Risk Analysis and Insurance Planning

Q7. In India under section 64 U of the Insurance Act 1938 there shall be established a committee to be called the ____________________ to control and regulate the rates to meet certain standards,advantages, terms and conditions that may be offered by insurers in respect of general insurance business. (a) Taxation Advisory Committee (TAC) (b) Tariff Advisory Committee (TAC) (c) None of the above Q8. In this method the actual loss ratio is compared with the expected loss ratio. (a) Pure Premium method (b) Loss ratio method (c) Class rating Q9. Life expectancy has been increasing in India since 1921. The reasons for this are (a) Better health care facilities (b) Improved dietary standards (c) Safer birth practices (d) All the above. Q10. Which of these factors is not considered by the insurers in determining the premium rates? (a) Age (b) Financial status (c) Gender (d) Smoking status Q11. The pricing of insurance products is based on (a) The law of large numbers (b) The law of averages (c) Both the above (d) None of the above Q12. The function of pricing of insurance products is done by (a) The underwriter (b) The actuary 139

(c) The intermediary who sells the product (d) None of the above Q13. Loss forecasting is done by insurers with the help of (a) Law of demand (b) Law of large numbers (c) Law of consumer propensity (d) All the above Q14. Which of the following is an underlying principle in insurance? (a) Theory of probability (b) Law of large numbers (c) Both the above (d) None of the above Q15. Which of the following is not a component of life insurance premium (a) Mortality (b) Interest (c) Commission (d) Expenses Q16. Which of the following factors does not affect Mortality (a) Age (b) Colour (c) Occupation (d) Habits Q17. Which of the following is the method of rating for underwriting (a) Experimental method (b) Probabilistic method (c) Numerical method (d) None of the above 140

Q18. Which of the following is consideration for an insurance contract (a) Proposal form (b) Premium (c) Policy bond (d) Other documents Q19. Mortality rate is the (a) rate of death in the population (b) probability of death in a group (c) probability that the insured will die before reaching a certain age (d) rate of death in a group Q20. Adverse loss ratio refers to (a) Higher premium being received by the insurer (b) Lower premium being received by the insurer (c) Lower than expected claims ratio in the pool (d) Higher than expected claims ratio in the pool Q21. The following factors affect the premium on a policy (A) Mortality (B) Investment rate (C) Expenses (D) Senior management policies (a) A,B,C,D (b) A,C,D (c) A,B,D (d) A,B,C Q22. A sub-standard Indian life is (a) a below average Indian life (b) An individual with health problems (c) A life which cannot be insured (d) Classified dependent on the underwriting standards of the insurance company. 141

Q23. The role of an actuary in insurance is (a) to decide the policies of the insurance company (b) to accept or reject insurance claims (c) to decide on the finances of the insurance company (d) to decide the premiums paid by the company Q24. Net Premium refers to: (a) Premium received from Policy holder (b) Premium Income less taxes (c) Cost of doing business (d) Cost of expected losses. Q25. Which of the following classes of business is covered by Market Agreement:- (a) Fire (b) Compulsory Third Party Liability (c) Public Liability (d) Workmen's compensation Q26. Numerical Rating system refers to: (a) Rate the performance of Agents (b) Rate the performance of Insurers (c) Rate the Risk of Proposers (d) Rate the premium on standard lives. Q27. In rating, what method is generally used where the underwriter is unable to group the data for rating or when reliable loss data is not available: (a) Class Rating (b) Merit Rating (c) Schedule Rating (d) Judgmental Rating Q28. In group life and health insurance this method of rating is generally used: (a) Experience Rating (b) Merit Rating (c) Class Rating 142

(d) All of the above Q29. Which one of the following statements is not true: (a) Standard mortality is considered to have a value of 100% (b) Ratable impairment is expressed as an addition to extra mortality. (c) Standard or normal mortality does not account for favourable features. (d) Favorable mortality factors are expressed as say \"minus 50%\" to standard mortality. Q30. A group of 50000 persons each aged 35 years wishes to apply for Term Insurance for a one year period for a Siam of ₹2 lakhs. If the mortality tables show that out of 50 lakh people 30000 die within a year, find the premium to be paid by each of the 50000 applicants. (a) 1250 (b) 1300 (c) 1350 (d) 1200 Q31. There are 5000 people in a village. They want to get insured for a sum assured of ₹2 lakhs. If the mortality rate is .004, what is the natural premium? (a) 40,00,000 (b) 8,00,000 (c) 40,000 (d) 10,000 Q32. Insurance operates on (a) Law of large numbers (b) Law of probability (c) Both (d) None Q33. Out of 400 houses, each valued at ₹20,000/-, 4 houses get burnt (on an average) every year. What should be the contribution of each owner to pay for the losses of 4 houses? (a) ₹800 (b) ₹200 (c) ₹400 (d) ₹600 143

Hint: 20000 x 4 / 400=200 Q34. Out of 1000 pedal cycles, each valued at ₹2000,5 are stolen on an average every year. The rate of premium for each pedal cycle in % may be indicated. (a) 5 (b) 10 (c) 50 (d) 0.5 Hint: Premium per cycle= 2000 x 5 / 1000= ₹10 Rate of premium = 10/2000= 0.5 ANSWERS 1 C 13 B 25 C 2 B 14 C 26 C 3 C 15 C 27 D 4 B 16 B 28 D 5 C 17 C 29 C 6 A 18 B 30 D 7 B 19 C 31 A 8 B 20 D 32 B 9 D 21 D 33 B 10 B 22 D 34 D 11 C 23 D 12 B 24 D 144

2.4 ANALYSIS AND SELECTION OF INSURANCE PRODUCTS AND ITS PROVIDER 2.4.1 Purpose of Coverage The formulae used for establishing the maximum amount of cover for life, critical illness and TPD are related to the insured's age and their current earned income. Some recognition may be given to potential income, where an individual has excellent future prospects. For example, an insurer may adopt the following rules for life and critical illness insurance: Age Group Life cover Critical Illness (multiple of earnings) (multiple of earnings) Up to 40 20 7 41 - 50 15 7 51 and over 10 7 And an insurer may adopt the following rules for TPD benefits: Age Group TPD Benefits (multiple of earnings) Up to 40 5-7 41 - 50 5-7 51 and over 3-5 In relation to TTD cover under personal accident insurance, the maximum limits of cover available will vary by occupation and income. As a guide, for a person in teaching profession earning ₹3,000 p.m., Sum insured sought over ₹100,000 will get close attention by the underwriter, while manual workers (blue collar) earning ₹5,000 p.m. applying for sum insured of ₹100,000, may only be considered subject to substantiation of earned income. In the case of both life cover (including critical illness and TPD) and TTD cover under PA policy, depending on the levels of cover sought, the insurer may seek some or all of the following in relation to cover with large sum insured:  Proof of income — by way of tax returns, assessment notices or business annual accounts for up to three years. This may need to be accompanied by a statement from the client's accountant verifying the accuracy of the accounts.  A financial questionnaire signed by both the policy owner and the insured person, stating the reason for and how the level of cover has been calculated. When a planner encounters a situation where large amounts of cover are sought, they should prepare their client for the fact that the insurer may require quite extensive 145

