There are two types of contracts: bilateral and unilateral. In a bilateral agreement, each party makes a commitment in return for another promise. In a unilateral contract, however, one party's commitment is exchanged for a particular act by the other. Insurance policies are unconditional in nature; the insured pays the insurance fee, and the insurer agrees to compensate the insured for any covered damages. It's worth noting that after the insured has paid the insurance fee, there's nothing more he or she has to do; no other guarantees of success have been made. Only the insurer has agreed to take some further action, and only the insurer may be held liable for contract breaches. (f) Conditional: A condition is a contract clause that restricts the rights granted by the contract. Insurance arrangements are conditional in addition to being executory, aleatory, adhesive, and of the highest good faith. And if a failure has occurred, the contract must be legally upheld if certain conditions are met. For example, the insured person or beneficiary must meet the requirement of providing adequate evidence of loss to the insurance agent or proving that he or she has an insurable interest in the person insured. There are two groups of conditions: those that come before and those that come after. Any action or act that must occur or be done before the contractual right can be issued is referred to as a condition precedent. For example, before a person may receive medical benefits, he or she must become ill or injured. Furthermore, before a death benefit is paid to a survivor, the insured must pass away. An occurrence or act that serves to cancel a contractual right is known as a condition subsequent. One example of such a situation is a suicide clause. Typical suicide provisions nullify the right to a death insurance payout. (g) Personal contracts: Insurance contracts are normally private arrangements between the insurer and the insured person, and they cannot be transferred to another person without the insurer's permission. (There are some significant exceptions to this rule, such as life insurance and some marine insurance policies.) For example, if a car owner sells the vehicle and no provision is made for the buyer to maintain the same car insurance (which, in fact, would actually be the drafting of a new policy), coverage would end when the title is transferred to the new owner. (h) Warranties and Representations: A warranty is a statement that is guaranteed to be valid and, once claimed, becomes a contractual obligation. A violation of warranty, in most cases, is ample cause for the contract to be cancelled. 51 CU IDOL SELF LEARNING MATERIAL (SLM)
A representation, on the other hand, is an argument that the other party believes to be true to the best of their understanding. A party must claim that the information misrepresented is relevant to the agreement in order to void a contract based on a misrepresentation. The answers that an individual gives on an insurance application are considered representations, not guarantees, according to the laws of most states and in most circumstances. Consider the case of an individual who is looking for life insurance. He or she would be asked to fill out an application, which would ask for the applicant's sex and age. For the insurer to accurately assess the liability and calculate the insurance price, this information must be accurate. If the claimant answers these questions incorrectly, they will almost certainly be considered misrepresentations, and the insurance provider will use this as a reason to cancel the policy (absent outright fraud). However, there is a distinction to be made between representing (or misrepresenting) a fact and expressing an opinion. Take, for example, a standard insurance application question like \"Do you now consider yourself to be in good health, to the best of your knowledge?\" An applicant who answers \"yes\" while knowing that he or she has a specific medical condition is guilty of misrepresenting a fact. If the claimant, on the other hand, had no signs that would be recognized by an ordinary citizen and no doctor's opinion to the contrary, he or she would simply be expressing an opinion rather than making a false statement. (i) Misrepresentations and Concealments: A misrepresentation is a false statement that is made in writing or orally. In general, for an insurance provider to cancel a policy due to misrepresented information, the misrepresented information must have been material to the decision to extend coverage. Concealment, on the other hand, is the inability to reveal knowledge about which one is fully aware. In order to cancel a contract on the basis of concealment, the insurer must normally show that the claimant knowingly and deliberately withheld material details. (j) Fraud : Fraud is the deliberate attempt to convince, mislead, or manipulate others in order to obtain something of value. While fraud can be committed by misrepresentations or concealments, not all misrepresentations and concealments are fraudulent. For example, if an insurance claimant knowingly lies in order to gain benefits or file a false claim, this may be grounds for a fraud charge. However, no fraud has occurred if an applicant intentionally misrepresents 52 CU IDOL SELF LEARNING MATERIAL (SLM)
any piece of information (for example, failing to reveal a medical procedure that the applicant is personally ashamed to discuss). (k) Impersonation (false pretences): When one person assumes the identity of another in order to commit fraud, that person commits the crime of impersonation (also known as false pretenses). For example, if a person is likely to be denied insurance benefits due to poor health, he or she may ask a friend to complete a physical examination in his or her place. (l) Parole (or Oral) evidence rule: This theory restricts the impact of oral comments made prior to the execution of a contract on the contract. Any oral agreements reached prior to the contract’s drafting were assumed to be immediately integrated into the contract’s drafting. Any previous oral remarks will not be permitted in a court of law to amend or counter the contract until it has been enforced. The role of insurance agents in insurance contracts : Anyone who acts on behalf of another person is considered an \"actor\" in the eyes of the law. If we authorize others to act on our behalf, we will almost certainly have to take responsibility for whatever they do on our behalf as long as the terms of the agreement are followed. This is true in insurance, where if an intermediary is involved, legal relationships are formed. A licensed intermediary employed by an insurance firm to market its policies on its behalf is referred to as an agent. As a result, the intermediary takes on the role of legal ‘agent,' working on behalf of the ‘principal' (in this case, the insurance company). They have been given permission by the principal to enter into a contractual arrangement with a third party (in this case, the proposer/individual seeking insurance). 3.3 INSURANCE ACT 1938 This is the most significant piece of insurance legislation passed in India, and it went into effect on July 1, 1939, as described in Chapter 1. The Act codifies the law governing the insurance industry, and it was the first piece of legislation to regulate all types of insurance and give the government power over the industry. Following the establishment of the IRDA, the original 1938 Act was revised in 1950, 1956, 1968, 1972, and also in 1999 and 2002. (see section D). The Act covers a wide range of topics, including: 53 CU IDOL SELF LEARNING MATERIAL (SLM)
• insurer registration and renewal. • premium investment methods. • insurer solvency levels (see ‘Be aware' below); • staff appointments. • amalgamation and transfer of insurance business. • assignment or transfer of policies and nominations. • rural and social sector; and control over mana. Until 1999, the Insurance Act 1938 was administered by the Controller of Insurance (an individual appointed by the Central Government to exercise all powers, discharge all functions, and perform all duties of the Authority). The IRDA took the place of the Controller. Provisions with specific relevance to agents : The following parts of the Act are especially relevant for agents to understand since they provide the rules that must be followed regarding: • Agent licensing; • commission payable to agents; and • rebate prohibition. Section 40(1) – Prohibition of payment by way of commission or otherwise for procuring business : Any kind of remuneration for soliciting or procuring insurance business in India to someone other than a licensed insurance agent or an insurance intermediary is prohibited under Section 40(1) of the Insurance Act 1938. Example: Prashant took the mandatory pre-recruitment examination in life insurance but did not pass it because he did not achieve the minimum passing score. As a result, he is still not accredited or licensed by the IRDA to solicit or procure life insurance company. As he is neither a licensed insurance agent nor an insurance intermediary, Prashant cannot be compensated for soliciting or procuring insurance company. In fact, before the Authority grants him a license, Prashant is not permitted to solicit or procure any life insurance business for any life 54 CU IDOL SELF LEARNING MATERIAL (SLM)
insurance firm. Section 40A(1) stipulates the limits on the remuneration or reward by way of commission or otherwise that can be paid to an insurance agent. Section 40B(1) also prescribes limits for expenses of management of life insurance business. All insurers have to comply with this and provide statements in the prescribed format, certified by an actuary, within a given time limit. Section 41(1) – Prohibition of rebates : Any insurance agent/intermediary who offers a commission/premium refund as an inducement to carry out, renew, or continue a policy of insurance is in violation of Section 41(1) of the Insurance Act 1938. The section also forbids anyone from accepting any such rebates in exchange for purchasing insurance. Example: Santosh works for ABC Insurance Company as a licensed life insurance agent. Santosh approaches Karan about purchasing life insurance to meet his lifecycle requirements. Agents from other life insurance firms have also approached Karan to inquire about their products. In this case, Santosh is prohibited from offering Karan any rebates from the commissions he would obtain from ABC Insurance Company as an inducement to purchase life insurance from him and disregard the products of other companies under section 41 of the Insurance Act 1938. Similarly, Karan cannot ask for any discounts from any company's agents in exchange for purchasing life insurance from them. Section 42 – Insurance Provider Licensing: Section 42 of the Insurance Act of 1938 lays out the requirements for granting an insurance agent license to an individual or corporation for the purpose of soliciting or procuring insurance business. The following topics are covered in this section: 55 CU IDOL SELF LEARNING MATERIAL (SLM)
