Risk Analysis and Insurance Planning

depreciation, etc. Once the value is agreed, it cannot be re-opened subsequently, unless the Insurer is able to prove fraud. Valued policies are recognized by law and their issue is not considered to be a violation of the principle of indemnity. Thus, in marine insurance what is provided is commercial indemnity, and not pure indemnity. Limitations on the Insurer's Liability The measure of indemnity in different classes of insurance has been dealt with above. However, the Insurer's liability is subject to several limitations, some of which are mentioned below: (i) Every policy of insurance contains a sum Insured which is the maximum limit of liability under the policy. This amount is not the agreed value of the property (except under valued policies) nor is it the amount which will be automatically paid in the event of loss or damage. The amount payable under the insurance contract is the actual loss or the sum insured whichever is less. (ii) The property insurances are generally subject to the condition of average, and if there has been under insurance, only that proportion of the loss is payable, which the sum Insured bears to the market value of Insured property at the time of loss. (iii) Some policies are subject to excess or ‘franchise' which means that under certain circumstances, a part of the loss may have to be borne by the Insured. In these circumstances, the Insurer's liability is the measure of indemnity determined as above, less the amount of ‗excess' or ‗franchise‘. The difference between' excess' and ‘franchise' should be clearly understood. In either case, if the loss does not reach the limit, it is not payable at all; if it exceeds the limit, the excess only is payable under the ‗excess' clause and the entire loss is payable under the’franchise' clause. For example, if there two insurance policies ‘A' and ‗B', policy ‗A' subject to an excess of ₹1000/- and policy ‗B' subject to a franchise of ₹1000/-, and if a loss of ₹500/- is reported under each policy, nothing will be payable under both the policies. If however, the loss under each policy was ₹1,100/- policy ‗A' will pay ₹100/- only but policy ‗B' will pay₹1,100/ (iv) Salvage is property which is partially damaged, by fire for example, and if the full loss is paid, the Insurers may take over the salvage and dispose it off. Alternatively, the salvage may be retained by the Insured and the claim is paid less the value of the salvage. Salvage also arises in other property insurances e.g. motor burglary and fire etc. 39

1.4.2 Insurable Interest Insurable interest is a legal pre-requisite for insurance. There is no single definition of Insurable Interest universally accepted However, it can best be explained as under- The primary interest of a person in the object of insurance (such as a house, car, machinery or life) which gives him the right to take insurance and so to say, this is insurable interest. In other words, it is not the house, the car, machinery or life that is insured but it is the pecuniary interest of the person in the object of insurance. The Insurance Act 1938 does not define insurable interest. Essentials of Insurable Interest - (a) There must be some property, right, interest, life, limb or potential liability capable of being insured i.e. capable financial measurement. (b) Objects cited in (a) above must be subject matter of insurance. (c) The insured must stand in a relationship with the subject matter of insurance whereby he benefits by its safety and is prejudiced by its loss or damage. (d) The relationship between the insured and subject matter of insurance must be recognized by law. 40

Examples to show the presence of Insurable Interest (based on the court decisions): 1. A person has an insurable interest to an unlimited extent in his own life. 2. The husband has insurable interest in the life of his wife and vice-a-versa. 3. Other family relationships as such may not give rise to insurable interest if, however, family members are having a common business or there is some other financial relationship, it may give rise to insurable interest. 4. Legal position about assurance on the lives of children is not very clear. However, in India, it is accepted that parents have insurable interest in the lives of their children. 5. An employer has an insurable interest in the life of his employee to the extent of the value of his services. 6. An employee has an insurable interest in the life of his employer to the extent of his remuneration for the period of notice for determination of service. 7. A creditor has an insurable interest in the life of the debtor to the extent of his debt. 8. A surety has an insurable interest in the life of co-surety to theextent of debt and also on the life of principal debtor. 9. Partners have insurable interest in the life of co-partners. 10. A company has an insurable interest in the life of a valuable keyperson. Courts in Indian have consistently held that an insurance on the life of a person, in which the person effecting insurance has no insurable interest, is void as a wagering agreement under Section 30 of the Indian Contract Act. When should insurable interest exist?  In the case of life insurance contract, it must exist at the beginning  In the case of non-life insurance contract-  In case of Marine Insurance, it must exist at the time of claim and  In other non-life insurance contracts, it must exist both at the beginning as well as the time of claim. 41

Rules of Insurable Interest 1.4.3 Utmost Good Faith In ordinary commercial contracts, the parties are governed by the principle of caveat Emptor' i.e.’ let the buyer beware'. In most of the commercial contracts, each party to the contract can  examine subject matter of the contract; and  verify truth of the statements made by the parties. There is no need to take the statements on trust. Prof can be asked for. So long as there is no attempt to mislead and the answers are given truthfully, the question of avoiding the contract would not arise. There is no need to disclose the information, which is not asked for. However, in insurance contracts the product sold is intangible. It cannot be seen or felt. Therefore, in insurance contracts, the principle of ‗Caveat Emptor' does not apply as the contract is based on the revealing of many facts which -  are known only to the proposer, and  insurer cannot know them, if the proposer does not disclose them. 42