information of the type discussed above, before they are prepared to provide that cover. Most insurers provide guides indicating at which levels supporting financial evidence is routinely required. 2.4.2 Duration of Coverage The duration of coverage depends on the purpose of coverage. In case of policies which have been purchased to typically cover risk of dying early, the said policy should continue till:  The life insured does not create a sizeable estate or  The major life goals of the life insured have not been fulfilled or  The life insured retires On the contrary, a policy purchased to provide coverage against a particular risk event should continue till the event does not expire. For example, a mortgage redemption policy typically continues till the underlying loan is not repaid in full. 2.4.3 Participating or Non-participating A participating policy is also known as \"with profits\" policies. Such a policy receives a proportion of the profits of the life insurance company every year. In this case policy holder pays an additional premium which entitles him/ her for the bonuses. The bonus rate is decided by the insurance company after considering a variety of factors such as:  The return on investment,  The level of bonuses declared in previous years and  The actuarial assumptions (especially future liabilities and anticipated investment returns). A non-participating policy is also known as \"without profit\" policy. Such a policy is not entitled to receive a proportion of the profits of the life insurance company every year. In this case policy holder pays no additional premium and is thus entitled for the basic sum assured only under the policy as benefits. 2.4.4 Cost-benefit Analysis Determining the Cost of Life Insurance Life Insurance provides a complete, balanced and perfect hedge against threats which confront everybody, i.e. premature death, disability and the risk of living too long. For securing the present and the future at a very small cost and enjoying later life, life insurance must have first claim on savings. In all contingent events, money is required to meet the cost of living and maintaining the current standard of living. Therefore selection of a policy is a very important task. 146

How to select a Life Insurance Policy? Choice of a life insurance policy differs from person to person. It depends on age and needs of the person i.e. it depends upon life cycle stages, attitudes, expectations and financial wellbeing of an individual. Broadly, choice of life insurance can be made according to a) stage of life cycle and b) income earners in the family viz. one income family, two income families. In families where there are two income earners, money is certainly more plentiful. Family income is much higher. In such cases if income stops due to disability or death it will be difficult for dependants to maintain their standard of living. In time with changing insurance needs, insurers have devised innovative new products and today the market boasts of a basket of plans. Cost Comparison There exists great variation in policy costs. These variations are due to companies' management expenses, marketing overheads i.e. agency commission costs, underwriting policies or investment performance or profit margins or such other factors. Many of us confuse between premium and cost. The premium is annual outlay for the policy and not its cost. Cost includes all elements i.e. premium, death benefits, bonuses for with profit policies, other benefits, etc. and not just premiums. There are various methods available to compare costs. The objective of any method is to provide a means of guiding the prospect to a competitively priced policy. Actually the cost of life insurance to any person is dependent on that particular individual's typical circumstances and the actual cash flows experienced under the policy. This can be determined only after the contract has been terminated by death, maturity or surrender and after considering the time value of money. Even so attempts to estimate costs prospectively are useful and desirable. None of the methods of comparing life insurance costs take into consideration all the possible factors that a consumer should consider in the purchase decision. Factors to consider while buying Life Insurance Making a wise life insurance purchase decision is not easy. Firstly, one has to decide whether any life insurance is needed? This of course depends upon the subjective probabilities of death in the minds of individuals. If yes, then the amount must be decided. Secondly, as to what kind of insurance to buy and from whom? The latter has become a very important question after the liberalization of the insurance sector. Before purchasing a policy one should determine as to how much one is willing to spend for life insurance as well as the cost of life insurance. Sometimes an individual may find it difficult to estimate the cost of insurance but one should purchase a life policy that is reasonably priced in 147

relation to the other life products available in the market from other insurers. Careful shopping leads to sound decisions regarding type and amount of life insurance to buy and from whom. Often, a little awareness of detailed information about the available products can result in sizeable savings over the years. After the life cycle stages and needs at various stages, let's now consider how an individual makes a choice of policy. Life insurance policies are designed to meet a variety of needs. Some life insurance policies are designed to give pure protection while other life insurance policies are designed to serve primarily as investments. Some life insurance policies also cater to special needs in the life cycle. Therefore, the choice of a life insurance plan by an individual depends on a number of factors. Important among these are the following: 1. Needs - Needs in terms of the extent and the period of time over which the protection is required. 2. Special needs - Special needs generally depend upon status and occupation of an individual. In some occupations, mortality risk of disability is more. 3. Premium of life policy - Affordability of premium outgo in relation to disposable income of an individual. E.g. consider an industrial worker who earns ₹5,000 per month and his family consists of a wife and two children. He definitely needs insurance cover but after deduction for compulsory savings like provident fund, etc., he gets a net salary of around ₹4,000 per month. After deducting household expenses (₹2,500) and emergency expenses (like medical expenses, educational expenses ₹1,000), the disposable income in his hands is very small i.e. ₹500. He has to purchase a life policy from this amount. In any case, a beginning has to be made somewhere and a term insurance plan would be suitable in this case. 4. Return on life insurance plans: In case of early death of life assured, life insurance policies yield a high rate of return but in case, held till maturity, the return is more or less comparable with that of savings deposits. 5. Tax features of life policies: Life insurance premiums paid by life assured are eligible for tax rebate under the Income Tax Act. 6. Risk bearing capacity and wealth of individual. 2.4.5 Claim Settlement (a) The insurer verifies whether the other party (i.e. the life assured) has performed his part of the contract. A computer print-out, namely the Policy Status Report, gives the relevant material information. Such information relates to – 148

Premium payment position; Whether age stands admitted; Any outstanding loan and interest thereon; Survival benefit paid, if any; Legal requirements, if any Any other charge on the policy. (b) The insurer, before considering a claim, satisfies itself whether the insured event has taken place. (c) The Insurance its obligations under the contract. These will vary according to Policy Conditions. For example:- Bonus may or not be payable; Sum Assured may be payable either in lump sum or in installment; There may be waiver of future premiums. (d) The insurer determines who are the persons entitled to demand the performance of the promise. These may be - the nominee (in case of death claim), if nomination was made; the assignee, if assignment is there the Trustee/The Beneficiaries in case of MW Act Policies. There may be some legal restraints like – notice from income tax authority prohibitory order from a curt of law notice of the official assignee (in case of insolvency) 149

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QUESTIONS Q1. An ____________ is a series of periodic payments. Most of us make and receive such periodicpayments. (a) Insurance (b) Annuity (c) Policy Q2. A ________________ is an annuity that is purchased by the payment of a single, lump-sum premium. (a) Periodic level premium annuity (b) Flexible premium annuity (c) Single premium annuity Q3. The decision to accept or reject a life insurance claim after receipt of all requirements at the insurance office is: (a) 30 days (b) 15 days (c) 21 days (d) 10 days Q4. Age and life expectancy are: (a) Conversely related (b) Inversely related (c) Not related (d) None of the above Q5. Life expectancy is: (a) The average numbers of years of remaining life that a person has (b) The demographic profile of a life as per the latest Census. (c) The number of years an adult male is expected to live as per insurer's experience. (d) None of the above. 151