Fig 4.2 Section 42 – Insurance Provider Licensing: Section 44 – Prohibition of cessation of payments of commission: As we saw in chapter 10, under section 44 of the Insurance Act 1938, no insurance agent can be refused payment of renewal commission due to him on renewal premium, in respect of life insurance business conducted in India under the agreement. Even after the termination of agency the renewal commission is payable, except for fraud, provided that: (a) the insurance agent has served the insurer continually and exclusively in respect of life insurance business for at least five years, and policies insuring a total sum of not less than Rs. 50,000 effected through him for the insurer were in force for one year before his ceasing to act as an agent for the insurer, and that the commission on renewal premiums due to him does not exceed 4%; or (b) the agent has served the insurer continually and exclusively for at least ten years and after his ceasing to act as an agent he does not directly or indirectly solicit or procure insurance business for any other person. 3.4 LIC ACT 1956 Life Insurance Business in India was nationalized with effect from January 19, 1956. On the date, the Indian business of 16 non-Indian insurers operating in India and 75 Provident Societies were taken over by Government of India. 56 CU IDOL SELF LEARNING MATERIAL (SLM)
Life Insurance Corporation of India, Act was passed by the Parliament on June 18, 1956 and came into effect from July 1, 1956. Life Insurance Corporation of India commenced its functioning as a corporate body from September 1, 1956. Its working is governed by the LIC Act. The LIC is a corporate having perpetual succession and a common seal with a power to acquire hold and dispose of property and can by its name sue and be sued. Important Provisions of Life Insurance Corporation Act, 1956 • Constitution • Capital • Functions of the Corporation • Transfer of Services • Set-up of the Corporation • Committee of the Corporation • Authorities • Finance, Accounts and Audit • Miscellaneous Life Insurance Corporation of India (LIC): The LIC of India was set up under the LIC Act, 1956 under which the life insurance was nationalised. As a result, business of 243 insurance companies was taken over by LIC on 1-9- 1956. It is basically an investment institution, in as much as the funds of policy holders are invested and dispersed over different classes of securities, industries and regions, to safeguard their maximum interest on long term basis. LIC is required to invest not less than 75% of its funds in Central and State Government securities, the government guaranteed marketable securities and in the socially-oriented sectors. At present, it is the largest institutional investor. It provides long term finance to industries. Besides, it extends resource support to other term lending institutions by way of subscription to their shares and bonds and also by way of term loans. 57 CU IDOL SELF LEARNING MATERIAL (SLM)
LIC which has entered into its 57th year has emerged as the world’s largest insurance co. in terms of number of policies covered. The LIC’s total coverage of policies including individual, group and social schemes has crossed the 11 crore. 3.5 GIC ACT 1972 In 1971, as a prelude to nationalization of the general insurance industry, the Govt. of India took over the management of all private general insurance companies. In the year 1972 General Insurance Business was nationalized. The main objective of this nationalization was to channelize the insurance funds for the benefit of the community at large. With the enactment of General Insurance Act 1972, General Insurance Corporation of India (GIC) was set up as a Holding Company. It had four subsidiaries: New India, Oriental, United India and National Insurance Companies. GIC was responsible for broad policy matters that could affect the general insurance industry in India. The company did not offer any direct insurance policies except the aviation insurance policies of Air India, Indian Airlines, Hindustan Aeronautics and Crop insurance. Thus General Insurance business was primarily conducted by the four subsidiaries of GIC. Apart from the four subsidiaries, GIC set up the GIC Asset Management Company to manage the GIC Mutual Fund, GIC Housing Finance, and Export Credit Guarantee Corporation. GIC was formed for the purpose of superintending, controlling and carrying on the business of general insurance. As soon as GIC was formed, GOI transferred all the shares it held of the general insurance companies to GIC. 3.6 INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY 58 CU IDOL SELF LEARNING MATERIAL (SLM)
(IRDA) ACT 1999 The Insurance Regulatory and Development Authority (IRDA) Act 1999 was passed by Parliament in December 1999. The Act provided for the establishment of the IRDA as a corporate body: • to protect the interest of holders of insurance policies; • to regulate, promote and ensure orderly growth of the insurance industry; and • for other related matters. As mentioned in section A, the IRDA Act 1999 led to amendments in the Insurance Act 1938, the Life Insurance Corporation Act 1956, and also the General Insurance Business (Nationalization) Act 1972. Definitions : Like any other Act, various terms have been defined as follows under section 2: - a) “Appointed Day” means the date on which the Authority is established. b) “Authority” means the Insurance Regulatory and Development Authority. c) “Chairperson” means the chairperson of the Authority. d) “Fund” means the Insurance Regulatory and Development Authority Fund. e) “Interim Insurance Regulatory Authority” means the Insurance Regulatory Authority set up by the Central Government. f) “Intermediary or Insurance intermediary” includes Insurance brokers, reinsurance brokers, insurance consultants, surveyors and loss assessors. g) “Member” means a whole time or a part time member of the Authority and includes the Chairperson. h) “Notification” means a notification published in the Official Gazette. i) “Prescribed” means prescribed by rules made under this Act. j) “Regulations” means the regulations made by the Authority. Features of Authority : • Corporate body by the aforesaid name which means it will act as group of persons, called members, who will work jointly not as an individual person like Controller of Insurance. • Having perpetual succession which means any member may resign or die but the Authority will work. • A common seal with power to enter into a contract by affixing a stamp on the documents. 59 CU IDOL SELF LEARNING MATERIAL (SLM)
• Sue or be sued means the Authority can file a case against any person or organization and vice versa. Composition of Authority : The Authority shall consist of nine persons as per details given below: • Chairperson. • Not more than 5 whole time members. Z • Not more than 4 part time members. These persons shall be appointed by the Central Govt. from amongst persons of ability, integrity & standing who have knowledge or experience in life Insurance, general Insurance, actuarial science, finance, economics, law accountancy, administration or other discipline which would in the opinion of the Central Govt. be useful to the Authority. (Section 4). Tenure (Section 5): • The Chairman tenure will be for 5 years and eligible for reappointment till he attains the age of 65 years. • The appointment of members will be for 5 years and eligible for reappointment but not exceeding the age 62 years. Removal of Members (Section 6): The Central Government can remove any member of the Authority if he :- a) Is declared bankrupt b) Has become physically or mentally incapable of acting as a member. c) Has been awarded punishment by any Court. d) Has acquired such financial or other interest which affect his function as a member. e) Has so abused his position as to render his continuation in office detrimental to the public interest. But no member can be removed from the office unless & until the reasonable opportunity of being heard is given to such member in the matter. Salary & Allowances (Section 7) : The Chairperson and full time members’ shall receive the salary & allowance as prescribed by the Government. Bar on future employment (Section 8): The Chairperson and the whole time members cannot accept any appointment without Govt. approval within 2 years from the date on which he ceases or retires from the office. 60 CU IDOL SELF LEARNING MATERIAL (SLM)
Superintendence & Direction (Section 9): The Chairperson shall have overall control & provide direction in respect of all administrative matters of the Authority. He will chair the meeting as and when he is present in the meeting. Meeting of Authority (Section 10): The meeting of the Authority will be held at the time and place as decided by the Chairperson as per regulation made under this act. If the Chairperson is unable to attend the meeting then the members will choose the Chairperson from amongst the present members. All the issues to be discussed in the meeting shall be decided by a majority of votes by the present and voting. In case of equal voting the decision of Chairperson of that meeting will be final. 3.7 SUMMARY • Insurance is a relationship between the policyholder and the insurance provider (insurer) (insured). The insurance provider agrees to pay a fixed amount to the insured if a specific incident occurs in exchange for a consideration (the premium). • An insurance policy is a legal agreement between the insurance provider and the insured individual that must meet certain requirements in order to be effective. • Essentials of Valid Contract : • Insurance contracts vary from other types of contracts. Insurance contracts are based on the principle of \"utmost good faith,\" while general contracts are based on the principle of \"basic good faith.\" The theory of absolute good faith is also known as the Uberrima Fides principle. 61 CU IDOL SELF LEARNING MATERIAL (SLM)
• The seller is the insurer and the buyer is the insured in an insurance policy. In this situation, the buyer or insured is fully aware of the property being insured, while the seller is unaware. This is the polar opposite of a standard purchasing agreement. The seller, not the buyer, will have complete knowledge and details of the property in a general purchasing contract. As a result, in the case of insurance contracts, the seller is reliant on the buyer to provide full property details. As a result, the insurer must have absolute confidence in the insured that the latter has given complete property details. • The Insurance Act of 1938 contains provisions for the monitoring and regulation of insurance company activities. Registration of insurers, capital adequacy and solvency provisions, investment norms, statutory returns to be filed by insurers, rural and social responsibilities of insurers, and regulations about agents and other intermediaries are only a few of the topics covered by the act. • The Insurance Act of 1938 was the first law in India to govern the behaviour of insurance companies. This Act is still in effect, as amended from time to time. Under the terms of the Insurance Act, the Government appoints the Controller of Insurance. • The Life Insurance Corporation Act was passed by the Indian Parliament on June 19, 1956, and the Life Insurance Corporation of India was established on September 1, 1956. • The General Insurance Corporation of India (GIC) was formed under GIBNA Section 9(1). • It was formed as a private company limited by shares on November 22, 1972, under the Companies Act, 1956. 62 CU IDOL SELF LEARNING MATERIAL (SLM)
