent is in a strong position to decide whether the proposer wants to take out insurance because he or she is in direct touch with the proposer. They should state in their report whether they believe the proposer's motives are not genuine. The agent must evaluate the responses provided by the proposer and their family when conducting a personal conversation with them. They should challenge the proposer further if they have details that seems to be inconsistent. • The consultant will assist the proposer in determining their human life value (HLV) and the amount of life insurance they can purchase. • The insurer will speed up the underwriting process by sending the necessary documentation and the proposal form in a timely manner. • Taking life insurance based on the HLV estimate sum offers income security to the family and helps it fulfil its financial obligations even after the income provider's premature death. • If the insurance plan is approved, the policy can be sent directly to the insured or given to the agent for delivery. • If an additional medical check-up is requested, the agent may assist the proposer in making the correct appointment with the doctor and ensuring that the doctor's report is submitted as soon as practicable. Even if the plan is refused, the agent can still have a part to play. While the insurer will give the proposer a letter explaining why their application was declined, the agent can contact the proposer directly and explain the reason(s) for the rejection. 7.6 SUMMARY • Underwriting is the name given to the procedure of assessing proposals and deciding whether to accept the risk and if so, on what terms. • Underwriting has two purposes i. To prevent anti-selection or selection against the insurer ii. To classify risks and ensure equity among risks. • Underwriting or the selection process may be said to take place at two levels: 139 CU IDOL SELF LEARNING MATERIAL (SLM)
a. At field level b. At underwriting department level. • Some of the rating factors for non-medical underwriting include • Age and gender • Large sum assured • Habits and life styles • Moral hazard etc. • Some of the factors considered in medical underwriting include • Family history including Heredity, • Personal history of disease • Personal Characteristics. 7.7 KEY WORDS • Underwriter - assess the risks of insuring people and property and determine a risk's price • Gross Premium - is the total premium of an insurance contract before brokerage or discounts have been deducted • Moral Hazards - is more difficult to describe than physical hazard since it involves the proposer's conduct, attitude, and/or intentions • Human Life Value (HLV) - can be used to determine how much life insurance an individual is liable for. • Physical hazard - Physical hazards refer to the physical characteristics of the risk associated with the life insured. • Risk Premium - is the investment return an asset is expected to yield in excess of the risk-free rate of return • Bonuses - is an additional sum which is accrued to the life insurance policy on an annual basis. • Financial Underwriting - ensures that the insured individual is eligible for a sum of insurance that does not surpass their insurable interest • Liens - is a legal claim that an auto insurance company, health care provider, or 140 CU IDOL SELF LEARNING MATERIAL (SLM)
health insurance company has over settlement claims after paying the injured party's bills • Adverse Selection - is the tendency of those in dangerous jobs or high- risk lifestyles to purchase products like life insurance • Level Premium - is a type of life insurance in which premiums stay the same price throughout the term, while the amount of coverage offered increases 7.8 LEARNING ACTIVITY 1. Collect a proposal form from any life insurance company. Prepare a list of the details/information that the form asks for. What kind of information is the proposal form asking for? ___________________________________________________________________________ ____________________________________________________________________ 2. Visit an insurance company and collect a proposal form for medical insurance and non– medical insurance. What sort of additional information is asked for by the non-medical form compared to the medical form? Prepare a summary report to help you to understand the difference in the two approaches. ___________________________________________________________________________ ____________________________________________________________________ 7.9 UNIT END QUESTIONS A. Descriptive Questions 141 Short Questions 1. What is a lien in insurance? 2. What is the role of the agent when the underwriter rejects the proposal? 3. What is an ‘interim bonus’? 4. Define Underwriting 5. When is a health declaration made? 6. Why object of insurance is necessary? CU IDOL SELF LEARNING MATERIAL (SLM)
7. When are medical tests needed to be done? Long Questions 1. When the underwriter receives a proposal for insurance, what are the various decisions that they can take in respect to that proposal? 2. Can the area where the proposer lives be considered a physical hazard? Give reasons to support your answer. 3. How does an insurance company take account of the effects of inflation when calculating a ‘level premium’? 4. Discuss the various modes of payment of premium and explain in detail? 5. Classify the various kinds of risk and explain? B. Multiple Choice Questions 1. What is proposal? a. A request for an insurance cover. b. An offer to enter into a contract. c. Both a request and an offer to enter an insurance contract. d. None of these 2. Moral hazard may be suspected in cases where 142 a. The life to be insured is old. b. The insurance is for a very large sum insured. c. In the both the cases. d. None of these 3. Under the system of non–medical underwriting a. There is no restriction on age. b. There is no restriction on sum assured. c. Only some towns are covered. CU IDOL SELF LEARNING MATERIAL (SLM)