Q6. Which of the following statements is true: (a) Males enjoy better longevity than females (b) Male and female longevity profile just about the same (c) Females have greater life expectancy than males (d) Longevity profile of sexes do not follow any pattern Q7. In the case of an over the 40 clients, the following protection need is not that important: (a) Personal protection coverage (b) Education needs coverage (c) Property protection coverage (d) Business Estate protection coverage Q8. The sum assured received under any policy is taxable if (a) The premium payable exceeds 20% of the sum assured (b) If it exceeds 30% (c) If it exceeds 15% (d) If it exceeds 12.5% Q9. The condition under which the insurer may not honour the liability under a policy is set out in the (a) Schedule of the policy (b) Forfeiture clause (c) Title provision (d) None of the above Q10. Which of the following is correct meaning of sum assured under majority of policies? (a) Fair value of subject matter of insurance (b) Agreed value of property insured (c) The amount paid when there is a total loss (d) The maximum limit of liability under the policy 152

ANSWERS 1 B5A9 B 2 C 6 C 10 D 3A7 B 4 B8A 153

2.5 LEGAL LIABILITY 2.5.0 Introduction Let us now try to understand the concepts of legal liability. Unlike policies we have already examined for property protection, liability insurance covers events to third parties. This insurance gives protection to individuals and organizations against financial implications due to lawsuits. For understanding this insurance it is essential to understand some legal principles. The concept of legal liability has developed from the English common law principle ofDuty of care'. In simple words it means that every individual owes a duty of care, which means not causing any injury or suffering to fellow citizens. When this duty of care is breached, the person is legally liable to compensate the affected parties. Broadly speaking there are three areas of law under which legal liability risks may arise: Under Statute: It refers to those liabilities that arise under the Acts of Central or State Governments and delegated legislation e.g. Consumer Protection Act, 1986 in case of product liability. Under Contract: It refers to those liabilities that are consequential to the voluntary entering of multiple parties in a legal contract e.g. contract of lease of premises. At Common Law: It refers to those liabilities that arise are primarily guided by the provisions of common law e.g. careless driving of motor vehicle. Law of Torts - Breach of Duty of Care Torts Torts is a civil wrong. Torts can be classified as under:  Intentional torts  Absolute liability/strict liability  Negligence Let us discuss each of them. Duty of Care How to decide whether a duty of care exists? For deciding this Lord Atkins Neighbour principle' comes to some help. It states that a general duty of care exists towards all legal neighbours - those closely and directly affected by our act or omission at the time the tort is committed. 154

The next problem will be deciding whether a breach of that duty of care has been committed. Mostly, the decision is subjective and courts will decide, depending upon the facts of a particular case and considering the precedents i.e. case laws. The degree of care also may vary from circumstance to circumstance. This means there is no single standard of care applicable for all circumstances. The degree of duty of care also varies according to different classes of persons. The degree of care exercisable by owners or occupiers of a property is different in case of trespassers, licensees, invitees, passers - by and children in ascending order with degree of care towards children being the utmost. 2.5.1 Intentional Torts These are intentional acts, which may result in injury or suffering to others. Examples of intentional torts are: Assault, false imprisonment, slander and libel. Many a time it is difficult to differentiate these torts from criminal acts. Moreover, since these acts are committed intentionally and are within the control of the insured, they can be avoided generally and are not insurable. Those intentional torts which result in physical injury to others like assault are not insurable. Intentional torts like libel, slander, etc. which do not result into physical injury are insurable.  Libel: It is the publication of a false statement in a permanent form designed to damage the reputation of another person.  Slander: It is similar to libel but in verbal form  Assault: It is touching another person unlawfully. 2.5.2 Absolute Liability It is also known asNo Fault Liability'. Many a time this liability arises because of statute - which means the law dictates it. This type of liability is different from other types of liabilities in one important aspect - the negligence or fault need not be established by the affected party. Examples of this liability are:  Employer's liability for his employee's injury or suffering even when there is no negligence or fault of the employer. Even in cases where the employee himself or his co-employees are responsible for the injury, the employer is made responsible by statute. (Workmen's Compensation Act, 1923). Here, let us appreciate the difference between strict liability and absolute liability. 155

Strict Liability The principle of strict liability was laid down in the English case RylandsVs Fletcher (1868). An interesting Indian case applying this rule is that of Mukesh Textile Mills (P) Ltd. Vs. H.R.SubramanyaSastry (1987). This concept mainly emerges in case of a type of tort - private nuisance. Strict liability means that: If land is used unnaturally by bringing or collecting or keeping something for one's own purposes which can cause mischief to others if it escapes, the person is prima facie answerable for all the damage which is the natural consequence of its escape. In case of strict liability certain defenses are allowed. For example, if an employee has sustained injuries resulting from his direct disobedience or drunkenness then the employer is not liable. But in case of absolute liability, such defenses are not allowed. Absolute liability arises in case of injuries resulting from inherently hazardous activities. A famous landmark Indian case which proposed the absolute liability concept is MC Mehta V. Union of India (1986) in which Oleum gas leaked from Sriram Foods and Fertilizer Industries causing personal injuries to several people. Strict Liability Absolute Liability Requires non natural use of land and Requires hazardous and inherently escape of material capable of causing dangerous activity loss/damage Will not cover the cases of persons within Makes no distinction between ‘within‘ and the premises ‘outside‘ the premises Some defences available to defending No defences available party Test of foresee ability is required No such test required Damages awardable will be ordinary or Damages may be exemplary and punitive compensatory besides compensatory Statutory Liability Many Acts/statutes in India also give rise to legal liability. Mostly, this is in the form of strict or absolute liability. Let us note some of the important statutes, which we will be referring to, when we discuss different liability insurance products: 156

 The Public Liability Insurance Act, 1991: this statute imposes ‗absolute liability' in respect of handling of hazardous materials as specified in the Act. The compulsory public liability insurance takes care of the provisions of this Act.  Other important statutes, which have relevance for public liability insurance in India, are:  Water (Prevention and Control of Pollution) Act, 1974  Air (Prevention and Control of Pollution) Act, 1981  The Environment Protection Act, 1986  The Factories Act, 1948  Important statutes which have relevance for employers' liability:  Workmen's Compensation Act, 1923  Fatal Accident Act, 1855  Consumer Protection Act, 1986 has relevance for product liability insurance and professional indemnity insurance  Companies Act has a bearing on directors' and officers' liability insurance 2.5.3 Law of Negligence In simple terms negligence means not doing something, which a reasonable man would do, and doing something, which a reasonable man would not do. For understanding this we must be clear about the definition of a reasonable man. Here, a reasonable man means someone who possesses all the normal faculties of humans e.g. to think, to speak or to act with reason and who is honest and prudent in all activities. However, deciding whether a person has acted reasonably is a question of fact to be decided by the court of law based on the circumstances of the case. In other words negligence meansabsence of care'. It implies that for proving negligence the following conditions have to be satisfied:  There exists a duty of care towards the injured person.  That duty of care has been breached.  Injury or damage has resulted as a consequence of that breach.  There is a direct causal relationship between that breach and the injury. 157