• GIC was formed for the purpose of supervising, managing, and carrying on the general insurance company, and GOI immediately transferred all of the general insurance companies' shares to GIC. In December 1999, the IRDA Bill was passed, and in April 2000, it became law. • The Insurance Regulatory and Development Authority of India (IRDAI) is a statutory body formed by an Act of Parliament, the Insurance Regulatory and Development Authority Act, 1999 (IRDAI Act 1999), to oversee and grow India's insurance sector. Functions of IRDA • Issuing certificate of registration. • protecting the interest of policy holders. • issuing license to agents. • Specifying code of conduct for surveyors and loss assessors. • Promoting efficiency in the insurance business. • Undertaking inspection, conducting enquiries etc., on insurance companies. 3.8 KEYWORDS • Insurance Contract - Contract between Insurer and Insured. • LIC Act 1956 - Life Insurance Act was passed in June’1956, and this Act came into force from 1.9.1956 • GIC Act 1972 - General Insurance Corporation of India • Proposal - When one person expresses his or her desire to do or refrain from doing anything in order to gain the other's consent to that act or abstinence, he or she is said to make a proposal. • Consideration - The consideration for the contract is a sum equal to the Premium charged by the Customer • Consensus ad idem - When two or more people agree to the same issue in the same 63 CU IDOL SELF LEARNING MATERIAL (SLM)
way, they are said to consent • Utmost Good Faith - states that the insurer and the insured must disclose all material facts before the policy inception • Insurance Act 1938 - The Insurance Act, 1938 is a law originally passed in 1938 in British India to regulate the insurance sector. 3.9 LEARNING ACTIVITY 1. List the section 42 provisions related to the licensing of insurance agents. ___________________________________________________________________________ ____________________________________________________________________ 3.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What are the essentials of Insurance contract? Explain? 2. What are the features of Insurance Contract? 3. Define utmost good faith and explain the meaning of it.? 4. What is indemnity? 5. When is the insurance contract considered to be completed? Long Questions 1. Explain the history of insurance Sector in India? 2. Brief LIC Act 1956? 3. Explain the various features of any commercial contract. 4. Do you agree that the insurance & maintenance contracts are same? Explain in detail? 5. What is the difference between a service contract and a contract of insurance? Describe? B. Multiple Choice Questions 64 1. The Insurance ACT CU IDOL SELF LEARNING MATERIAL (SLM)
a. 1937 65 b.1938 c. 1956 d.1972 2. LIC Act was passed in the year a. 1956 b.1987 c.1947 d.1999 3. GIC Act a. 1987 b.1972 c. 1999 d.1956 4. The IRDA bill was passed in a. December 1999 b. Jan 1999 c. Mar 1956 d. July 1972 5. Life Insurance Business in India was nationalized with effect from a. January 19, 1956 b. January 26,1956 CU IDOL SELF LEARNING MATERIAL (SLM)
c. August 15, 1956 d. August 15, 1972 Answers 1-b,2-a,3-b,4-b,5-b 3.11 REFERENCES Text Books: • IC – 38 – Insurance Institute of India. 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 66 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 4: AN OVERVIEW OF INSURANCE INDUSTRY Structure 4.0. Learning Objectives 4.1. Introduction 4.2. Types of Insurance 4.3 Life Insurance 4.4 Marine Insurance 4.5 Motor Vehicle Insurance 4.6 Health Insurance 4.7 Liability Insurance 4.8 Summary 4.9 Keywords 4.10 Learning Activity 4.11 Unit End Questions 4.12 References 4.0 LEARNING OBJECTIVES After studying this unit, students will be able to: • Evaluate the Overview of Insurance • Describe the types of Insurance • Describe the Life Insurance • Outline the Marine Insurance • Outline the Motor Vehicle Insurance • State the process of Health Insurance • Explain the complete details about Liability Insurance 67 CU IDOL SELF LEARNING MATERIAL (SLM)
4.1 INTRODUCTION Companies that provide risk management in the form of insurance contracts make up the insurance industry. The basic premise of insurance is that one entity, the insurer, would guarantee reimbursement in the event of an unforeseen future occurrence. Meanwhile, another entity, the insured or policyholder, pays the insurer a lower premium in return for insurance against an unknown future event. Insurance is viewed as a low-growth, low-risk business for investors. While not as high as it was in the 1970s and 1980s, when compared to other financial industries, this view still holds true. • The insurance industry is made up of a variety of players that operate in various areas. • Life insurance providers concentrate on legacy preparation and replacing human capital value, while health insurers cover medical expenses, and property, liability, and injury insurance aims to replace the value of homes, vehicles, and other valuables. • Insurance companies may be organised as conventional stock companies with outside investors or as joint companies with policyholders as members. Insurance firms do not all sell the same products or serve the same clientele. Accident and health insurers, property and casualty insurers, and financial guarantors are the three most common types of insurance firms. Car, dental, homeowners, and life insurance are the most popular forms of personal insurance policies. Car insurance is required by law in the United States, and most people have at least one of these forms of insurance. The most well-known are the accident and health insurance providers. Companies such as UnitedHealth Group, Anthem, Aetna, and AFLAC are among those who provide assistance to individuals who have been physically injured. Life insurance firms typically sell plans that pay a death benefit to the insured's beneficiaries in a lump sum upon the insured's death. Contract life insurance is less costly and expires at the end of the term, whereas permanent life insurance (typically whole life or universal life) is more expensive but lasts a lifetime and has a cash accumulation feature. Long-term disability plans, which replace the insured's income if they become sick or disabled, are also available from life insurers. North-western Mutual, Guardian, Prudential, and William Penn are all well-known life insurers. Accidents involving non-physical harm are covered by property and casualty companies. This can include things like litigation, property loss, traffic accidents, and more. State Farm, Nationwide, and Allstate are all large property and casualty insurers. 68 CU IDOL SELF LEARNING MATERIAL (SLM)
Businesses require unique types of insurance plans that protect them against specific risks. A fast-food restaurant, for example, requires coverage for damage or injuries resulting from deep-frying operations. While a car dealer is not exposed to this danger, he or she must have coverage for any harm or injury that might occur during test drives. Kidnap and ransom (K&R), medical malpractice, and professional liability insurance, also known as mistakes and omissions insurance, are examples of insurance plans available for very particular needs. Reinsurance is used by some businesses to mitigate risk. Insurance firms purchase reinsurance to shield themselves from undue risks caused by high exposure. Reinsurance is an important part of insurance companies' attempts to stay solvent and prevent pay-out default, and it is required by regulators for companies of a certain size and nature. For example, an insurance provider could underwrite too much hurricane insurance based on models that predict a low probability of a hurricane striking a specific location. If the unthinkable happened and a hurricane hit that area, the insurance company could face significant losses. Insurance firms could go out of business if they don't have reinsurance to take some of the risks off the table when a natural disaster strikes. 4.2 TYPES OF INSURANCE There are two broad types of insurance: • Life Insurance • General Insurance Table 4.1 types of insurance Personal insurance, property insurance, and guarantee insurance are the three primary forms of insurance contracts. I. Personal Insurance: 69 CU IDOL SELF LEARNING MATERIAL (SLM)
Personal insurance is when a person purchases a life insurance policy for himself or herself. Personal insurance is also known as life insurance in a general context. The insurer offers coverage for catastrophic events such as death, sickness, and accidents under this scheme. Since we cannot quantify the insured's damage when he dies, the concept of indemnity applies to this insurance. There are three types of personal insurance: life insurance, personal accident insurance, and health insurance. Life insurance is a type of insurance in which a person may insure his or her own life. Since everyone has an infinite insurable interest in their own life, the indemnity principle does not apply to life insurance. Whole life insurance and endowment life insurance are the two forms of life insurance. Personal Accident Insurance: Under personal accident insurance, the insurer is required to compensate the insured if he is unable to operate as a result of the accident, or his candidate in the event of the insured's death. Compensation is calculated based on the percentage of disability. Health Insurance: With health insurance, a person should plan for medical expenses, operation costs, and other hospitalisation costs. The insurer assumes responsibility for paying the whole amount directly to the hospitals under this scheme. II. Property Insurance: Property Insurance is described as when a person or an entity may insure their property for the purpose of compensating for potential losses. Property insurance is an indemnity contract. As a result, the indemnity principle applies to this insurance plan. Insurable interest in the property must be held by the insured. The insurer promises to compensate the insured for losses incurred as a result of property damage up to the policy cap. Insurance, on the other hand, neither protects nor prevents a peril from occurring. Insurance only compensates for financial losses incurred as a result of unknown risks. The primary goal of insurance is to provide cover against financial damage caused by perils. An individual may insure his or her office building, home, furniture, household goods, raw materials, plant and machinery, motor vehicle, jewellery, and valuables, among other things. III) Guarantee Insurance: 70 CU IDOL SELF LEARNING MATERIAL (SLM)