d. There is restriction on both the Sum assured & age. 4. Which one of the following statements is correct? a. An underwriter charges extra premium for physical hazards. b. An underwriter charges extra premium for moral hazards. c. Both (a) and (b) statements are correct. d. Both (a) and (b) statements are wrong. 5. Which one of the following statements is correct? a. The underwriter assesses the risk. b. No policy can be issued without underwriter decision. c. Both (a) and (b) statements are correct. d. Both (a) and (b) statements are wrong. 6. Which one of the following statements is correct? a. Underwriting is done only when there is a medical examination. b. Medical examination is necessary before a policy can be issued. c. Both (a) and (b) statements are correct. d. Both (a) and (b) statements are wrong. 7. Which one of the following statements is correct? a. Underwriters are more cautions while considering cases on female lives. b. Underwriting are more cautions while considering cases of educated women. c. Both (a) and (b) statements are correct. d. Both (a) and (b) statements are wrong 143 CU IDOL SELF LEARNING MATERIAL (SLM)
8. Which one of the following statements is correct? a. Working women are treated at par with men. b. Educated women are treated at par with men. c. Both (a) and (b) statements are correct. d. Both (a) and (b) statements are wrong. 9. Financial underwriting is done to evaluate a. The probability of the policy lapsing in future. b. The possibility of moral hazard. c. Both (a) and (b) statements are correct. d. Both (a) and (b) statements are wrong. 10. Which one of the following statements is correct? a. Underwriting standards are changing. b. The underwriting standards of all insurers are the same. c. Both (a) and (b) statements are correct. d. Both (a) and (b) statements are wrong. Answers 1-a 2-c 3-d 4-c 5-c 6-c 7-a 8-c 9-b 10-c 7.10 REFERENCES Text Books: • IC – 38 – Insurance Institute of India. Reference Books: • Sethi, Jyotsna and Bhatia, Nishwan, “Elements of Banking and Insurance” 144 CU IDOL SELF LEARNING MATERIAL (SLM)
• Emmett J.Vaughan and Therese Vaughan “Fundamentals of Risk and Insurance” • Agarwal, O.P “Banking and Insurance” • Periasamy,P; Veeraselvam,M., “Risk and Insurance Management”, Tata Mc Graw Hill 145 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 8: REINSURANCE Structure 8.0. Learning Objectives 8.1. Introduction 8.2. Definition - Reinsurance 8.3. Need for Reinsurance 8.4. Difference between Reinsurance and Double insurance 8.5. Essentials of Reinsurance Programs 8.6. Summary 8.7. Keywords 8.8. Learning Activity 8.9. Unit End Questions 8.10. References 8.0 LEARNING OBJECTIVES After studying this unit, students will be able to: • Describe what is Reinsurance • State the features of Reinsurance • Evaluate the difference between Reinsurance and Double Insurance • Explain the essentials of Reinsurance programs 8.1 INTRODUCTION Insurance for insurers, also known as reinsurance, or stop-loss insurance, is a form of reinsurance. The process of insurers transferring parts of their risk portfolios to other parties in some kind of arrangement to mitigate the possibility of paying a significant obligation arising from an insurance claim is known as reinsurance. The ceding party is the party that diversifies its insurance portfolio. The reinsurer is the entity that assumes a portion of the future liability in return for a share of the insurance premium. How Reinsurance Works 146 CU IDOL SELF LEARNING MATERIAL (SLM)
Reinsurance helps insurers to stay afloat by recouping some or all of the money they've paid out to claimants. Reinsurance lowers the net exposure on individual liabilities and protects against significant or multiple losses in a disaster. Ceding businesses that pursue reinsurance benefit from the practise because it allows them to expand their underwriting capabilities in terms of the amount and scale of risks they will take on. Unlike co-insurance, which involves many insurance companies banding together to cover a common risk, reinsurers are usually last-resort insurers. The insurance industry is focused on probability rules, which assume that only a small percentage of policies issued will result in claims. As a result, an insurance company's gross amount insured will be many times its net worth. Insurance premiums are set by insurance providers based on the same risk of loss. The premiums are set in such a way that the overall premium paid is sufficient to cover all claims incurred after expenses are deducted. However, in a poor year, the overall value of claims may be much higher than the premium received. There is a risk that the company's net worth would be wiped out if the losses are very high. Insurance firms carry out plans to protect themselves from certain dangers. Second, as insurance firms lack the capacity to offer coverage on their own, they enlist the help of reinsurers. 8.2 DEFINITION - REINSURANCE Reinsurance is a risk transfer mechanism whereunder an insurance company passes on the risk on an insurance policy to another entity called Reinsurer for a consideration under a Reinsurance treaty (contract). 147 CU IDOL SELF LEARNING MATERIAL (SLM)