2.5.4 Special Tort Liability Problems So far we have seen under what circumstances legal liability arises. Now let us see what defenses are available to the tort easers (those who have committed the tort) to defend their case and avoid paying any damages. The following are the defenses available:  Volenti Non fit Injuria: If a person voluntarily consents to take a risk, he has no right of action against anyone for injuries suffered as a result of his actions.  Contributory Negligence: If the affected party (the plaintiff) is also negligent and is a partly responsible along with the defendant to his own injury or suffering, the damages are reduced according to the blame attaching to the plaintiff.  Inevitable Accident: An inevitable accident is one, which occurs in spite of taking all reasonable care. The defendant has to prove that it was not possible to avoid the accident.  Act of God: e.g. Earthquake, Storm, Flood etc  Emergency: An act committed when the person himself is in danger  Contracting Out: By entering into agreements with others and by incorporating necessary conditions, a person can avoid or reduce his liability.  Limitation: If a law suit is time barred as per Limitation Act, the defendant can avoid liability 2.5.5 Civil Justice System-IRDA, Insurance Ombudsman, Consumer Protection Act-1986 Understand ombudsman Scheme (Redressal of Public Grievances Rules 1998) The word ‘Ombudsman' has originated from Sweden which literally means an appointment of an official to investigate people's complaints with regard to mal-administration by public authorities. The scope and function of Ombudsman is keenly followed in different countries to control and monitor corruption. The Indian Banks have resorted to ombudsman to improve customer service and to control corruption. In 1998, the Indian Government introduced Insurance Ombudsman for redressal of grievances of policyholders of life and non-life insurance business and to resolve complaints in an efficient and impartial manner. 158

Appointment of Ombudsman The rules state the following with regard to appointment of ombudsman. One or more persons may be appointed as ombudsman Selection will be from an eminent group of persons who have experience in Industry, judicial service, administrative service etc. The Governing Body of Insurance Council appoints an ombudsman Initial appointment is for 3 years but reappointment is allowed Powers Ombudsman is authorized to deal with Claim disputes including delays and refusals Disputes with regard to premium payable Disputes with regard to legal aspects of policies The non issue of relevant insurance documents after receipt of premium Any delay in settlement of claims Appointing Authority The insurance council is the final authority to decide the territorial jurisdiction of the Insurance Ombudsman at each center and to appoint the necessary secretarial staff for assistance. Who can make a complaint to Ombudsman A complaint may be made by an insured person himself or his legal heirs in writing to the ombudsman within whose jurisdiction the branch or office of the insurer, against whom the complaint is made, is located. All complaints must relate to policies of life insurance or non-life. Only an individual policyholder can make the complaint. Firms and organizations are debarred to approach ombudsman for making a complaint. Circumstances in which complaint can be sent to Ombudsman A written complaint can be sent to Insurance Ombudsman in the following circumstances viz 159

When the insurer has rejected complainant's written representation, When the complainant has not received a reply for more than a month, or When the complainant is dissatisfied with the reply given by the Insurance Company Time Limit for Filing a Complaint Any complaint shall be made to insurance ombudsman within one year of the complaint being rejected by the insurance company (Specifically where the insurer has rejected the complaint or has not replied with in a span of one month of receiving the complaint). Complaint Procedure If the person making the complaint and the insurance company give their consent in writing for the ombudsman to act as mediator, then the ombudsman has to give his \"Recommendations\", within a period of one month for resolving the complaint. If the complainant accepts the \"Recommendations\", then the Insurance Company shall implement the \"Recommendation\". If the complaint is not settled by the agreement as mentioned above, the ombudsman shall pass an \"Award\" which is fair and is based on facts and circumstances of the case within 3 months of receipt of the original complaint. If the \"Award\" is acceptable to the Complaint, then the Insurance Company shall implement the award and intimate to the ombudsman accordingly. Expenses of the Ombudsman Scheme All new Insurance Companies will come under the purview of Insurance Ombudsman Scheme. As per the rules, the expenses of Ombudsmen's office will be borne by Life Insurance and General Insurance Industry. The expenses will be shared by companies within each industry (Life and General) in proportion to their Gross Premium Income. 160

Types of “Defences” 161

QUESTIONS Q1. Civil law refers to laws that define ____________________. (a) regulate the behavior of people within the state. (b) The rights, duties & obligations of the individuals (or corporations) in the society. (c) Relates to Public administration on the principle of Driot Administrative. Q2. The person who commits the tort is known as ____________________. (a) Criminal (b) Tortfeasor (c) Plaintiff Q3. What are the areas of law under which legal liability risks may arise? (a) Under statute (b) under contract (c) at common law (d) all three given above Q4. What is tort? (a) Hobby (b) civil wrong (c) disease (d) self inflicted injury Q5. What are the types of damages awarded in case of personal injury claims (a) Special damages and general damages (b) Special damages only (c) Damages to third parties only (d) None of the above 162

Q6. The liability that arises because of failure of one party not fulfilling the provisions of contract which it had entered into with another party is called (a) Vicarious liability (b) Special damage (c) Contractual liability (d) strict liability Q7. No Fault liability is the other name of: (a) Absolute liability (b) Strict liability (c) Vicarious liability (d) Contractual liability Q8. Which of the Tort is not insurable: (a) Assault (b) Stander (c) Libel ANSWERS 1 B4 B7A 2 B5A8A 3 D6 C 163

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SECTION - III Life Insurance-Analysis of Cover, Strategies and Products 165

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3.1 ASSESSMENT AND IDENTIFICATION OF RISK EXPOSURE 3.1.1 Gathering Data on Current Life Insurance Coverage The information needed will come from the client and will only be ascertained after lengthy and patient discussions. While almost all the information needed is known to the client, you need to remember that the client is not aware of what information you need, nor necessarily its particular importance. The different data collection forms provide a checklist of the information needed and a place to record the information provided. This topic will focus on the information sought for these forms, the reasons for obtaining the information, and how the insurer uses that information. In addition, where insurance covers are to be placed, the insurer will require proposal forms to be completed. The information required for these forms also will be discussed in this topic. Prior to the interview, it is best to give the client some idea of the type of information required and why it is needed, so he/she will come prepared. Items that might be needed include:  bank statements;  tax returns;  last annual statements for insurance policies;  superannuation details;  credit card statements; and  current and previous cheque books. The client needs to understand the importance of gathering accurate and detailed information, and that it is given in complete confidence. Let the client know that the information he/she provides is confidential, and that the only party it would be revealed to would be an authorised government agency. From the information gathered in the Fact Finder, the client can be shown his/her insurance needs and where current covers are inadequate. 1. PERSONAL DETAILS This covers the client and any dependants, their ages, gender, whether they smoke, and their occupation. The significance of this data relates to the possibility of premature death or 167