These facts relate to the proposer's health, habits, personal history, family history, etc. Insurer cannot possibly be aware of all these details unless the proposer discloses them. It may be argued that the insurer can know about the proposer's health by getting him medically examined from approved medical examiners. Even if medically examined, a person suffering from high blood pressure (B.P.) or diabetes can evade detection of these facts. Personal history of past sicknesses, injuries, operations can also be suppressed. These facts affect the longevity of the proposer and material from underwriter's point of view. Non-disclosure of these facts may adversely affect the interest of the insurer and thereby the community of policy holders. As such the law imposes a duty on the proposer to fully disclose all material facts (whether asked for or not), which are necessary for the insurer to assess and accept the risk. It is an implied condition of all insurance contracts that each party must disclose every material fact known to him. Failure on the part of the proposer to do so may result in treating the contract, as null and void. This principle of₹Utmost good Faith' is called ‘uberrimae fides'. The principle applies to Insurer as well but the chances and degree of breach are more in case of a Proposer than that of an Insurer. Examples of breaches on the part of the Insurer/ Agent: Making untrue statements during sale Not informing the proposer about non-availability of loans under the plan offered or that bonus rates could be different from other plans. Withholding information that the sprinkler system entitles the proposer to a rebate in fire premium.Utmost Good Faith can be defined as - 'A positive duty to disclose, accurately and fully, all the facts material to the risk being proposed, whether asked for or not'. Material fact can be defined as - \"Every circumstance is material which would influence the judgment of a prudent insurer in arriving at the decision to accept risk and fix premiums\". Therefore, facts regarding age, height, weight, build, previous medical history, smoking/drinking habits, operations, non-disclosure of earlier insurances, hazardous occupation must be disclosed. 43

It is not for the proposer to decide which fact is material to the risk. Facts which need not be disclosed: 1. Facts which everyone is supposed to know i.e. facts of common knowledge 2. facts of law. 3. facts which a survey would have revealed. 4. facts which lessen the risk. 5. facts which could reasonably be discovered, by reference to previous policies, records of which are available with the insurer. In Life Insurance, The Duty to Disclose' Operates: 1. From the date of submission of proposal till the risk commences. 2. However, if the terms of the contract are sought to be altered, then there is a duty to disclose all material facts relating to alteration. 3. If a lapsed/paid-up policy is revived or a surrendered policy is reinstated there would be a fresh duty to disclose all material facts at that time since what follows is a contractnovellor new contract. The breach of utmost good faith arises due to misrepresentation or non-disclosure. Misrepresentation It can be of three types: (a) An unwarranted positive assertion of that which is not true although the person making it believes it to be true; (b) Any breach of duty without an intent to deceive, by which a person gains an advantage; and (c) Causing, however innocently, a party to commit a mistake as to the subject matter of the agreement. To constitute a breach of utmost good faith, a Misrepresentation  Should be substantially false  Must be concerned with facts which are material to the acceptance or assessment of the risk, and this must have induced the other party to enter into a contract. Non-disclosure  Should be within the knowledge of the first party  Should not be known to the second party, and 44

 Must be calculated to induce the other party to enter into contract on its own terms. Implications of Doctrine of Utmost Good Faith on both the Parties to Types of Breach of the Doctrine of Utmost Good Faith 45

1.4.4 Subrogation Subrogation may be defined as the transfer of rights and remedies of the Insured to the Insurer who has indemnified the Insured in respect of the loss. If the Insured has any rights of action to recover the loss from any third party, who is primarily responsible for the loss, the Insurer, having paid the loss, is entitled to avail himself of these rights to recover the loss from the third party. The effect is that the Insured does not receive more than the actual amount of his loss and any recovery affected from the third party goes to the benefit of the Insurer to reduce the amount of his loss. The principle of Subrogation arises from the principle of indemnity. To allow the Insured to collect the claim from the Insurers and then collect again from the person responsible for the loss would be contrary to the principle of indemnity. He would then, be clearly making a profit out of the misfortune, and that would defeat the principle of indemnity. Common law has, therefore, evolved the doctrines of subrogation and contribution as corollaries of indemnity. The doctrine maybe illustrated by the following examples: (a) Insured property may be destroyed by fire caused by the negligence of a third party that is at law responsible to make good the loss. The Insurer having indemnified the Insured is entitled to the Insured's right of recovery against the third party. (b) If cargo is damaged due to the negligence of a carrier (e. g. railways, truck operators, shipping companies etc.) who have an obligation to make good the loss of the Insured, the benefit of this obligation passes to the Insurer. (c) A private car may be damaged in a collision caused by the rash and negligent driving of a truck. The private car owner‘s right of recovery against the truck owner is 46

transferred to the Insurer who has indemnified the loss. (d) Under products liability policies, if a retailer is indemnified in respect of a claim preferred against him for a defective product, the Insurer can recover from the wholesaler or manufacturer who supplied the product, if liability can be established against him. (e) Under fidelity guarantee policy, the Insurer after payment of the loss is entitled to claim reimbursement from the defaulting employee. 1.4.5 Contribution An Insured may have several insurances on the same subject-matter. If he recovers his loss under all these insurances, he will obviously make a profit out of the loss. This will be an infringement of the principle of indemnity. Common Law has, therefore, evolved the principle of contribution which maybe defined as the right of Insurers who have paid a loss under a policy to recover a proportionate amount from other Insurers who are liable for the same loss. The Common Law principle allows the Insured to recover his full loss within the sum Insured from any Insurer he likes. Contribution under Policy Conditions The principle of contribution would lead to a situation in which the Insured would be able to recover his loss from any one Insurer, who then, will have to effect proportionate recoveries from other Insurers concerned. In order to avoid this, fire policies and a majority of accident policies contain a contribution condition, which modifies the common law position. According to this condition, whenever contribution applies, the Insured is obliged to prefer claims against all the Insurers, each of whom pays only his proportion of the loss. This can be illustrated with an example. Sum Insured with Insurer A₹5,000/- A pays ₹1,000/- Sum Insured with Insurer B ₹10,000/- B pays ₹2,000/- Sum Insured with Insurer C ₹15,000/- C pays ₹3,000/- Total Sum Insured ₹30,000/- Loss ₹6,000/- The principle of contribution does not apply to personal accident policies as these are not contracts of indemnity. However it may apply in the case of medical expenses extension, weekly benefits etc. The position, depends on the wording of the policy conditions, In any case, Insurers seek to control additional insurances through a question in the proposal form. 47