This is a relatively new form of coverage. Guarantee insurance was established in the early twentieth century. The variety and volume of business transactions have greatly increased since the industrial revolution. The majority of businessmen depend on the organization's staff. The society produces two groups of people: owners and workers. Simultaneously, the risk of fraud and dishonesty rises. Guarantee insurance is a contract in which the insurer agrees to indemnify the insured for a specific amount against loss caused by dishonesty, fraud, or a breach of contract. For example, if a borrower fails to repay a bank loan, the bank's cashier or any credit society or business misappropriates cash, the insurer agrees to cover the loss. The assurance insurance protects against employee dishonesty rather than fraud. As a result, these two forms are diametrically opposed. IV. Liability Insurance: Liability insurance is a type of insurance that protects you from an individual is liable to a third party due to the provisions of any law or to his employees due to an act if he has liability insurance. Third-party costs, compensation of workers under workmen's compensation insurance, and liability to car owners if third-party injury occurs as a result of a motor vehicle accident are all covered by liability insurance. Reinsurance is also covered. 4.3 LIFE INSURANCE Risks involving human lives are covered by life insurance companies. They have various advantages with different types of goods which cover both the risk of dying young and the risk of living to a ripe old age. Insurance companies offer death coverage for standard policies, such as life insurance plans. If the insured individual dies during the policy's period, the nominee/beneficiary receives a prescribed sum of money (also known as the sum insured). When we looked at the case of Ajay at the beginning of this chapter, we saw an example of this. Insurance firms make annual monthly payments (annuities) to help the insured during their retirement under pension schemes. The business of commercial Insurance involves four aspects • An asset • The risk insured against • The principle of pooling 71 CU IDOL SELF LEARNING MATERIAL (SLM)
• The contract The Asset: An asset is a type of property that generates income or value. Human life value [HLV] is a term used in life insurance that recognizes human life as a type of property or commodity that generates an income. As a result, it calculates the worth of a human life based on a person's estimated net future earnings. HLV represents the financial loss a family will face if a wage earner died prematurely. The Risk: Life insurance protects against risk occurrences that can depreciate or kill the value of a person's life as an asset. The risk of dying too young, living too long, and living with disability or illness are the three types of conditions in which such loss would occur. Unlike other types of risks, the risk of death rises with age, and premiums will become prohibitive at older ages. As a result, life insurers charge a fixed premium that does not increase with age and remains constant over the term of the contract. Life insurance policies with level premiums are usually long-term insurance contracts that last 10, 20, or even more years. The insurance provider holds premiums paid in the early years of the arrangement in trust for the benefit of its policyholders. The total sum accumulated is referred to as a \"Reserve.\" This reserve is held by an insurance provider to cover the insurer's future obligations. The extra money goes into a fund called the \"Life Fund.\" This fund is invested by life insurers, who gain interest on it. Mutuality or Risk Pooling: Mutuality, also known as risk pooling, is one of the most effective methods for reducing risk in financial markets, alongside diversification. The pooling theory serves two purposes: it protects against financial loss as a result of an untimely death, and it provides investment coverage by pooling and evening out financial risk. The Contract for Life Insurance: Life insurance is a vehicle of financial protection since the amount of coverage is contractually assured. The guarantee aspect of a life insurance contract means that life insurance is governed by strict regulations and is closely monitored. As compared to other financial instruments, a central issue that is often discussed is whether the benefits offered to policyholders are sufficient. Indeed, as a financial commodity, life insurance provides certain benefits to its owners: (1) it is a safe and stable investment; 72 CU IDOL SELF LEARNING MATERIAL (SLM)
(2) it provides the discipline that savers require. (3) It manages investments; (4) it offers liquidity and tax benefits; and, ultimately, (5) it may be protected from creditors' claims. Lower rates of return for assured policies and the corrosive impact of inflation may be drawbacks. 4.4 MARINE INSURANCE A marine insurance policy is an arrangement under which the insurer agrees to indemnify the insured against transit damages, or losses that occur during transit, in the manner and to the degree agreed. Marine insurance is extremely relevant in both domestic and foreign trade. Most sales contracts stipulate that the products must be insured against loss or injury, either by the seller or the buyer. In normal export/import trade, the exporter would ask the importer to open a letter of credit in the exporter's favor with a bank. The exporter hands over the documents of title to the bank when the goods are ready for shipment and has the bill of exchange drawn on the importer discounted with the bank. The products that are the subject of the sale are used by the bank as physical protection against the funds it has advanced to the exporter in this process. The bank also requires additional coverage in the form of an insurance policy to cover its interests in the event that the goods are lost or damaged in transit, in which case the importer will be unable to make the payment. The letter of credit specifies the insurance terms and conditions. This is the oldest branch of insurance, and it is closely linked to the practice of Bottomry, which is mentioned in Babylonian records and Hammurabi's code dating back to B.C.2250. Goods manufacturers advanced their materials to merchants, who gave them receipts for the materials and settled on a rate of interest. If the merchant was robbed on the way, he would be released from the debt, but if he returned, he would have to pay both the materials' value and the interest. The first known marine insurance contract was signed in Genoa on October 13, 1347, and marine insurance became legally controlled in that city in 1369. Meaning of Marine Insurance: A marine insurance policy is an arrangement under which the insurer agrees to indemnify the insured against transit damages, or losses that occur during transit, in the manner and to the 73 CU IDOL SELF LEARNING MATERIAL (SLM)
degree agreed. By its express terms or by use of trade, a marine insurance policy may be extended to cover losses on inland waters or any land danger that may arise as a result of a sea voyage. Fig 4.1 Marine Insurance A. Cargo insurance, which covers the loss or harm of goods when they are being transported by train, road, sea, or air. As a result, freight insurance is concerned with the following: Export and import shipments by all types of ocean-going vessels, (ii) Coastal shipments by steamers, sailing vessels, mechanized boats, and other coastal shipments, (iii) Shipments by inland vessels or country craft, and (iv) Consignments by rail, sea, or air, as well as articles sent by mail. B. Hull insurance, which deals with the protection of ships' hulls (hull, machinery, etc.). This is a rather technical topic that will not be covered in this module. 4.5 MOTOR VEHICLE INSURANCE This is the type of insurance that the majority of people are familiar with, owing to the fact that all motorized vehicles are required to have a third-party liability insurance policy before they can be driven on the road. Despite the fact that this form of insurance is the primary source of premium income for insurance companies, it is also the one with the most losses. The first party in property insurance is the owner of the property (a motor vehicle), the second party is the insurer, and the third party is a random individual on the street. In most insurance policies, loss or damage to the insured's property is protected. Your car will be repaired and replaced if it is destroyed. This is referred to as first-party insurance. According to the Motor Vehicles Act, third-party insurance is required for all vehicle owners. It only protects the legal responsibility for harm you can cause to a third party when operating your car, such as serious injury, death, and property damage. In response to a Supreme Court ruling, IRDAI has required that all General Insurance Companies have long-term third-party 74 CU IDOL SELF LEARNING MATERIAL (SLM)
auto insurance in order to reduce the number of uninsured vehicles on the road. In a July 20, 2018 order, the Supreme Court stated that third-party insurance, i.e., cars should be insured for at least three years and two-wheelers for five years in the case of new vehicles, either as a separate insurance policy or as part of the comprehensive cover. The order will go into effect on September 1st. The court also ordered the regulator to collaborate with the police and online outlets in order to promote the selling and renewal of accident insurance. The decision came after a Supreme Court-appointed committee on road safety discovered that only one out of every three vehicles on Indian roads were insured, out of a total of 18 crore. As a result, accident victims and their families do not receive any compensation. In a similar vein, the IRDAI has recently required Insurance Companies to increase the Compulsory Accident Coverage from the current 1,00,000 to at least 15,00,000/- with the aim of providing comfort to victims of road accidents who are also vehicle owners. Definition: A motor insurance policy is an arrangement between the insured and the insurer in which the insurer agrees to cover the insured's financial obligations in the event of a loss. Motor third- party insurance, also known as third-party liability insurance or 'act only' insurance, is a legal provision under the Motor Vehicles Act. The beneficiary of the policy is someone other than the two parties involved in the deal, i.e. the insured and the insurance provider. This is known as a 'third-party' cover. The policy does not offer any benefits to the insured, but it does compensate the insured's legal responsibility for third-party death/disability or property harm. This paper aims to clarify the significance of third-party insurance. What is third-party insurance, and how does it work? What exactly is a third party? Why is third-party insurance required by the Motor Vehicles Act of 1988 for all vehicles? What distinguishes third-party insurance from other types of insurance? With the aid of numerous case laws, these elements of third-party insurance have been clarified. What is Third-Party Insurance, and how does it work? In the damages scheme, there are two types of insurance that are involved. The first is third- party liability insurance, which is simply referred to as liability insurance by insurance companies. The second is first-party liability insurance. A third-party insurance policy is one in which the insurance provider offers to indemnify the covered individual in the event that he is sued or held legally responsible for injury or harm to a third party. 75 CU IDOL SELF LEARNING MATERIAL (SLM)