serious illness or injury of the income earner(s). The effect of either of these outcomes relates to the cessation or reduction of income and its subsequent impact on dependants (or in the case of disability, the income earner as well). However, the life of the ‗breadwinner' is but one consideration; the death or long-term disablement of the principal homemaker is also an important consideration, for such an event will trigger the need for alternative care arrangements for any dependants. Also be aware that you will encounter a range of personal relationships and dependencies — from the doubleincome, married couple with no children, to the single person. Irrespective of the nature of the relationship that the client is in, it is important to establish the status of the income earner(s), the scope of any dependencies, and the wishes of the client in case of his/her premature death or disablement. The principal points to consider are:  the age and life expectancy of the income earner(s) in relation to the likelihood of death or disablement;  the gender of client(s) and any dependants;  the effects of smoking; and  the number and status of dependants — who they are and how the position changes according to’stage of life Let's look at these principal points in some detail. 1.1 Age and Life Expectancy Age and life expectancy are inversely related — the older one gets, the less years of remaining life one has. 1.1.1 Age of Death From a risk point of view, age is significant in relation to:  Premature death; and  The period of time that dependants need to be provided for following a death. In recent years, the number of deaths in India has averaged around 8961000 p.a., with about 53 per cent of those deaths being males and 47 per cent females. 168

1.1.2 Life Expectancy Indian Assured Lives Mortality (2012-14) Ult. Published Mortality Table, effective 1st April, 2013, within the meaning of regulation 4 of IRDA (Asset, Liabilities and Solvency Margin of Insurers) Published with the concurrence of IRDA vide it‘s letter dated 20th February 2013 Age x is defined as age nearest birthday. Age (x) Mortality rate(qx) Age (x) Mortality rate(qx) 0 58 1 0.004445 59 0.009944 2 0.003897 60 0.010709 3 0.002935 61 0.011534 4 0.002212 62 0.012431 5 0.00167 63 0.013414 6 0.001265 64 0.014497 7 0.000964 65 0.015691 8 0.000744 66 0.017009 9 0.00059 67 0.018462 10 0.000492 68 0.020061 11 0.00044 69 0.021819 12 0.000428 70 0.023746 13 0.000448 71 0.025855 14 0.000491 72 0.028159 15 0.000549 73 0.030673 16 0.000614 74 0.033412 17 0.00068 75 0.036394 18 0.000743 76 0.039637 19 0.0008 77 0.043162 20 0.000848 78 0.046991 21 0.000888 79 0.051149 22 0.000919 80 0.055662 23 0.000943 81 0.060558 24 0.000961 82 0.06587 0.000974 0.07163 169

25 0.000984 83 0.077876 26 0.000994 84 0.084645 27 0.001004 85 0.091982 28 0.001017 86 0.09993 29 0.001034 87 0.10854 30 0.001056 88 0.117866 31 0.001084 89 0.127963 32 0.001119 90 0.138895 33 0.001164 91 0.150727 34 0.001218 92 0.163532 35 0.001282 93 0.177387 36 0.001358 94 0.192374 37 0.001447 95 0.208585 38 0.001549 96 0.226114 39 0.001667 97 0.245067 40 0.001803 98 0.265555 41 0.001959 99 0.287699 42 0.00214 100 0.311628 43 0.00235 101 0.337482 44 0.002593 102 0.365411 45 0.002874 103 0.395577 46 0.003197 104 0.428153 47 0.003567 105 0.463327 48 0.003983 106 0.501298 49 0.004444 107 0.542284 50 0.004946 108 0.586516 51 0.005483 109 0.634244 52 0.006051 110 0.685737 53 0.006643 111 0.741283 54 0.007256 112 0.801191 55 0.007888 113 0.865795 56 0.008543 114 0.935453 57 0.009225 115 0.985796 170

The reduction in death rates in the older age groups, due to the reduction in deaths from a number of diseases, especially those relating to the circulatory system, has led to the life expectancy increases. 1.1.3 Life Expectancy and Gender Females have a greater life expectancy than males. This is true of advanced countries as well as ours. 1.1.4 Smoking It is now statistically clear that smoking reduces life expectancy and increases the risk of disablement. The trends in death rates for males from ischaemic heart disease, lung cancer, strokes, bronchitis and emphysema-related conditions have been attributed to changed patterns in smoking. 1.1.5 Dependants As the name implies, these are people who are dependent on the client for their maintenance. There is a range of people who can come into this category. They can be:  spouse or partner;  children;  relative; or  other person. In the main, the needs of each of these people are the same. Whether the situation is death, critical illness or disability, they need to be provided for, for the remainder of the time that they will be dependant. This can vary considerably. 1.1.6 Spouse In the case of a spouse, the question that arises is whether they are currently in the workforce or whether they will return to the workforce in the future. It may be that the spouse is currently out of the workforce raising children, but the intention is that they will return to their career in the future. In that event, the dependency would be for the period needed to raise the children and return to work. Having been out of the workforce for some years, it may be necessary for some further training or study to take place, so that the person is adequately skilled to.re-enter the workforce. This will incur a cost and that cost needs to be provided for. There may also be 171

circumstances where the spouse has never entered the workforce. The reality of the previously non-working spouse returning to the workforce prematurely due to the death, critical illness or disablement of the client can raise a number of financial problems that need to be considered:  If there are still dependent children, alternative arrangements will need to be made for their care. Day care can become quite expensive and, consequently, a return to work may not be economically viable.  Is there a realistic expectation of a previously non-working spouse generating sufficient income to maintain the previous lifestyle? Where the partner is unlikely to re-enter the workforce, then provision needs to be made for support for the balance of their lives. Where a separate retirement program is in place, then the provision would need to be made until such time as the retirement program commences. In the majority of cases, it will be the breadwinner who is relied on for financial support. However, another factor that can directly affect the family, but is often not considered, is the death, critical illness or disablement of a homemaker, and the subsequent financial and emotional consequences. In circumstances where this occurs, the breadwinner will have two choices, either:  take leave from work to look after the household; or  employ someone to do the job. The ongoing costs that need to be considered are, for example, light domestic duties such as washing, ironing and shopping, plus the caring for any dependent children. In the event that the homemaker has survived after suffering a disablement or critical illness, further consideration will need to be given to the cost of additional personal care for them. 1.1.7 Children In the case of children, their dependency would usually be until they have completed secondary school or university, depending on their aspirations. 1.1.9 Relatives In the case of a relative, this would most likely be a parent. The period provided for would be different from that provided for in the previous categories, as these people would be older, in an age group where the probability of suffering an illness or disease will increase. 172