The application of the principle of contribution is subject to the following pre-requisites: The subject-matter must be common to all policies.  The peril which causes the loss, must be common to all policies,  The interest covered under all the policies must be the same.  The policies must be effected in favors of a common Insured.  The policies must be in force at the time of loss.  The policies must be legally enforceable. 1.4.6 Proximate Cause Proximate Cause Relationship The final requirement of a negligent act is that a proximate cause relationship must exist. A proximate cause is a cause unbroken by any new and independent cause, which produces an event that otherwise would not have occurred. That is there must be an unbroken chain of events between the negligent act and the infliction of damages. (For example, a drunk driver who-runs a red light and kills another motorist would meet to the proximate cause requirement.) Proximate Cause The object of insurance is to provide indemnity for such losses which are caused by Insured perils. If stocks are burnt, then the cause of loss is fire which is covered under a fire policy and hence the claim is payable. If stocks are burgled, the loss is not payable under the fire policy, asburglary is not a peril covered. If stocks are burnt by a bomb dropped by an enemy country, then the loss is caused by war which is an excluded peril and hencenot payable under the standard fire policy. Thus, it is important to determine the cause of loss to decide whether the loss is payable or not. There is no liability for a loss caused by an uninsured peril or an excluded peril. If the loss is brought about only by one event, it would be no problem to decide the question of liability. But in actual situations/ the loss may be the result of two or more causes, acting simultaneously or one after the other. Then, it becomes necessary to choose the most important, the most effective, the most powerful cause which has brought about the loss. This cause is termed theproximate cause', all other causes being considered asremote. 48

Examples: The following examples based on English case law will illustrate the distinction between ‗proximate cause' and ‗remote cause'. (a) A person Insured under a personal accident policy went out hunting and met with an accident. Due to shock and weakness, he was unable to walk. Whilst lying on the wet ground he contracted cold which developed into pneumonia which caused his death. The Court held that the proximate cause of death was the original accident and pneumonia (a disease which is not covered under the policy) only a remote cause. Hence the daim was payable. (b) An Insured suffered accidental injuries and was taken to hospital. While undergoing treatment he contracted an infectious disease which caused his death. In this case, the court gave a contrary ruling. The ‘proximate cause' of death was the disease and the original accident only a ‘remote cause.' Hence, the daim was not payable under a personal accident policy. Types of Peril 49

Peril, Proximate Cause & Indemnification Caselets Insurable Interest 1. A company purchased a₹10 lakh worth life insurance policy on a senior manager who was a 20% stockholder in the company. Shortly thereafter, the manager sold his stocks and resigned. Two years later he died. The insurer paid the death proceeds to the company. The legal heirs of the deceased challenged the decision of the insurer. Is the corporation entitled to the death proceeds? Yes! The court stated that termination of insurable interest before the policy matures does not affect policyholders' right of recovery under a policy valid at the time of inception. Utmost Good Faith 2. The insured misrepresented that she had no traffic violation in the prior three year period. After an accident, a check of her records revealed that she had two over speeding chards in that period. Is the insurer in a rightful position to deny cover? Yes! Material misrepresentation made with the intent to deceive voids insurance. 3. RatanSinha applied for a life insurance policy on own life. Five months after the policy was issued, he was murdered. The death certificate named the deceased as Ratan Seth, his true identity. The insurer denied payment on the ground that rattan had concealed a material fact by not revealing his true identity and that that he had an extensive criminal record. Is the decision of the insurer legally correct? Yes! Intentional concealment of one's true identity is material and is a breach of goodfaith. 50

Proximate Cause 4. A captain (ship) lost his course and took his ship in a different direction to try and pick up a light house. Due to hostilities, the lights in the light house were however put out and the ship ran aground. The Proximate Cause was bad seamanship. 5. Insured had hidden money in the fire place and later mistakenly lit up the fire place. The Proximate Cause was something accidentally falling into fire. 6. A building was left in a dangerous state due to a fire and hence it was ordered to be demolished. During the demolition process the neighbours' houses suffered damages. The Proximate Cause was fire. 7. A thief took advantage of a blackout during an air raid happening due to war. The Proximate Cause was theft. 8. The insured fell from his horse and suffered some injuries which forced him to lie in cold and damp condition so that he contracted pneumonia and eventually died. The Proximate Cause was accident 9. The insured fell from his horse and suffered some injuries which forced him to be hospitalized where he contracted pneumonia from a neighboring patient and eventually died. The Proximate Cause was disease. 10. Afire led to gathering of a mob from where riot spread and glasses of a shop were damaged. The Proximate Cause was riot. 51

QUESTIONS Q1. A substantial amount of information is supplied by the applicant by way of _____________. (a) Completion of a submission form (b) Completion of an application form (c) Completion of a require mental form Q2. Under the principles of insurance law, there is no limit the value of a human life and a person can take up _____________. (a) as much life coverage as he wants to (b) as much risk coverage as he wants to (c) as much insurance coverage as he wants to Q3. Which of the following isnot considered as a material fact? (a) The Insured had cancelled his policy. (b) The previous Insurer had cancelled the policy. (c) The previous Insurer had rejected the proposal. (d) The previous Insurer had refused to renew the proposal. Q4. It should be noted that for a Life Insurance Policy to be valid, the owner need only show that he has an insurable interest at the time of _____________ of the policy. (a) Renewal (b) Presentation (c) Inception Q5. The common law right of subrogation only arises _____________ the insurers have admitted the insured claim and paid it. (a) Twice (b) Once (c) Thrice Q6. The fundamental principles of Insurance are: utmost good faith, Insurable interest, Indemnity, and _____________. (a) proximate loss (b) proximate cause (c) proximate profit Q7. Proposal forms are designed to obtain all material information about _____________. (a) the subject matter of insurance (b) the legal matter of insurance (c) the fundamental matter of insurance 52