The insured is one party, the insurance provider is the second, and the third party is the individual you (the insured) kill who sues you for damages. The government is a \"third party\" under Section 145(g). In National Insurance Co. Ltd. v. Fakir Chand, the term \"third party\" should refer to anybody (other than the insurance policy's contracting parties), be it a driver in another car, a pedestrian on the lane, or a passenger in the vehicle that is the subject of the insurance policy. “No individual shall use or enable any other person to use a motor vehicle in a public place unless the vehicle is protected by a policy of insurance,” states Section 24 of the Motor Vehicles Act. The word insurance is referred to as \"Third Party Insurance\" in this case. Classification of Motor Vehicles: As per the Motor Vehicles Act for the purpose of insurance the vehicles are classified into three broad categories such as: (a) Private Cars - vehicles used only for social, domestic and pleasure purposes. (b) Private vehicles - Two wheeled. 1. Motorcycle/Scooters 2. Auto cycles 3. Mechanically assisted pedal cycles (c) Commercial vehicles 1. Goods carrying vehicles 2. Passengers carrying vehicles 3. Miscellaneous & Special types of vehicles The risks under motor insurance are of two types: 1. Legal liability due to bodily injury, death or damage caused to the property of others. 2. Loss or damage to one’s own vehicle\\ injury to or death of self and other occupants of the vehicle. IRDAI has set up a panel to look into pricing of auto insurance covers as well as classification of the various types of vehicles. Motor Vehicles Act, 1988 : It is important to be familiar with the Motor Vehicles Act of 1939, as amended in 1988. Many pedestrians who were struck by motor vehicles and killed or wounded did not receive compensation in the past because the motorists lacked the financial means to pay the compensation and were also uninsured. 76 CU IDOL SELF LEARNING MATERIAL (SLM)
The Motor Vehicles Act of 1939, for example, established mandatory insurance in order to protect pedestrians' interests. The protection of motor vehicles against injury is not required, but it is required for third-party liability resulting from the use of motor vehicles in public places. Without this protection, no motor vehicle can operate in a public location. 4.6 HEALTH INSURANCE Health insurance is a form of general insurance that assists policyholders financially when they are admitted to hospitals for care. Some policies often cover the cost of care received at home prior to a hospitalisation or after discharge from one. With the cost of health care and medical expenses that the average person cannot afford, this type of insurance is becoming more common. A family's health care costs are projected to be 10% of their monthly income on average. In India, where there is no public social insurance, each person is responsible for himself and his family. A long-term illness or disability can devastate the family budget and throw everything off. Though the value of health insurance cannot be overstated, it is sad that in India, health insurance is only obtained by families and individuals who can afford to pay their medical bills. However, the Indian government is making every effort to enable citizens to purchase health insurance, and specialist insurance firms that specialise in health insurance are being promoted. Health insurance policies may also be issued by life insurance firms. Health insurance has become a must in India due to increasing medical inflation. Consider the different types of health insurance policies available in India before continuing with your order. Types of Health Insurance policies: In India, there are eight different types of health insurance schemes. They are as follows: • Individual Health Insurance - Individual health insurance policies cover only one policyholder. • Family Floater Insurance - These policies allow you to insure your entire family without having to purchase individual plans for each member. Under one such family floater policy, a husband, wife, and two of their children are usually covered. • Critical Illness Coverage - These are specialised insurance programmes that provide substantial financial support to policyholders who are afflicted with such chronic illnesses. 77 CU IDOL SELF LEARNING MATERIAL (SLM)
Unlike traditional health insurance schemes, these programmes pay out a lump sum following a diagnosis. • Senior Citizen Health Insurance - As the name implies, these plans are designed for people over the age of 60. • Group Health Insurance - These plans are often provided to employees of a corporation or organisation. They are structured such that older beneficiaries may be replaced and new beneficiaries can be introduced depending on the company's willingness to retain employees. • Maternity Health Insurance - These plans provide coverage for medical costs incurred at the prenatal, postnatal, and delivery phases. It protects both the mother and her child. • Personal Injury Policy - These medical insurance plans only cover financial responsibility for incidents that result in injuries, disability, or death. • Preventive Healthcare Plan - These plans provide for medication that is aimed at avoiding a serious illness or disorder. Benefits of Health Insurance: After reviewing the different types of health insurance plans available, you might be wondering why you and your loved ones need one. Take a look at the list of explanations below to see why. • Medical Cover - The main advantage of this type of insurance is that it provides financial protection against medical expenses. • Cashless Claim - If you seek care at one of the hospitals in which your insurance company has a tie-up, you might be eligible for a cashless claim. This feature guarantees that the insurer and hospital settle all medical bills directly. • Tax Benefits - Those who pay for health insurance premiums will be eligible for tax breaks. A tax gain of up to Rs.1 lakh is available under Section 80D of the Income Tax Act on premium payments for health insurance plans. FEATURES/COVERAGES OF HEALTH INSURANCE POLICY : The following costs should be covered by every health insurance policy: 78 CU IDOL SELF LEARNING MATERIAL (SLM)
1) The policy should cover hospitalization / domiciliary hospitalization costs for illnesses/diseases or accidental injuries that occur during the policy era. Hospital/Nursing Home: Any institution in India founded for indoor care and treatment of sickness and injuries is referred to as a hospital or nursing home. • Has been accredited with the local authority as either a hospital or a nursing home, and is supervised by a registered and trained medical practitioner. • Must meet the following minimum requirements: a) At least 15 in-patient beds should be available. b) Its own fully fitted operating room, where surgical procedures are performed. c) Availability of fully trained nursing staff 24 hours a day, 7 days a week. A fully trained doctor or doctors should be on duty 24 hours a day, seven days a week. A facility that is a place of rest, a place for the elderly, a place for drug users or alcoholics, a hotel, or a similar place is not considered a hospital or nursing home. The term \"domiciliary hospitalization benefit\" refers to medical care for a span of more than three days for an illness or injury that would normally necessitate treatment in a hospital or nursing home but is instead received when confined at home in India under any of the following circumstances: (i) The condition of the patient is such that he / she cannot be removed to the hospital / nursing home or (ii) The patient cannot be removed to hospital / nursing home due to lack of accommodation therein 2) The policy should pay during the period of insurance maximum up to the sum insured for expenses incurred under the following heads: (a) Room, Boarding Expenses in the Hospital / Nursing Home (b) Nursing Expenses (c) Surgeon, Anesthetist, Medical Practitioner, Consultants. Specialist fees 79 CU IDOL SELF LEARNING MATERIAL (SLM)
(d) Anesthesia, Blood, Oxygen, Operation Theatre Charges, Surgical Appliances, Medicines and Drugs, Diagnostic Materials, and X-Ray, Dialysis, Chemotherapy, Radiotherapy, Cost of Pacemaker, Artificial Limbs and Cost of organs and similar expenses. 3) Reimbursement is allowed only when treatment is taken in a hospital or nursing home which satisfies the criteria specified in the policy. 4) Expenses on hospitalization for minimum period of 24 hours are admissible. However, this time limit is not applied to specific treatment i.e., Dialysis, Chemotherapy, Radiotherapy, Eye Surgery, Dental Surgery, Lithography (Kidney stone removal), D&C, Tonsillectomy taken in the hospital / nursing home and the insured is discharged on the same day; the treatment will be considered to be taken under hospitalization benefit. 5) Relevant medical expenses incurred prior to up to certain period, say 30 days and after hospitalization up to certain period, say 60 days, are treated as part of the claim. 6) Any one illness means continuous period of illness and it includes relapse within 105 days from the day of last consultation with the Hospital/Nursing Home where treatment may have been taken. Occurrence of same illness after a lapse of 105 days will be considered as fresh illness for the purpose of this policy. 7) The policy does not cover some disease i.e., Asthma, Bronchitis, Chronic Nephritis Diarrhea and all type of Dysenteries including Gastroenteritis, Diabetes Mellitus and Insipid us, Epilepsy, Hypertension, Influenza, Cough and cold, all psychiatric or Psychosomatic Disorders Pyrexia of unknown origin for less than 10 days, Tonsillitis and upper respiratory Tract infection including Laryngitis and Pharyngitis, Arthritis, Gout and Rheumatism EXCLUSIONS NOT COVERED BY THE HEALTH INSURANCE POLICY: a) All pre-existing illnesses or accidents at the time the cover is first introduced. b) Any disease contracted by the insured individual within the first 30 days from the policy's start date, except those mentioned in clause (c) below. This exclusion shall not apply, however, if the insured person may not have learned of the presence of the disease, or any signs or complaints thereof, at the time of making the proposal for insurance to the insurer, in the judgement of a Panel of Medical Practitioners constituted by the company for the purpose. This requirement does not apply if the insured individual has been covered under this scheme or a community insurance scheme with either of the Indian Insurance Companies for the previous 12 months without interruption. c) Costs for treatment of diseases such as Cataract, Benign Prostate Hypertrophy, Hysterectomy for Menorrhagia or Fibromyoma, Hernia, Hydrocele, Congenital Internal Disease, Fistula in Anus within the first or more years of the policy's service. Pile formation, 80 CU IDOL SELF LEARNING MATERIAL (SLM)