The expenses associated with this risk also need to be taken into account. While a parent is the most common dependant relative, it could also be a relative of any other age or impairment, and their particular situation needs to be taken into account in allowing for the funds needed to provide for dependants. 1.1.10 Others In the case of other persons, their situation is probably covered by one of the cases outlined above, except they are not a spouse, child or relative. The point here is that on occasions, there are dependants who are not related, and they also need to be taken into account. 1.1.11 Dependants with a Disability If any of these dependant has a disability, and it is not expected that they will become self- sufficient, then they need to be provided for, for the remainder of their lives. Depending on the nature of their disability, this may not follow the normal life expectancy. With some disabilities, this could be 20 or more years less than the normal life expectancy. What needsto be taken into account is the special needs of the disabled person and the level of care needed. The death or disabling of their principal career could mean that a large expense will need to be met . 2. Occupation In terms ofpure risk', occupation needs to be considered from the viewpoint of the degree to which it may be the cause of premature death or disablement. A clerical worker would have a much safer occupation than a long-distance truck driver. Equally, a broken arm may not keep a clerical worker off work, whereas the truck driver would be off work until the arm healed. 2.1 Occupational Classifications for Insurance Disability underwriters generally use the following, or similar, broad classifications:  professionals, such as accountants, doctors, lawyers, etc.;  clerical and other white-collar workers in sedentary and stable occupations;  skilled workers in non-hazardous industries (mainly supervisory but can include some light manual work);and  trades people doing manual work in occupations without unusual accident hazards. 173

Occupations that fall outside these categories would each be considered on their merits. While there are few occupations that present problems in the assessment of life or critical illness insurance, more specific information is required for those applying for total and permanent disablement or income protection insurance. The specific definitions of disablement offered by life insurers will range from the conservative to the liberal, and this will be reflected in both the cost for the cover and the underwriting assessment process. The occupation group given to an individual will be based on their actual duties and not on their job title and, consequently, a breakdown of duties will be requested in the proposal form. For example, the response builder could range from an executive who in his daily work does no manual work at all, but is principally office-bound with occasional site visits, to another who is engaged full-time in manual work. The risk of death or injury in relation to the latter situation would be much greater, and this information would be significant to the insurer in assessing the risk. In addition, the underwriter will be interested in knowing specific details of employment and income-earning history, as well as educational qualifications. 2.2 Other details  Employed or self-employed: If employed, in the event of disablement the employer would provide some level of sick leave benefit. This period needs to be established, as it would be significant for determining a waiting period under an income protection policy. If self-employed, the client would need to provide for himself from the first day. An employed person's income can easily be established from pay slips. For a self- employed person, tax returns would be the principal means used to establish income. At the time of underwriting a proposal for a higher sum insured, insurance companies will require such evidence to be produced.  Permanent part-time or casual or contractor: This group of options is attempting to establish the consistency of the employment. If part-time, then how many hours? Is the work permanent part-time?₹Casual' is intended to refer to intermittent work; it is not necessarily every day/week and may or may not be for a regular number of hours. A contractor may be anyone of these. Is the work consistent? What has the income flow been in the past, and what is it likely to be in the future? The whole purpose of these questions is to establish the nature of the income that exists at present and also to ascertain the future position. This is needed to establish the consistency 174

of the income, details sought in the next section of this topic, and to help point to areas where there may be some protection present, such as sick leave. 3. Income and Expenditure The income and expenditure is sought for several reasons as follows:  To calculate the level of income needed for the family to survive in the event of the premature death of one or both ‗breadwinners', the family's current expenditure is needed. From this, future costs can be calculated. The manner of these calculations will be examined in the next topic.  For income protection insurance, which is available in advanced markets, the cover provided is usually for a maximum of 75 per cent of income. This income needs to be ascertained. Note that it is the pre-tax income that is needed here, as the policy proceeds with this cover are to be declared as taxable income. Where the insured operates his/her own business, it is the net business income that is used. That is the income after business expenses have been deducted. 4. Current Insurances Information gathered in this section of the data-collection form (under ‗Insurances') will establish the extent ofcurrent insurances, and serve as a starting or reference point for any further insurance recommendations. Thesedetails are sought in the fact finder. The details can be put into three categories  Death and lump sum disability covers: The type of the policy and benefit amount is sought. The type is significant, for with some covers, changes may be costly. For example, with a policy taken some years ago that uses a level premium, (i.e. one that doesn't annually increase with age), it maybe better to leave the policy in force and arrange additional covers around it. In addition, the ownership of the cover is also sought. This can be significant, for if the policy is not owned by a dependant (or spouse), it cannot be automatically included in ascertaining the current provision for dependants. Remember, also, that it is not uncommon for life and disability covers to be included in a superannuation scheme. These details need to be established. With all the covers above, it is necessary to establish the wordings used and ascertain 175

any deficiencies that exist. The necessary details, in plain language, are usually spelt out in sufficient detail under the₹Key features statement' and other sections of the customer information brochure. However, you may also need to sight the actual policy document for other conditions that may be attached to the client's cover. These should be pointed out and discussed with the client.  Health and general insurances: These should be brought to the client's attention and the need for them explained. The significant points in relation to each of these covers will be discussed in later topics, and these points should at least be included in the discussion with the client. The issue of general insurances can be raised as the assets are being discussed. With each, you need to look at the insurance protection that is in force in case of loss or damage, and what liabilities could arise out of them.  Health insurance details should also be ascertained, such as whether they have health insurance and if so, the type of cover (hospital, ancillaries, combined hospital and ancillary cover) and other details of the policy(ies). 5. Assets and Liabilities The extent of assets and liabilities needs to be ascertained for a number of reasons.  Firstly, significant assets need to be protected against risk of loss or damage, so an appropriate cover will need to be effected to meet the cost of any loss or damage. The type of information insurers will look for to provide that cover varies according to the type of asset, but the more common assets are listed below.  Secondly, significant assets (such as investments assets) can be a source of funds for the insured and/or dependants should the insured die or become disabled. These assets can then reduce the amount of insurance required to meet ongoing living expenses.  Thirdly, financial liabilities need to be identified so that appropriate cover can be put in place. These liabilities may be short-term (credit card debt, personal loan, hire purchase, lease etc.), and given the current ease with which credit can be obtained, quite significant in value. Longer-term liabilities include a house mortgage. From this information, an estimate of the client's net worth can be calculated. In the event of death, insurance cover must be sufficient to meet those liabilities, as well as the obligations a client may have (provision for dependants and so on). 176

3.1.2 Identifying Client’s Life Insurance Needs The regulations promulgated by the Insurance Regulatory and Development Authority (IRDA) concerning the licensing of the Agents (and other intermediaries, as and when allowed) clearly enunciate the code of conduct to be adhered to by the members. This has to be borne in mind in dealing with clients. IRDA vide its letter dated 18th June, 2010 has circulated a draft on modification to Regulations for Protection of Policyholders Interest, 2002 to incorporate thousands and procedure for₹Needs Analysis' for sale of Life Insurance policies. 3.1.3 Situational Analysis for Perils and Hazards 1.2 Stages of Life The needs of a client will vary over their lifetime, as their situation and goals change. In this section the needs according to stage of life will be considered. These stages start with the young adult, progress to the young family, and finally to the mature couple, where the children have become independent. Clearly, needs are related to age, but also to other factors such as marital status, any dependants (as we have seen), employment situation, and so on. At the outset, we should stress that today's world is typified by diversity in partnership relationships, and an increasing trend for people to live alone for much (if not all) of their adult lives. You will therefore encounter clients at stages typical of the traditional family, and other clients who do not ‗conform' to that pattern. For example, clients may be in their second (or third) marriage or relationship, and there may be associated dependants and quite complex interdependencies. Irrespective, what is important is to clearly identify the specific needs of the client, and be wary of making generalised assumptions about client needs based on some notion of ‗life stages'. With that caveat, let's continue. 1.2.1 Young Adult This most commonly describes a young person as they are embarking on their career. At this stage, they have no commitments and are most likely working for a salary. They are beginning to acquire assets, often through going into debt. This is a high-risk group with regard to accidental death or injury. In the event of death, the only liabilities they might have would be debts. These could comprise outstanding balances on credit or charge cards, and outstanding amounts on any personal loans or lease agreements. These debts may have been incurred for a range of reasons — purchase of a car, electronic equipment or a range of other items. 177