Q8. Once the application is completed and signed by the insured, _____________. (a) It can't then be submitted to the insurer together with the premium payment (b) it can then be submitted to the insurer together with the premium payment (c) The work is completed Q9. \"Cooling off\" provision in insurance policies refers to _____________. (a) the period during which insured can elect to cancel the policy and receive refund of premium (b) the period during which insurance company cools of i.e. stops operations. (c) the period during which the insureds do not have to pay premiums. (d) None of the above. Q10. At a building site, Ramesh sustains injuries, when the building contractor's car runs over his toes and he is unable to attend work for 6 weeks. What are the options available to Ramesh? (a) Ramesh gets accident insurance, the contractor also gets accident insurance (b) Ramesh gets accident insurance, the contactor gets third party liability insurance and Ramesh can sue the contractor for damages (c) Ramesh gets disability insurance if he has one, the building contractor gets third party liability insurance and Ramesh also gets insurance for third party negligence (d) Ramesh gets disability insurance, the contractor gets accident insurance. Q11. Uberrimaefidei refers to (a) Let the buyer beware (b) Caveat emptor (c) Utmost good faith (d) Principle of adhesion Q12. Subrogation means that (a) the insurer is entitled to any profits that the insured might make from the insurance claim (b) the insurer is entitled to a part of the claim which is unjustified (c) the insured is entitled to the sum assured (d) the insured is entitled to atleast return of premiums on survival 53

Q13. The principle of indemnity does not (a) differentiate between different types of policies (b) apply to general insurance policies (c) recognise that it is difficult to establish the extent of insurable interest (d) have the principle of subrogation as a corollary Q14. Insurable interest refers to: (a) Interest paid by the insured to the Insurer. (b) Interest paid by the Insurer to the Insured (c) Interest taken by the Insurer in the life of the Insured. (d) Interest of the Insured in the subject matter of Insurance. Q15. Disclosure of which of the facts by the insured is not material: (a) Terms of acceptance of previous Insurance (b) Facts which diminish the risk (c) Facts which increase the risk (d) Previous record of losses and claims. Q16. There is a property worth ₹10 lakhs. An Insurance cover has been preferred by its owner for ₹6 lakhs. Claim has been lodged for a loss. The loss is valued for ₹2 lakhs. How much will the Insurer usually pay? (a) ₹2 lacs (b) ₹6 lacs (c) ₹1.20 lacs (d) ₹1.50 lacs. Q17. Mr. Paul owns a Ford Ikon. He opted to have statutory minimum cover to avoid higher premium. One day, in trying to save a child while driving, his car hit a parked car, causing damage to it for ₹5000/- and then hit a boundary wall causing damage to it for ₹5000/-. His own car suffered a repair cost of ₹8000/-. How much claim is admissible. (a) ₹ 18,000/- (b) ₹10,000/- (c) ₹5000/- (d) None of the above 54

Q18. Which among the following is not a part of the \"essentials\" of insurable interest: (a) There must be life or limb, property, potential liability, rights or financial interest capable of being covered. (b) Such life or limb etc in (a) above must be the subject matter of the insurance. (c) The insured must have adequate financial resources to pay the premium. (d) The insured must be in a legally recognised relationship with the subject matter of insurance. Q19. In the Indian context, which one of the following relationship does not satisfy the criteria of insurable interest principle: (a) Husband on wife's life and vice-versa. (b) Debtor on creditor's life (c) Parent on the child's life (d) Business partner on the life of the partner Q20. The Doctrine of Adhesion protects: (a) The insured (b) The insurer (c) The IRDA (d) None of the above Q21. Obligations under the principle of utmost good faith rest on the: (a) Proposer only (b) Insurer only (c) Both the proposer and the insurer (d) On neither Q22. The principle of \"utmost good faith\" places on each party to the contract the obligation to disclose all \"material facts\" to each other. Which one of the facts referred to bellows does not fall into the category of \"material fact\": (a) Proposer's vocation hobby etc. (b) Proposer's personal medical history and profile (c) Proposer's parents' occupational status (d) Proposer's family history. 55

Q23. The provision in the Insurance Act which deals with the incontestability of an insurance policy an grounds/ misstatement or concealment after the expiry of two years is covered by (a) Section 27 (b) Section 47 (c) Section 45 (d) Section 11 Q24. The \"principle of utmost good faith\" will be most relevant at the time of (a) Issuing the policy (b) Settling claim (c) Underwriting the risk (d) None of the above. Q25. Insurable Interest can exist between a Member of Parliament and his (unrelated) party workers. (a) True (b) False (c) Data insufficient Q26. Ram insures his home worth ₹50 lakhs for ₹30 lakhs. The house is destroyed in a fire and he suffers lossesworth₹20 lakhs. How much will he receive from the Insurance Company? (a) ₹20 lakhs (b) ₹16 lakhs (c) ₹12 lakhs 56

Answers 1 B 10 B 19 B 2 C 11 C 20 A 3 A 12 A 21 C 4 C 13 C 22 C 5 B 14 D 23 C 6 B 15 B 24 C 7 A 16 C 25 B 8 B 17 B 26 C 9 A 18 C 57

1.5. RISK MANAGEMENT 1.5.1 Meaning and Objective of Risk Management To speak in a layman's language risk is about the unfortunate things which may happen in the future. Risk management is about recognising what these events are, how severe they may be and how they can be controlled. A working definition of risk management could be: The identification, analysis and economic control of those risks which can threaten the life, assets or earning capacity of an individual/enterprise. The threat to life is relevant mainly to individuals but may be applicable to commercial enterprise also in a limited sense, in that a risk may threaten the very existence of an enterprise. We need to consider one or two important points about this definition; The three-fold approach to risk management is quite evident. Risks must be identified before they can be measured and only after their impact has been assessed can we decide what to do with them. The eventual control mechanism, whatever it is must be economic. There is no point in spending rupees ten to control a risk which can only ever cost you five. There will always be a point where spending on risk control has to stop. The definition mentions life, assets and earning capacity. All the three are important, and risk management must be seen to have a part to play in all of these. Whenever a risk strikes life or assets it may have its implications on the earning capacity of the individual/enterprise and for this reason the definition mentions the earning capacity of an enterprise. Finally, note that the definition uses the word individual as well as enterprise rather than restricting itself to commercial enterprise. This means that the principles of risk management are just as applicable to the individuals as to the commercial enterprise. In the above meaning of risk management itself is contained the objective of any risk management exercise and that is the economic control of the risks. Earlier, we briefly discussed that the risks can be handled by either control measures or risk financing measures. We shall now discuss this in detail. 58