sinusitis, and other associated conditions. If these diseases are already present at the time of proposal, they will not be protected, even if the policy is renewed later. d) Circumcision, unless it is required for the treatment of a disease not mentioned above or as a result of an accident, vaccine or inoculation, or a change of life, or cosmetic or aesthetic treatment of some kind, plastic surgery, unless it is required as a result of an accident or as a part of any illness. e) Spectacles and contact lenses, as well as hearing aids. (These may be classified as routine maintenance costs.) f) Any dental or surgical procedure, unless it necessitates hospitalization. g) Convalescence, general debility, run-down state or rest cure, congenital external illness, abnormalities or anomalies, sterility, venereal disease, deliberate self-injury, and use of intoxicating drugs/alcohol h) AIDS is a term that refers to a group of diseases. (i) Charges incurred solely for diagnostic purposes at a hospital or nursing home. X- rays, laboratory tests, or other medical findings that do not support the existence or occurrence of any ailment, illness, or injury that necessitates confinement in a hospital, nursing home, or at home under Domiciliary Hospitalization as specified. ii) Vitamin and tonic costs, unless they are part of a care plan. k) Post-partum care, such as Caesarean section (can be deleted, if maternity benefit is covered). iii) Abortion (voluntary surgical termination of pregnancy) within the first 12 weeks after conception. m) Treatment with naturopathy. PROCEDURE TO FOLLOW WHEN PURCHASING HEALTH INSURANCE: 1) Filling out the proposal form: The proposal form will contain the person's personal details, such as name, address, age, occupation, and amount insured, as well as two photographs of the individual. 2) Declaration of good health/medical questionnaire: A person should declare his or her good health. In the event of a medical emergency, he must request a doctor's certificate. 3) Medical examination report: If the individual is over 45 years old, a report from a doctor with an MD qualification is required. Even if the individual is in good health, it is essential. 4) Payment: To receive the tax benefit under the Income Tax Act of 1961, the fee is charged by check. 5) Policy Documents: After the above-mentioned information/documents are received, the policy document is released. 81 CU IDOL SELF LEARNING MATERIAL (SLM)
6) Third Party Administrator (TPA) Issue of Photo Card: After issuing the policy documents, the TPA will issue each individual with a photo identification card that will enable them to receive cashless hospital care. The IRDA has authorized TPAs to resolve health insurance lawsuits on behalf of insurance firms. TPAs have enlisted the services of various hospitals across India to provide health care on a cashless basis, which means that the policyholder will not pay any money to the hospital and the hospital will receive payment directly from the TPA up to the policyholder's amount insured. If the amount covered is insufficient to cover the hospital bill, the policyholder would be responsible for the excess amount. 4.7 LIABILITY INSURANCE The word \"liability insurance\" applies to an insurance policy that protects a covered party from lawsuits arising from accidents or property damage to others. Any legal expenses and pay-outs that an insured party is responsible for if they are found legally liable are covered by liability insurance plans. In general, liability insurance plans do not compensate intentional injury or contractual liabilities. Liability insurance, unlike most forms of insurance, pays third parties rather than policyholders. Insurance is now more important than ever before, owing to the fact that we live in an economically unstable environment where one never knows when financial assistance will be needed. Insurance serves as a safety net, shielding consumers from a variety of potential problems. Insurance products come in a variety of shapes and sizes, depending on your needs. Life insurance plans and health insurance policies, among others, are the most widely purchased policies. Some insurance plans, on the other hand, are very detailed in nature and adhere to specific criteria. Customers who only need coverage for specific problems rather than general ones such as life and health purchase these types of policies. Liability insurance is one of them. There are two types of legal liability: 1) Criminal Responsibility 2) Liability in Civil Court 82 CU IDOL SELF LEARNING MATERIAL (SLM)
1) Criminal Liability: is enacted by the state government and is punishable by statute with a fine, imprisonment, or both. 2) Civil Liability: happens when one party takes an action against another that causes collateral harm, death, or physical injury to the aggrieved party, and compensation is due under the law of the country. The most likely scenario is when a person is driving a car and collides with another person on the road, resulting in death or bodily injury. The aggrieved party may seek compensation from the vehicle owner, who may be unable to pay the compensation sum due to financial difficulties. There is liability insurance available. The Bhopal Gas Tragedy of 1984, one of the worst environmental disasters in history, is another historical example. The Union Carbide plant released lethal gas, impacting thousands of people in the surrounding areas. Many people died or became permanently injured, prompting the government to pass the Public Liability Insurance Act of 1991, which requires someone who treats dangerous material to pay compensation to victims of an accident. Aside from the mandatory insurance, the public's growing knowledge and the high pay-out paid by the courts have made this type of insurance a must-have for professionals and business owners who could be held responsible for damages. What is Liability Insurance and How Does It Work? Liability insurance is essential for those who are legally responsible and at fault for the injuries of others, or for those who harm the property of others. As a result, third-party insurance is also known as liability insurance. And if the covered party is held criminally liable, liability insurance does not cover malicious or criminal actions. Anyone who owns a company, drives a car, practises medicine, or practises law—basically anyone who can be sued for damages and/or injuries—takes out a policy. The insured and third parties who could be harmed as a result of the policyholder's unintended negligence are also covered by the policy. Why is Liability Insurance Required? Companies or persons who may be held legally responsible for accidents or other problems typically purchase this form of insurance policy. This is particularly true for hospitals, physicians, and business owners. For example, if a product maker sells defective goods or 83 CU IDOL SELF LEARNING MATERIAL (SLM)
damages other people's property, he or she can be held liable for the damages. Liability insurance would protect the manufacturer from any subsequent litigation expenses. Under the risk transference category, liability insurance is one component of a general insurance policy. Liability insurance is required in many countries, especially for drivers of public transportation vehicles. The Public Liability Insurance Act of 1991 defines the nature of this form of insurance in India. Types of Liability Insurance Plan: Customers can choose from a variety of liability insurance plans depending on their line of work and needs. Public, product, employer, and third-party liability insurance are the most common types of liability insurance. • Public Liability Insurance While only a few countries have made this form of insurance mandatory, most businesses, especially those that have an impact on third parties such as tourists, trespassers, and so on, are required to carry it. Regardless of whether it is needed or not, the majority of businesses obtain it to avoid unnecessary risk. Since the premiums are so high, certain small businesses do not purchase liability insurance. But, in the case of a lawsuit, the legal costs will normally outweigh the premium costs. As a result, getting this policy is normally a better idea. When these sites include shopping malls, theatres, bars, and areas where sporting activities are held, as well as places where alcohol is consumed, the risk multiplies exponentially. Policy companies either refuse to insure these risks or charge exorbitant premiums in situations where the risk is exceptionally large. • Product Liability In certain nations, this is not a mandatory insurance requirement, but it is important. Companies that produce commonly used products, such as chemicals, tobacco, medicinal products, food, recreational products, and others, obtain this. • Employer Liability This form of insurance protects an employer against liability that might arise if an employee is injured on the job or on the job. Companies may overlook this, but if they are faced with a lawsuit, they may be forced to file for bankruptcy. • Third-Party Liability 84 CU IDOL SELF LEARNING MATERIAL (SLM)
The insured's damages against others are covered by this provision. The insured is the first party, the insurance agent is the second, and the injured or person/company filing the claim is the third. How is the Premium Amount Decided? The premium that the insured must pay is calculated using a base rate that is dependent on the insurance company's needs and calculations. Another factor taken into account is the level of risk associated with the company and its goods. The higher the risk, the higher the premium. Additional considerations include claim history, risk scale, and the company's risk management strategy. Insurance firms weigh the market, the number of prior claims, and their track record when determining premium amounts. 4.8 SUMMARY There are two forms of insurance: health insurance and life insurance. a. life insurance policy b. general insurance policy • Life insurance is protection against the loss of one's life. • Health insurance is purchased to cover the costs of costly medical care. • Motor vehicle insurance protects you from unfavourable events such as collisions. Some plans also cover damage to your vehicle caused by natural disasters such as flooding or earthquakes. It also protects third-party liability, which requires you to pay compensation to other drivers. • Marine insurance protects against the loss or destruction of ships, freight, ports, and any other mode of transport used to transport property between points of origin and final destination. • Liability insurance is part of the general insurance scheme of risk financing, and it protects the buyer from the costs of liabilities imposed by litigation and related claims, as well as the insured if the buyer is sued over claims covered by the insurance policy. 4.9 KEYWORDS • Life Insurance - insurance that pays out a sum of money either on the death of the 85 CU IDOL SELF LEARNING MATERIAL (SLM)