In the event of disability, the ongoing support of the client is the principal focus, as well as meeting commitments such as loan and credit commitments While only in the early stages of a career and with a limited budget for insurance protection, the insurance needs of the young adult are still very real. Consideration must be given to the basic forms of insurance, such as car insurance, householders' insurance (if, for example, renting premises), as well as personal protection insurance (income protection, critical illness, life, etc.). If the young adult plays a lot of sport, then health insurance may also be a consideration. Once the requirements have been identified, they can be ranked in order of priority, and allowed for in the young adult's budget. 1.2.2 Young Family Insurance needs start to increase substantially. The acquisition of a partner, children and a house would be the main reasons for change in an insurance situation. The partner may pull out of the workforce to raise the children. Whether there is a return to work may only emerge in time. If this likelihood is not known, then provision needs to be made for the partner for life, or if there is a retirement plan in place, until the plan begins to operate. If the partner wishes to rejoin the workforce, then provision need only be made during the time the children are being raised, but provision should also be made for any other costs that may arise for the partner to re-enter the workforce, such as retraining. If the homemaker dies, then provision needs to be made to cover the costs associated with rearing the children. The income earner needs to keep producing income to support the family, but there will be costs related to the minding and rearing of the children during that time. As far as the children are concerned, provision will need to be made until they become self- sufficient. This needs to bring into account any aspirations held for the children, such as university education or training in any specialist area, so their career goals can be achieved. It would be unusual with a young family (but not to be dismissed) that further dependant(s), such as parents or possibly other relatives would be involved. As they are dependants, their needs must not be overlooked. In the event of disability, several aspects need to be considered:  If the income earner becomes disabled, there needs to be sufficient income to support not only the disabled, but also the dependants. As well as the cost of medical and other 178

expenses, alterations needed for access and mobility, and any other associated costs need to be provided for.  If the homemaker is disabled, then provision needs to be made for the costs associated with those duties that were previously done by the homemaker, but which now have to be paid for. If the homemaker becomes critically ill, then not only his/her duties must be covered, but also allowance made for the spouse to take extended time off work to administer care. Other insurance needs also emerge with the young family. Healthcare needs to be considered —young families are one of the heaviest users of healthcare services, and costs associated with medical, dental and pharmaceutical bills can grow significantly. Costs need to be estimated and provision made for them, through either savings or private health insurance. Assets and liabilities will also have grown substantially —family home, car(s) and so on. These assets will need protection against loss or damage, and liabilities (consumer credit, home mortgage, personal loans, etc.) may also need protection through insurance (for example, consumer credit insurance, or home mortgage insurance). Over 40s At this point in life, the client's needs, from a planner's viewpoint, begin to expand. This comes about because the client who comes to a planner:  would normally have an increased disposable income and older children;  would generally have a professional career or mature business; and  is also now becoming more aware of the need to start to protect their income-earning capacity for retirement, which is fast approaching. Risk protection for this group should be focused in four key broad areas: 1. Personal protection: Debts, mortgages, income to sustain the family, income protection, healthcare provision and so on. 2. Business estate protection: Protecting a dependant's interests in any business ventures—share purchase and the like. 3. Business protection: A person's business protecting itself against an unforeseen event, such as lossof a key person. 4. Property protection: Assets and equity will be substantial and need protection against loss ordamage. 179

Clients at this stage may also be considering their estate planning needs and the potential use of life insurance as a source of future funds for distribution to beneficiaries. Mature Couple This is the family at the stage where the children have now ceased to be dependant. By this stage, the couple will be entering that age bracket where the likelihood of contracting illnesses or diseases increases considerably. Provision needs to be made to cover the costs associated with these events. This would need to include the income that would cease, as well as the medical and other costs associated with the condition. There also may be dependant relatives or others, and this need to be provided for. By this stage, debt levels have generally reduced, with the house mortgage paid off and other loans repaid. However, there may be other borrowings against the equity of the family home. Estate planning matters may also come into consideration, and the appropriateness of insurances to meet the clients wishes can be an issue. Mature Adult This is an attempt to describe an older adult who does not have a partner. The commitments by this stage may have grown. There could be a mortgage or other substantial commitments that need to be provided for. Depending on their age, the same position in relation to illness and disease described for mature couples above would also apply here. By this stage, there could also be dependants in the form of relatives, most commonly one or both parents. The future welfare of these people needs to be provided for. An adult may be single because of divorce or breakdown of some other relationship, and there may be dependants or other obligations or commitments (see ‘other' below) where insurance may be relevant. These clients may be asset-rich, having not had the financial burden of supporting a family. However, they may travel regularly or engage in other pastimes, which raise insurance questions. Others The ‗family' groups described above cover many of the situations you will encounter. It does not cover them all. There is a need to patiently inquire about a client's situation to 180

establish which people need to be provided for. Here are some examples of other situations that could be encountered: Where there are dependants in a nursing or other home. This could be a parent, child or relative. Even where governmental assistance or assistance from some other organisation is provided, there may also be a degree of dependency on the client. Where there are children in a divorce or separation situation. The children may not be living with the client, but the client maybe contributing to their maintenance. In the event of death or disability and the maintenance ceasing, the needs of the children need to be considered. Alternatively, your client may have custody of the children and be reliant on maintenance support from the ex-partner. Death of the ex-spouse will create the same need. From this discussion, you can see that a range of data about the client's situation is required to adequately assess their needs. That data will be identified not only under ‗Personal details', but also under sections of the Fact Finder, such as employment, income, expenditure, net worth, and personal priorities. We need to look at some of these other aspects of the client's circumstances and requirements. 181

QUESTIONS Q1. In deriving recommendations, the insurance adviser must focus on the client's (a) goals & objectives (b) status (c) behavior Q2. Risks faced by an individual depend on the following major stages of lifecycle (a) Young adult (b) young with family (c) middle ages (d) pre retiree/retiree (e) all the above Q3. What are the various stages of life that are required to be studied to understand the insurance needs of a person? (a) Young adult (b) Young family (c) Over 40s (d) Matured couple (e) All of the above Q4. Which of the following insurances may be required by a young adult? (a) Automobile insurance (b) Householders insurance (c) Personal protection insurance (d) All of the above. 182