1.5.2 Steps in Personal Risk Management The techniques of risk management are more easily applied to large organisations than to small enterprises or individual, yet the smaller enterprise and individuals can apply the same techniques, may be in a limited sense to the management of their risks. The various steps of personal risk management are: 1. Identification of risks 2. Analysis of risks 3. Evaluation of risks 4. Risk control 5. Risk financing Risk Identification When considering risk identification, as the first step in risk management process, the basic question would be₹How can the assets be or earning capacity of the enterprise be threatened? The response to this question would bring about the whole host of ways in which an organization may be impeded from achieving its objectives. Risk identification must be recognized as important within an enterprise and marked down as a task within the job description of a particular manager, for example, the risk manager who is employed to carry out the whole function of risk management. The risk management must dig into the operations of the organization and discover the risks to which it is exposed. He must be armed with the relevant₹tools of trade' and make use of them. There are a number of important tools or techniques including insurance policy checklists, risk analysis questionnaires, analysis of financial statements, hazard and operability studies, physical inspections of the operations, flow charts and organizational charts which provide the risk manager with a powerful weapon in the endeavor towards identifying the risks to which the organization is exposed. But no individual method or combination of methods can replace the diligence and imagination of the risk manager in discovering the risks to which the firm is exposed. Because risks may lurk in many sources, the risk manager needs a wide-reaching information system, designed to provide a continual flow of information about all aspects of the business of the organization and the changes in operations, the acquisition of new assets and changing relationship with outside entities. Risk Analysis Once it has been identified that there is a risk, then steps have to be taken to measure the potential impact of that risk on the organization. The next step is therefore in the area of 59

statistical analysis and measurement of risk. In practical sense, the measurement of risk starts with the gathering of information, followed by the analysis of past experience, and then move on to look at what data tells us about the level of severity of risk and its periodicity to which an organization is exposed. There is a need for accuracy and relevance at each stage and, above all, it is necessary to ensure that the results make sense and can be understood. Risk Assessment The cost of risk can be looked at from a number of different perspectives. There is at least the: (a) Frequency of risk; (b) Monetary cost or financial severity; (c) Human cost in terms of pain and suffering. The risk manager must evaluate the risks that are identified. This means that measuring the potential size of the loss and the probability that it is likely to occur. The evaluation requires some ranking of priorities. Certain risks, because of the severity of the possible loss they would entail, will demand attention prior to others, and in most instances there will be a number of exposures that are equally demanding. The risks may, therefore, be grouped as critical, important and unimportant as discussed in later paragraphs. Critical risks include all exposures in which the possible losses are of a magnitude that would result in bankruptcy. There is no doubt that regardless of how risk is measured, it has had a significant impact on the personal and national life of many countries. There were a number of incidents, names of which have become commonplace the world over. e.g. Bhopal, Chernobyl, Kings Cross, the challenger Space Shuttle, Hillsborough, Mexico City, Exxon Valdez, Bradford City, Manchester Airport, Zeebrugge, Heysel Stadium, Clapham Armenia, Lockerbie, San Francisco, Piper Alpha. These were major risks which certainly grabbed headlines when they occurred. There will be many less serious events and it is this major thrust of risk with which the people in the risk and insurance business spend their time. Important risks include those exposures in which the possible losses would not lead to bankruptcy, but would require the firm to borrow in order to continue operations. Unimportant risks include exposures in which the possible losses could be met out of the existing assets or current income of the firm without imposing undue financial strain. Assignment of individual exposures to one of these three categories would depend on financial loss that might result from a given exposure and also the ability of the firm to absorb such losses. In other words, the size of an organization would influence the above 60

categorization, eg, a risk which is important risk to a small organization may be reckoned as unimportant risk by a large organization. Implementation of the Decision The decision for dealing with the risk may be - (a) To retain the risk - this may be attained with or without a reserve or a fund; (b) To deal with the risk through loss prevention - the proper loss prevention programme must be designed and implemented; (c) To transfer the risk through insurance and this must be followed by the selection of an insurer. Evaluation and Review Evaluation and review are essential to the risk management programme for two reasons. First, the risk management process does not take place in a vacuum. Things change; new risks arise and old ones disappear. The techniques that were appropriate last year may not be most advisable this year, and constant attention is required. Second, mistakes sometimes occur. Evaluation and review of the risk management programmes permits the manager to review decisions and discover mistakes hopefully, before they become costly. An independent risk management consultant may also be hired to evaluate the entire risk management to provide an independent outside review. 1.5.3 Risk Control and Risk Financing Risk Control Risk control covers all those measures aimed at avoiding, eliminating or reducing the chances of loss-producing events occurring, or limiting the severity of the losses that do happen. Here, one is seeking to change the conditions that bring about loss-producing events or increase their severity. Though some measures call for little more than commonsense, often considerable technical knowledge is required which is beyond the capabilities of ordinary persons and needs expert risk managers in the particular field. Risk Financing Here one is concerned with the manner in which those risks that remain after the risk control measures have been implemented, shall be financed. It has to be recognized that in the long run an individual/organization will have to pay for its own losses. Therefore the primary objective of risk financing is to spread more evenly over time, the cost of risks in order to reduce the financial strain and possible insolvency, which the random occurrence of large losses may cause. The secondary objective is to minimize the cost of risk. Essentially an organization can finance its risk costs in the following ways: 61