insured person or after a set period • Marine Insurance - Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport by which the property is transferred, acquired, or held between the points of origin and the final destination. • Liability Insurance - Liability insurance is a part of the general insurance system of risk financing to protect the purchaser from the risks of liabilities imposed by lawsuits and similar claims and protects the insured if the purchaser is sued for claims that come within the coverage of the insurance policy. • Motor Insurance - is insurance for cars, trucks, motorcycles, and other road vehicles. • Health Insurance - is a type of insurance that covers the whole or a part of the risk of a person incurring medical expenses • Money Back Insurance - It provides life coverage during the term of the policy and the maturity benefits are paid in installments by way of survival benefits in every 5 years • 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 • Asset - is any resource owned or controlled by a business or an economic entity 4.10 LEARNING ACTIVITY 1. Get up and out of their seats while learning about 5 different types of insurance they will likely need in their lifetimes. ___________________________________________________________________________ ____________________________________________________________________ 4.11 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Explain Marine Insurance? 2. Describe the process of Motor Vehicle Insurance in India? 86 CU IDOL SELF LEARNING MATERIAL (SLM)
3. Who will get claim amount in case of marine insurance? 87 4. If sale contract is FOB, who should insure the goods? 5. Who settles the Health Insurance Claim? Long Questions 1. Describe the types of Personal insurance policies with examples? 2. Explain the how the Property Insurance works? 3. Define Life Insurance and explain the four aspects of Life insurance? 4. How many sections are in Overseas Medical Policy? 5. Explain whether recoveries can be made from Carriers. B. Multiple Choice Questions 1. The Life insurance involves a. An Asset b. The risk insured against c. The Contract d. All of these. 2. Property and casualty companies insure against accidents of a. non-physical harm b. Assets c. Office d. All of these. 3. When an individual person takes insurance policy of own life then it is called a. Accident Insurance b. Life insurance c. Health insurance CU IDOL SELF LEARNING MATERIAL (SLM)
d. All of these. 4. The first known Marine Insurance agreement was executed in a. United States of America b. Genoa c. England d. India 5. In property insurance First party is the owner of property (Motor Vehicle), Second party is the a. Insurer b. Person on Street c. Government d. None of these. Answers 1-d ,2-d,3-d,4-c,5-b 4.12 REFERENCES Text Books: • IC – 38 – Insurance Institute of India. • IC – 33 Insurance Institute of India. 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” 88 CU IDOL SELF LEARNING MATERIAL (SLM)
• Periasamy, P; Veeraselvam, M., “Risk and Insurance Management”, Tata Mc Graw Hill. 89 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 5: INSURANCE INTERMEDIARIES Structure 5.0. Learning Objectives 5.1. Introduction 5.2. Agents and Procedure for Becoming an Agent. 5.3. IRDA (Licensing of Insurance Agents) Regulations 2000. 5.4. Summary 5.5. Keywords 5.6. Learning Activity 5.7. Unit End Questions 5.8. References 5.0 LEARNING OBJECTIVES After studying this unit, students will be able to: • Describe the Insurance Intermediaries • Understand the procedure for becoming an agent • Evaluate the prerequisite for obtaining a license. • Outline the duration of License • Cancellation of license. • Outline the Revocation of suspension/ termination of agent appointment. 5.1 INTRODUCTION • Insurance intermediaries assist in the placement and procurement of insurance, as well as providing insurance providers and customers with resources that support the insurance placement process. Insurance intermediaries have traditionally been classified as either insurance agents or insurance brokers. • Insurance is a complicated policy that promises to pay the insured or a third party according to defined terms and conditions if a covered contingency occurs. An insurance agent (individual or corporate) or an insurance broker is typically involved in most insurance transactions. 90 CU IDOL SELF LEARNING MATERIAL (SLM)
• Insurance intermediaries act as a link between customers (who want to purchase insurance policies) and insurers (seeking to sell those policies). • Insurance brokers are regulated by the Insurance Regulatory and Development Authority (Insurance Brokers) Regulations, 2002, which are issued by the IRDA. Individual insurance agents and corporate agents are also regulated by the Insurance Regulatory and Development Authority (licensing of Individual Insurance Agents) Regulations, 2000 and the Insurance Regulatory and Development Authority (Licensing of Corporate Agents) Regulations, 2002. The Code of Conduct for the respective intermediaries is outlined in these Regulations. • An intermediary has a unique role to play during a product's life cycle, from the point of sale to policy servicing and claim servicing. An intermediary must include all relevant information about a potential cover in order for the prospect to choose the best option. The agent is required to provide full disclosures and accountability to the prospect. After the transaction is completed, the broker must efficiently arrange policy and claim servicing between the consumer and the insurer. • The Insurance Regulatory and Development Authority (IRDA) has developed regulations to protect the interests of policyholders, imposing responsibilities not only on insurers but also on intermediaries. These dictate responsibilities at the point of sale, as well as procedure and claim servicing. • Agents (individual, corporate, and micro-insurance), brokers, online aggregators, and Common Service Centres are all involved in the distribution of insurance products. • In general insurance claim assessment, intermediaries such as surveyors and damage assessors are involved. • In health insurance, specialized intermediaries known as Third Party Administrators (TPAs) are in charge of issuing policy cards, arranging cashless care through a network of hospitals, and managing and settling claims. • Insurance Repositories are recently implemented intermediaries that electronically store data from insurance plans for ease of storage, retrieval, and servicing. 5.2 AGENTS AND PROCEDURE FOR BECOMING AN AGENT Agent: An individual who sells insurance policies is known as an agent. Agents are typically used to sell insurance. The insurance firm is represented by an insurance agent. 91 CU IDOL SELF LEARNING MATERIAL (SLM)
In India, these account for the majority of insurance sales. The agent's primary duty is to consult with potential clients, consider their needs, and make appropriate product recommendations. Insurance firms recruit these people and provide them with the necessary training. These agents search and obtain insurance business for the insurer after passing the necessary test and receiving their licence. Agents are paid a fee depending on the profits they make rather than being on the insurance company's payroll. In India, current laws limit an individual's ability to work as an insurance agent for more than one life insurance firm at a time. Becoming an agent : To become a life insurance agent, you must follow a set of steps and meet certain qualifications. An insurance agent is required by law to have a licence, and the IRDA is in charge of all licence issues and other agent-related matters. There are rules that must be followed at all times during the operation. The study text will go through these regulations and conditions in depth later. We'll just go through the basics of how to become an agent and what an agent does in this first chapter. Role of an agent : Agents are employed by insurance firms and serve as the primary point of contact between the insurer and the insured. Their job is to recommend the best items to clients based on their needs. Simultaneously, they must work in the insurance company's best interests by using their unique role of understanding their clients well enough to protect the insurer from any unfair adverse product selection. This makes the role of the agent in the entire insurance business very crucial. Agents help their customers with the paperwork involved with the selling of insurance policies, and once the policy is sold, the agent can ensure that it is adequately serviced until maturity or in the case of a lawsuit. The agent should also assist the client in completing the necessary formalities during the claim process to ensure a swift settlement. Life insurance agents in India deal with a variety of insurances that are classified as follows: • simple life insurance products, such as term insurance and whole life plans; • savings products; and • other financial products, such as health insurance and accidental death plans. All of these items will be discussed in more detail in subsequent chapters. The agent becomes 92 CU IDOL SELF LEARNING MATERIAL (SLM)
an independent practitioner after he or she has been approved and named. The need for agents to prioritise their clients' needs is at the core of this. Agents' Code of Conduct: Any licenced agent must follow the Code of Conduct set forth by the IRDA in Regulation 8 of the Insurance Regulatory and Development Authority (Licensing of Insurance Agents) Regulations 2000 in order to assist agents in carrying out their roles in a professional manner. The IRDA's Code of Conduct spells out exactly what an agent can and may not do. For example, the agent should make all details about the insurance company they represent and the products they recommend public. They can work in the client's best interests while still ensuring that there is no discrimination against the insurance company. Furthermore, the insurance provider must take action to ensure that the business they have secured with their company is maintained. To do this, they must make every effort – both verbally and in writing – to ensure that the policyholder pays the premium on time. Insurance brokers' roles in insurance contracts: Anyone who acts on behalf of another person is considered an \"actor\" in the eyes of the law. If we authorise others to act on our behalf, we will almost certainly have to take responsibility for whatever they do on our behalf as long as the terms of the agreement are followed. This is true in insurance, where if an intermediary is involved, legal relationships are formed. In Chapter 1, we learned that there are various types of insurance intermediaries, and that the word \"agent\" refers to a licenced broker employed by an insurance firm to market its products on its behalf. As a result, the intermediary takes on the role of legal ‘agent,' acting on behalf of the ‘principal' (in this case, the insurance company). They have been given permission by the principal to enter into a contractual arrangement with a third party (in this case, the proposer/individual seeking insurance). Some of the most significant intermediaries for selling life insurance policies are insurance brokers. Agents have a responsibility to provide their clients with the best possible product options based on their preferences and specifications. They also have a responsibility to the insurance provider to defend it from adverse selection, since they are the best judges in their own clients' risk profiles. 93 CU IDOL SELF LEARNING MATERIAL (SLM)