Q5. Provision will usually not be made to cover which of these costs for a mature couple (a) Illnesses / disease for self (b) Health costs for the small children (c) Income protection for self (d) Property Q6. For House and contents insurance which information will not be of any relevance to the insurers? (a) Type of construction of premises (b) Extent of burglary protection measures (c) Details of items of valuable nature (d) None of the above. Q7. Which of the following is not a Liability exposure? (a) Bodily injury Property damage (b) Professional negligence in giving advice (c) Self-injury in an accident (d) Injuries to employees Q8. Mr. Rao, a widowed surgeon earning 27,00,000 p.a. has the following details: Electronic items - market value 2,50,000 Furniture replacement cost 14,00,000 House market value 65,00,000 Daughter's marriage 2,50,000 Children's education 15,00,000 Retirement funding 45,00,000 Current professional indemnity 1,50,000 Current investments 10,00,000 183

Hispriority in regard to the following insurances should be (a) PTD (b) Life cover (c) Property insurance (d) Professional indemnity (a) a,d,b,c (b) b,c,a,d (c) c,a,b,d (d) d,c,a,b Q9. What do you mean by proposal form (a) It is document submitted by prospective insured to insurance company (b) It is written document by insurance broker (c) It is written document by medical examiner (d) None of the above Q10. Mr. and Mrs. Rao, aged 46 and 42 years, both have a life expectancy of 35 years. Calculate the insurance required based on need based and income replacement methods on Mr. Rao's life. You have the following information: Current investments ₹25,00,000 Expenses ₹3,00,000 (including 1 lakh of Mr. Rao's Mr. Rao's income post tax personal expenses) ₹3.5 lakhs Final costs ₹1 lakh Post tax, post inflation rate/discount factor is 3% (a) 42 lakhs, 117 lakhs (b) 20 lakhs, 68 lakhs (c) 42 lakhs, 83 lakhs 184

(d) 20 lakhs, 52 lakhs Q11. Ramesh and Mahesh are healthy, able bodied men working in mines. Ramesh lives on a flood plain, Mahesh lives on a hill in the next town. While taking out insurance, the insurance company proposes a higher premium for Ramesh. How should Ramesh react? (a) Both are healthy, both should be charged the same premium (b) They should in fact get a discount for being able bodied men (c) Living on a flood plain does not in any way affect the premium (d) Ramesh should understand that the risk for him is higher, therefore the higher premium. Q12. Vishal has insured his two-wheeler for property risk, wears a helmet while he drives but does not have accident insurance. Vishal has (a) taken a grave risk by not taking accident insurance (b) made a mistake, instead of property risk insurance, he should take accident insurance (c) transferred his property risk, controlled some of his risk and retained the rest (d) done a good thing by reducing his premium payout by not taking accident insurance Q13. For a young adult, least important is: (a) Property cover (b) Basic Life Cover (c) Accident Cover (d) Critical Illness cover Q14. Mr. Arya will retire 3 months from now completing 60 years. His 2 sons are very well off residing abroad. He inherited a flat where he resides with Mrs. Arya, both ingoing good health. Liabilities are insignificant and post retirement benefits substantial. The flat is very well decorated with valuable movable and immovable items. He owns a car purchased last year. He does not have any insurance cover except for the car, as of now. Which amongst the following covers in relevant for him: (a) Endowment Assurance (b) Money Back (c) Household Insurance (d) Term Insurance 185

Q15. The family history of Mr. Kumar, 30 years, overweight, revealed that his father died at age 50 years (accident) and mother died at age 60 years (heart failure). Would you consider the family history profile (a) Significant (b) Ignorable (c) To the extent of Mr. Kumar's overweight (d) None of the above Q16. A person over the age of 60 generally requires ____________ Insurance more urgently. (a) Life (b) Professional Indemnity (c) Long term Care Q17. A young unmarried individual (aged 20-23 years) with no dependents should ideally opt for the following insurance first. (a) Property (b) Life (c) Health ANSWERS 1 A 7 C 13 A 2 E 8 A 14 C 3 E 9 A 15 C 4 D 10 D 16 C 5 B 11 D 17 C 6 D 12 C 186

3.2 ANALYSIS OF LIFE INSURANCE NEEDS 3.2.1 Economic Value of Human Life In terms of physical composition the worth of a human body is only a few rupees, however, in terms of earning capacity it may be worth of millions of rupees. This earning power does not create any economic value unless its benefits are derived by a person or organization. Therefore a human life has an economic value when monetary value is derived during its existence. In general the family of an earning individual is completely dependent on him for subsistence, for other comforts and amenities. Family's economic security is protected till the family head is able to continue the flow of income stream as a result of his productive efforts. Out of his present earnings he also saves for creation of an estate in future to arrange for economic security to his dependants. This potential estate has also to be added to the present economic gain the family is getting. Thus, HLV of an individual gets converted into an economic value to his family (including his savings in future). To calculate HLV on a scientific basis, we have to deduct self- maintenance expenses incurred by the earning individual. As such from his total earnings we have to keep aside a reasonable amount, which he might have spent on self- maintenance. The balance, of course, is the surplus economic value offered to his family totally dependent on him. Definition of HLV \"Human Life Value (HLV) of any person can be measured by capitalized value of that part of his income or income earning capacity devoted or meant for dependants arising out of economic forces incorporated within his being, like character, health, education, training, experience and ambition\". (Source: Chapter 2, part 1 of the book₹Life Insurance' 10th Edition, By - Prof. S.S. Huebner1. This definition links individual's earning efforts to the economic principles being made applicable to life insurance. 187

In his widely acknowledged book ‗The Economics Of Life Insurance' 3rd edition, Dr.S.S.Huebner states further, \"We are so apt to construe death only in the light of ‗cascade variety' (actual physical death) whereas concepts need to be given an economic interpretation. Life insurance exists to serve mankind economically. Its broad mission is to protect against the total and presumably permanent loss of current earning capacity when that loss is occasioned by economic destruction of the insured life\". While developing the theory, certain basic features have been assumed before its application to arrive at a clear interpretation of HLV. It is quite interesting to observe that the assumed basic features provide a multidimensional approach to this concept. Basic Features 1. Human Life Value (HLV) is the source of all income and wealth. 2. It can be appraised and capitalized. 3. It is a connecting economic link between generations. 4. Family is an economic partnership organisation woven around the HLVs of its members. 5. HLV can be scientifically managed and protected with the application of accounting principles such as valuation, indemnity, depreciation through life insurance. The above features can be clarified further by developing this approach with appraisal concept. a) It is possible to arrive at fair estimation of an individual's future work life span as on date. b) Therefore, it is quite easy to make a reasonable estimate of the individual's potential earnings in future. c) The estimated potential earnings can be capitalized with application of a reasonable rate of interest keeping in view the present inflation level and bank rate. d) Thus, we can arrive at the present value of the total future earnings by application of the Discounting factor structured with adequate weightage to inflation index and interest rates operational as on date. e) However, to arrive at the total economic surplus that will be available to the dependant family (as an economic unit) the term earnings excludes the income earner's self-maintenance charges, statutory or legaltaxes and also the existing life insurance premium. After deducting all these expenses the balance earnings 188