 Payment out of current expenses  Through a funded or non-funded reserve  By debt or equity financing  By pre or post-loss credit  By forming a captive, a trust, by pooling, or through a spread-loss plan. The probability and severity of possible losses play an important part in the structuring of a risk-financing programme. It is axiomatic that in practice high probability of loss generally goes hand in hand with relatively low severity, and vice versa. If it were otherwise, exposure to a high probability of catastrophic losses would place any individual/enterprise in an untenable position. For example, if one stays in an area which has a high exposure to floods and every year at least one flood has to occur, then the probability of occurrence of a flood loss and its severity both are very high and the person should immediately abandon that place. 62

The Interrelationship of Risk Analysis, Risk Control and Risk Financing 1.5.4 Insurance Underwriting Definition Insurance involves the sharing of loss due to exposure to a common peril. All insured parties make contributions to a common fund from which payment of an agreed sum can be 63

made to members who are victims of the peril. For the payment of the contributions (premiums) to be equitable, the sum must be commensurate with the risk that the paying member adds to the insurable pool. Underwriting is a process of selection and classification of risk exposures to determine the extent of contribution payable by any particular individual who wish to be member. The goal of underwriting is not the selection of risks that will not result in losses; rather, it is to avoid a disproportionate amount of bad risks. In addition, an underwriter has to gain a sufficient number of exposure units in each class. Guidelines UNDERSTAND the guidelines for underwriting The underwriting process aims to establish a schedule of premiums for each class of risk. In the area of life insurance for example, it is usually subject to the following principles: (a) Standard Category to be the Main Class For the insurance concept to be viable, the main class should be those in the standard category, namely, the category consisting of those exposed to an average level of risk. This is especially important for insurers who do not insure those in the sub-standard category. By establishing the standard class to include a predominant group of insured, the morale of the agency force can be maintained, the cost of business can be controlled, public goodwill can be preserved and the group will be more stable. (b) Balance within each Risk Classification To ensure stability within each risk classification, each class covers risks that deviate from the class average to a specified extent. The margin of risk allowed to exceed the average in each class should, approximately, not be more than the margin allowed for the below average risks in order to control the extent of mortality expenses. (c) Equity among Policyholders For an insurance program to be sustainable, the policyholder's obligations and benefits must be equitable vis-a-vis those of other policyholders. It is not possible to ensure total equity among policyholders in view of the diversity and variety of cases. However, the program must attain a certain minimum level of fairness to ensure that no one is unduly discriminated against or favoured. (d) Based on Relevant Mortality Assumptions The underwriting process must ensure that the mortality expenses are in line with the 64

underlying mortality assumptions. If the mortality expenses are excessive compared to the assumptions, the common fund may be depleted. (e) System to ensure Underwriting Efficacy of Underwriting Process The insurer must be capable of ascertaining that, during the process of being insured, the risks remain insurable and that adverse selection is minimized. To do so, most insurers set up the following mechanisms: 1. Firstly, the insurer creates risk categories and establishes underwriting guidelines. 2. Secondly, the insurer will instruct the insurance agent to be field underwriters who are to filter off unsuitable risks. 3. Thirdly, the insurers will set up a panel of qualified underwriters to rigorously apply the guidelines. Life Insurance Underwriting In life insurance underwriting, several factors are normally taken into account to assess the level of risk faced by a prospect. They are:  Age: Except for the first few years of life, the risk of death and injuries faced by a person increases with age resulting in the increase of premiums payable.  Build: The relationship between the prospect's height, weight and girth is an important indicator of the health of a person and will thus affect his mortality. If the relationship is not within certain acceptable ranges, this may indicate that the person is more susceptible to illness or death and as a result, his premium will be higher. For example, a significantly obess person may run a higher risk of diabetes or heart disease, and for insurance to be equitable to all policyholders; the person may have to pay a higher premium.  Physical condition:If the prospect has any physical condition that affects his life expectancy, his premium will also have to be adjusted. Examples are heart valve defect or mental defect.  Personal History: Information on the prospect's personal history like his health record, past habits and surroundings, previous occupation and insurance are relevant to the underwriter and can help determine the prospect's life expectancy.  Family History: The prospect's family history is important as it enables the underwriter to discover any hereditary defects or illness, which may be found in the family. This may affect the life expectancy of the prospect. For example,if a person's 65

parents and siblings have suffered from colon cancer before, there is a higher risk of the disease striking him as well.  Residence:The person's place to stay can be a relevant factor in assessing his life expectancy. It can be argued, all other things being equal, that a person living in a diseased and violence ridden country is more likely to have a lower life expectancy than one who lives in a developed and secure place.  Habits:These habits refer to the taking of drugs or the consumption of alcohol. A drug addict or an alcoholic is unlikely to be insurable and prospects are normally required to declare any involvement with these substances for the underwriter's consideration.  Occupation:The nature of prospect's occupation is also a necessary factor to be considered by the underwriter. If the prospect works in a place that is accident prone, dangerous or filled with toxic particles, his life expectancy will be affected for the worse and a higher premium will be imposed on him. If the occupation requires him to perform dangerous and life threatening tasks, again the premium is likely to increase substantially. In fact, in certain cases, the prospect may be uninsurable because of his occupation.  Morals:A person's sense of morality is reflected in his conduct. The underwriter would desire in their prospect a minimum level of morality before agreeing to insure him. If the person happens to have an unsavory reputation, the insurer will be very careful about insuring him, as the information provided by the prospect in the application form may be false or contains serious omissions.  Sex:All things being equal, the premium for the female is usually lower than that of a male because statistics have shown that they have longer life expectancy than the males.  The Nature of the Insurance Plan: The strictness of underwriting standards also depends on the type of insurance policy. The gauge is the amount of risk found in the policy. The amount of risk in a policy refers to the extent of the insurer's exposure under the policy. For example, in underwriting a single premium policy, the underwriter is usually more lenient as the lump sum payment would have minimized the insurer's risk exposure.  Economic Status:Under the principles of insurance law, there is no limit to the value of a human life and a person can take up as much insurance coverage as he wants to. However, in practice, insurers do not want to provide coverage to an insured beyond a level deemed acceptable. 66