Insurance brokers are becoming increasingly conscious of the importance of maintaining a professional demeanour with their clients at all times. High professional standards are in the best interests of both the insurance industry and the public it represents. Methods of upfront disclosure and agent remuneration: IRDA regulations regulate the remuneration of life insurance agents. A life insurance agent is compensated on a commission basis. This commission is a set amount of the premium that the insurance firm collects. • An insurance provider will earn a maximum of 35 percent of the first year's premium, 7.5 percent of the second and third year's renewal premiums, and 5% of the following years' renewal premiums, according to the Insurance Act of 1938. (This does not extend to annuities, either immediate or deferred.) • Instead of the stipulated 35 percent, an insurance provider can be charged up to 40% of the first year's premium for the first ten years of the insurer's operation. • In this event, the agent's commission on renewal premiums must not surpass 4%. Section 44 of the Insurance Act imposes the following requirements on brokers (whose agency has been terminated) who wish to receive commission on the renewal premium: – the agent must have worked for the insurer for at least ten years and must not be directly or indirectly soliciting or procuring insurance business for an insurer for at least one year before the agency is terminated; or – the agent must have worked for the insurer for at least ten years and must not be directly or indirectly soliciting or procuring insurance business for an insurer for at least one year before the agency is terminated. The commission is payable to an agent's legal heirs in the event of his death. Within the defined limits, an insurance firm will pay its agents. Term plans typically have lower commission rates than other types of plans, such as whole life plans. In addition, as opposed to policies with longer term periods, policies with shorter term periods have less commission. Commission rates are lower in single premium contracts, annuities, and pension plans. 5.3 IRDA (LICENSING OF INSURANCE AGENTS) REGULATIONS 2000 The Insurance Regulatory and Development Authority (Licensing of Insurance Agents) Regulations were published in July 2000 by the IRDA. This is an important piece of 94 CU IDOL SELF LEARNING MATERIAL (SLM)
legislation to be aware of because it pertains to the issuance and renewal of insurance agent licenses. How to Become an Agent: If you want to become a life insurance agent, you must follow a set of steps and meet a set of qualifications. . Fig 5.1 life insurance agent Application: Firstly, a person who wishes to obtain a license to act as an insurance agent must make an application, in the required format, to a designated person as specified in Regulation 3. The application must be accompanied by the fee of Rs. 250, payable to the authority as specified in Regulation 7. Qualification : The applicant must possess the necessary qualification, as specified under Regulation 4, as follows : Practical training: Table 5.1 Qualification: CU IDOL SELF LEARNING MATERIAL (SLM) 95
The applicant needs to receive practical training, as specified under Regulation 5. When seeking a license for the first time, the applicant needs to have completed at least 50 hours (75 hours in case of a composite agency) of practical training in the life insurance business by an approved institution. However, the requirement for practical training is relaxed somewhat where the applicant has additional educational qualifications (as specified under sub- regulation (1)). Examination : An applicant also needs to pass the pre-recruitment examination in life insurance business as specified under Regulation 6. The examination may be conducted by the Insurance Institute of India (III) or any other approved examination body. Issue of license: The designated person may grant the license on being satisfied that the applicant: • is in compliance with Regulation 4 (is properly qualified); • is in compliance with Regulation 5 (has had practical training); • is in compliance with Regulation 6 (has passed the necessary examination); • has supplied an application, complete in all respects; • has the knowledge necessary to be able to seek and gain insurance business; and • is capable of providing the necessary service to policyholders. Renewal of license: Before seeking a renewal of their license to act as an insurance agent, the applicant needs to have completed at least 25 hours of practical training in life insurance business from an approved institution as specified in Regulation 5(3). Cancellation of license: The designated person may cancel the license of an insurance agent if the agent suffers from any of the disqualifications mentioned in sub-section (4) of section 42 of the Act. The disqualifications mentioned in this sub-section that are applicable to an individual agent are as follows: • The individual is a minor. • The individual is found to be of unsound mind by a court of competent jurisdiction. • The individual is found guilty of criminal misappropriation, breach of trust, cheating, forgery, or of abetting or attempting to commit such an offence by a court of competent 96 CU IDOL SELF LEARNING MATERIAL (SLM)
jurisdiction. – However, if at least five years have passed since the completion of the sentence imposed for such an offence, ordinarily the conviction ceases to operate as a disqualification. • The individual is found guilty of, or is found to have knowingly participated in any fraud, dishonesty or misrepresentation against an insurer or an insured. • The individual does not possess the necessary qualifications or has not undergone the necessary training for a period not exceeding twelve months as specified by the Regulations. • The individual has violated the Code of Conduct (see section D2). Issue of duplicate license: The authority may issue a duplicate license to replace a license lost, destroyed, or mutilated on payment of a fee of Rs. 50 Operating without a license: An individual who acts as an insurance agent without holding a license will be fined up to Rs. 500. Agent Code of Conduct : Along with the license regulations, the Regulator has also laid down a code of conduct that is to be followed by every insurance agent 5.4 SUMMARY • An individual who sells insurance policies is known as an agent. • Agents are typically used to sell insurance. The insurance firm is represented by an insurance agent. • An agent is defined as a person who is licenced under Section 42 of the Insurance Act, is allowed to sell insurance, and is paid commissions for soliciting, procuring, and maintaining business. • To be qualified to become an agent, the applicant must be at least 18 years old at the time of application. • Qualifications: Minimum of a tenth grade education • According to IRDA regulations, anyone who holds an insurance agent licence must follow the prescribed code of conduct. The act also forbids an insurer from providing a 97 CU IDOL SELF LEARNING MATERIAL (SLM)
refund as an inducement to someone to take out an insurance policy, as defined by the code of conduct. • In the insurance industry, four major areas of unethical behaviour have been identified: • Misrepresentation: stating one thing as another • Illustrations: showing only one example and implying that the illustrated one is right • Replacement: replacing an old policy in full or in part with a new policy • Guidance: providing legal or tax advice if you are not an attorney or a CPA. • The Agency Role entails two distinct responsibilities: • Providing professional financial advice to the consumer – allowing the latter to fulfil his or her insurance needs in the most suitable manner • Building a relationship with the customer – which encourages trust and confidence 5.5 KEYWORDS • Agent - A individual who sells insurance policies. • Insurance intermediaries - assist in the placement and procurement of insurance, as well as providing insurance providers and customers with resources that support the insurance placement process. • Insurance brokers - are regulated by the Insurance Regulatory and Development Authority (Insurance Brokers) Regulations, 2002, which are issued by the IRDA. • TPA - is an organization that processes insurance claims or certain aspects of employee benefit plans for a separate entity • Web aggregators - is a company registered under the Companies Act and approved by IRDA, which maintains or owns a website and provides information on insurance products of different insurers. • License - is an official permission or permit to do, use, or own something. 5.6 LEARNING ACTIVITY 1. List the duties or responsibilities of Agents. ___________________________________________________________________________ ____________________________________________________________________ 98 CU IDOL SELF LEARNING MATERIAL (SLM)
5.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is the role of the agent when the underwriter rejects the proposal? 2. What should an agent do if a client accepts some but not all of their Recommendations. 3. List out the insurance intermediaries? 4. Define Agents. Explain their role? 5. Define TPA and its process? Long Questions 1. Describe the procedure to become an agent? 2. Explain the code of conduct for Agents in insurance business? 3. Explain the Agents remuneration and upfront disclosure methods in detail? 4. List out the Insurance intermediaries and explain in details? 5. Describe licensing of Agents in insurance in detail? B. Multiple Choice Questions 1. The fees for Issue of duplicate license. a. Rs.1000 b. Rs.500 c. Rs.50 d. No fee 2. An individual who acts as an insurance agent without holding a license will be fined up to a. Rs.500 b. Rs.100 c. No fee d. Rs.1000 99 CU IDOL SELF LEARNING MATERIAL (SLM)
3. The disqualifications mentioned in this sub-section that are applicable to an individual agent are a. The individual is a minor b. The individual is found to be of unsound mind by a court of competent jurisdiction c. The individual is found guilty of criminal misappropriation, breach of trust d. All of these. 4. Insurance brokers are licensed by the a. Insurance companies b. IRDAI c. Government of India d. None of these. 5. ------------------- serve as a bridge between consumers (seeking to buy insurance policies) and insurance companies. a. Insurance Intermediaries b. Government c. Insured d. All of these. Answers 1-b,2-a,3-d,4-b,5-a 5.8 REFERENCES Text Books: • IC – 38 – Insurance Institute of India. • IC-33 - Insurance Institute of India. 100 CU IDOL SELF LEARNING MATERIAL (SLM)
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