Fig 8.1 Reinsurance Reinsurance is a process in which one direct insurance firm (also known as a Ceding company) passes (cedes) a portion of the liability to another insurance company (called Reinsurer). Which tends to significantly reduce the direct insurer's liability. Without reinsurance, an insurance company's financial position may be jeopardised, particularly if a natural disaster strikes. Swiss Re, Munich Re, RGA, Hannover Re, and other major reinsurance firms have opened reinsurance offices in India. GIC Re is the Indian reinsurer (General Insurance Corporation of India). Reinsurers have teams of qualified skilled specialists with expertise in Actuarial, Claims, Underwriting, and other areas. Reinsurers take a percentage of the Policyholder's premium and agree to pay the proportionate amount of any expenses covered by the Policy. 8.3 NEED FOR REINSURANCE Based on medico-actuarial reports, mortality statistics, thorough analysis, and his own experience in this area, the life insurance company's actuary prices the products and makes some critical mortality assumptions. In general, the real mortality experience is believed to be consistent with the actuaries' mortality assumptions. However, if there are variations and the real death experience is not favourable, this may result in damages, which will indemnify the direct life insurance provider against financial losses. When reinsurance agreements are in place, the risk/liability is borne by the reinsurer in return for a proportionate pre-determined premium, this situation may be resolved. Reinsurance may thus be described as the \"sharing or spreading of risks.\" The reinsurance plans reduce the direct insurer's financial exposure to death claims. The retention cap refers to the amount of liability that a direct insurance provider (ceding company) accepts. Example of Reinsurance: Reinsurance as an example: An illustration will help to clarify the principle of reinsurance: Mr. X, a factory owner, approached an insurance company ‘A’ for an insurance of an amount of Rs. 40 crores. Company ‘A’ has two options before it. It can reject the risk or accept the entire risk and share a part of the risk with other insurer. In case, the company ‘A’ decides to assume the risk, by retaining Rs. 20 crores worth of insurance with it and seeking assistance 148 CU IDOL SELF LEARNING MATERIAL (SLM)
of other insurer for the excess of his own limit. i.e., for the balance of Rs. 20 crores. The excess for which the company ‘A’ is approaching the other insurer is called “Reinsurance”. 8.4 DIFFERENCE BETWEEN REINSURANCE AND DOUBLE INSURANCE The word insurance refers to a contract under which the risk of loss is transferred from one party (insured) to another (insurer) by paying a predetermined amount at predetermined intervals (premium). A form of insurance in which a person or company insures a specific property with multiple insurers or multiple policies from the same insurer is known as double insurance. Double insurance is not the same as reinsurance since it involves an insurance provider transferring liability on a policy by insuring it with another insurer. As a result, there is a fine line between double insurance and reinsurance, which is discussed in this article. Comparison Chart : BASIS FOR DOUBLE INSURANCE REINSURANCE COMPARISON Reinsurance implies an Meaning Double insurance refers to a arrangement, wherein the insurer situation in which the same transfer a part of risk, by insuring risk and subject matter, is it with another insurance insured more than once. company. Subject Property Original insurer's risk Compensation It can be claimed with all It can be claimed from the original Loss Aim insurers. insurer, who will claim the same from reinsurer. Loss will be shared by all the The reinsurer will only be liable insurers in proportion of the for the proportion of reinsurance. sum insured. To assure the benefit of To reduce the risk of the insurer insurance 149 CU IDOL SELF LEARNING MATERIAL (SLM)
Interest of Insurable interest No interest insured Necessary Not necessary Consent of insured Table 8.1 Comparison Chart: Definition of Double Insurance Double insurance is described as an insurance arrangement in which a particular subject or risk is insured with multiple insurance policies of the same insurer, or with multiple insurers, for the same period. It is made to attain security and satisfaction, which the insurers will make good the loss occurred to the insured. In the event of loss, the insured can claim compensation from all the insurers under the concerned policies. However, the total amount of compensation cannot exceed the actual loss incurred to him, and so the insurers will contribute, in the proportion of the sum insured. Definition of Reinsurance Reinsurance is a product offered by insurance companies to other insurance companies to cover large losses. When an insurance company is not capable of bearing the entire loss arising out of the insurance provided to the insured, then it can go for reinsurance, in which a part of the risk is reinsured, with another insurer. Usually, the insurance company chooses reinsurance, when the insurance amount is high, and a single insurance company cannot bear it easily. Key Differences Between Double Insurance and Reinsurance The difference between double insurance and reinsurance are discussed in the following points in detail: 1. When a property or asset is covered by different insurers or under multiple insurance plans with the same insurer, it is referred to as double insurance. Reinsurance, on the other hand, is an agreement that allows an insurance provider to shift the liability associated with an insurance policy to another insurer. 150 CU IDOL SELF LEARNING MATERIAL (SLM)
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