The law does not prohibit the insurer from exercising its discretion in limiting the insurance coverage of any particular person. Most insurers will provide coverage up to an amount deemed suitable in relation to the insured's economic means. This will prevent over-insurance and also ensure a higher chance of the insured being faithful in the payment of the premiums.  Avocation:Certain avocations taken up by the prospects will result in a higher premium. Examples of such avocations are deep sea diving, speedboat racing, mountain climbing or motorcar racing.  Military Service:If the prospect is undergoing military service at a war front, the insurer may be unlikely to provide coverage for the soldier but in India, the life insurance cover is available for service personnel in Army/Navy/Air force. The Underwriting of Life and Critical Illness Insurance The intention here is not to train financial planners as underwriters, but to give them an insight into the underwriting process. By providing them with an understanding of how the underwriter goes about his/her job, they will be in a better position to understand and appreciate the need for the underwriting process and the requirements necessary to fairly assess a risk. This section deals with the process of underwriting, including the relevance of both personal and family history, financial evidence, smoking and alcohol. The Fundamentals of Underwriting The insurance industry aims to provide insurance at standard premium rates to as wide a cross-section of the community as possible To be able to do so, each insurer seeks information about the present state of health, the medical history, pastime activities and occupation of the customer, as. Using this information, the insurer assesses the risk and decides the terms of acceptance it will offer to the customer. The vast majority of customers (95 per cent wanting life insurance and 90 per cent wanting critical illness insurance) are offered standard premium rates. A small minority is accepted with a loading or exclusion. In a few cases (less than 2 per cent), an insurer will decline the risk outright or defer it to a later point in time. For example, when surgery is pending the risk may be deferred until surgery has been successfully performed and a full recovery made. 67

The underwriting process aims to protect the insurer by reducing the anti- selection factor. Accordingly, the underwriter attempts to identify persons who are suffering from or who may suffer a life-or-health-threatening medical condition or engage in a dangerous occupation or activity If there were no. underwriting process, most people would leave the purchase of life insurance until the last minute, then seek high levels of cover. The life insurance industry could not operate viably in those circumstances. The basis for the underwriting of life, critical illness and disability insurance is statistical information relating to mortality and morbidity experienced amongst different categories and age groups of people. Insurance companies generally try to offer standard rates of premium to as many people as possible. Non-standard assessments are few and far between for life and critical illness insurance. In determining whether a loading should be applied the underwriter uses a number of risk assessment tools including₹the reinsurance manual' which is a summary of medical conditions and their recommended mortality and morbidity extras. The underwriter will consider the application from a number of perspectives in relation to the type of cover being sought: Firstly, is the sum insured applied for consistent with the current needs and circumstances of the applicant? Consideration of the amount of cover sought underlines one aspect of the underwriter's job — financial underwriting. Secondly, does the applicant's medical history present any degree of risk? The degree of risk to the insurer will usually depend on the age of the client and the nature of the medical condition(s)—medical underwriting. Thirdly, are there particular risks associated with the pastimes and pursuits of the applicant? While certain pastimes will be accepted without any restrictions on the policy, other activities may either attract a premium loading or alternatively an exclusion of the activity. For example, recreational flying of a light aircraft (of more than 100 hours annually) will attract a small premium loading. This is known as pastimes underwriting. Fourthly, what level of risk does the particular type of occupation present to the insurer? This is referred to as occupational underwriting. 68

QUESTIONS Q1. Which of the following statements are correct (i) Risk means uncertainty about outcome (ii) Risk includes a possibility of a loss (iii) Risk is a condition where there is a possibility of adverse deviation from a desired outcome. (a) 1 & 2 are correct (b) 2 & 3 are correct (c) 1 & 3 are correct (d) All are correct Q2. Peril in insurance means (a) Financial loss (b) The cause of loss (c) The condition that can increase the loss (d) The amount of compensation in case of loss Q3. In Insurance, hazards are classified into (a) Pure and Speculative (b) Static and Dynamic (c) Physical, Moral and Morale (d) Fundamental and Particular Q4. Which of the following is an insurable risk (a) Pure Risk (b) Subjective Risk (c) Dynamic Risk (d) Speculative Risk 69

Q5. Risk analysis is done to measure (a) The frequency of risk (b) The severity of risk (c) Both the above (d) None of the above Q6. Match the following Group-B Group-A 1. Dynamic Risk (m) It involves those losses that occur even if there were no changes in economy 2. Static Risks (n) This risk is used to designate those situations that 3. Pure Risk involve the chance of loss or no loss 4. Speculative Risk (o) These risks arise from changes in the economy (p) It is a risk which describes a situation where there is possibility of gain (a) 1-p, 2-o, 3-m, 4-n (b) 1-m, 2-n, 3-o, 4-p (c) l-o, 2-m, 3-n, 4-p (d) 1-n, 2-p, 3-m, 4-o Q7. Risk management is a scientific approach which deals with (a) Pure risks (b) Dynamic risks (c) Static risks (d) Speculative risks Q8. Which of the following activity is not involved in the process of risk management (a) Risk identification (b) Risk analysis (c) Buying insurance (d) Selection of risk management tool. 70

Q9. Given below are some of the insurance concepts. Please mark whether they belong to personal or group insurance by putting (P) or (G) 1. the sharing of risk among policy holders of a company 2. the transfer of risk to a particular group 3. The life assured had a choice on deciding the insurance amount. 4. The life assured had no choice on deciding the insurance amount. (a) 1-P,2-P,3-G,4-G (b) 1-P,2-G,3-P,4-G (c) 1-G,2-G,3-P,4-P (d) 1-G,2-P,3-P,4-G Q10. The steps in the risk management process are (a) Risk identification (b) Risk analysis (c) Risk evaluation (d) Risk control (e) Risk financing (a) a,b,c,d,e (b) b,c,,d, a, e (c) d, a, c,b,e (d) e,b,c,d,a Q11. Identify disadvantage of Insurance as a tool of Risk Management: (a) Loss control (b) Moral Hazard (c) Indemnification (d) Investible fund generation 71

Q12. Only fact of Underwriting Process is: (a) Medical (b) Financial (c) Occupational, (d) None of them (e) All of them. Q13. Insurance is primarily a case of: (a) Risk retention (b) Risk reduction (c) Risk transfer (d) Risk prevention Q14. Which one among the following is not part of the steps in personal risk management: (a) Risk control (b) Analysis of risks (c) Risk transfer (d) Risk financing Q15. The function of an underwriter in an insurance company is to: (a) To determine the maximum amount of risk which can be accepted and or transferred. (b) Classify, accept or reject the risks. (c) To fix premium rates. (d) To ensure profits from operations Q16. In medical underwriting, which one of the following statement is not true: (a) In cases of mild or minor alcohol consumption without signs of disease conditions, a small extra premium is charged. (b) Essential hypertension may be because of renal disease or obesity. (c) Chest pain may indicate ignorable muscular twinges or heart problem. (d) Treated ulcers do not greatly affect mortality. 72

Q17. One of the following factors is not considered important from an underwriter's point of view. (a) Age (b) Sex (c) Occupation (d) Family income Q18. Whenever an insurer partly reinsures the risk with a re-insurer, it is a case of; A) Risk Retention B) Risk Transfer C) Risk Avoidance (a) A&B (b) A (c) B (d) B&C Q19. Risk transfer & risk retention are part of: (a) Risk financial (b) Risk Management (c) Risk Control (d) None of the above Q20. Risk management is a vital component of ____________. (a) managing planning process (b) financial planning process (c) maintaining planning process Q21. The ____________ and severity of possible losses play an important part in structuring of a risk- financing programme. (a) Risk control (b) Catastrophic loss (c) Probability 73

Q22. ____________ is a process of selection and classification of risk exposures to determine the extentof contribution payable by any particular individual who wish to be member. (a) Underwriting (b) Risk management (c) Risk financing Q23. At the time of implementing the initial program, you should emphasize to the client that ___________________. (a) the plan is designed to give protection (b) the plan is designed to secure your future (c) the plan is designed to meet the needs that exist at the time. Answers 1 D 9 B 17 D 2 B 10 A 18 A 3 C 11 B 19 B 4 A 12 E 20 B 5 C 13 C 21 C 6 C 14 C 22 A 7 A 15 B 23 C 8 C 16 B 74

SECTION - II Insurance Contract and Legal Liability 75

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2.1. THE INSURANCE CONTRACT Parties to an Insurance Policy 2.1.1 Competent Parties A contract of Insurance is a legal agreement between two or more parties and has to comply with the provisions of the Indian Contract Act; 1872. Such a contract is also governed by General Law of Contract as embodied in the Indian Contract Act. An Insurance Contract may be defined as an agreement between the Insurers and the Insured, in consideration of having received the premium, to undertake to make good the financial loss, subject to the limit of a specified amount, suffered by the Insured as a result of loss or damage of the Insured subject matter by specified peril/s Insured against during the stated period. All Insurance Contracts must have the following five essentials elements in order that they may be enforceable at law. 2.1.2 Offer and Acceptance The person who wants to take up cover against particular peril/s offers his risk through a proposal form to the insurance company which accepts the risks subject to certain terms and conditions mutually agreed. 2.1.3 Consideration The premium paid is the consideration for the Insurers and on receipt of that the contract comes into force. 77

2.1.4 Basic Parts of an Insurance Contract There should be a complete and unbiased agreement between the Insurer and the Insured regarding the terms of the contract. The intention of the Insured should have been clearly understood by the Insurance Company and vice-versa. Capacity to Contract of the Parties Both the parties must be legally competent to enter into an agreement. An agreement with a mentally unsound person is not a valid contract. So also an agreement with a minor, insolvent and foreigner is not a valid contract. Legality of Object of the Contract The purpose for which the agreement is entered into should be legal. It should not be against Public policy e.g. Insuring Contraband goods. Insurance contracts are subject to certain special principles evolved under common law in the U.K. and are generally followed by Indian Courts. These principles are known as fundamental or basic principles of law of insurance. These are: (a) Utmost good faith; (b) Insurable interest; (c) Indemnity (and its corollaries ‗Subrogation7 and ‘Contribution'); and (d) Proximate cause. Important Segments in a Policy Bond / Schedule The Heading Preamble Operative Schedule Conditions & Clause Privileges Name & It introduces This section Address of the parties to It specifies the information Express the contract. perils covered like SA, Policy conditions Insurer No., Premium related to under the rights & duties policy Rate etc. of both the parties under the contract. 78

2.1.5 Distinct Legal Characteristics of an Insurance Contract In India, Indian Contract Act, 1872 governs the commercial contracts. In terms of Indian Contract Act, 1872,₹contract' is defined as – anagreement made with an intention to create a legally binding relationship between two or more parties to do an act; or to abstain from doing an act. Every promise (and set of promises) made by one party to another, forming consideration for each other, is an agreement A simple contract to be enforceable at law must have the following essentials: (a) Offer and acceptance (b) Lawful consideration (c) Capacity to contract (d) Consensue₹ad idem' (Free consent) (e) Legality of the object. (f) The contract should also be capable of performance, and (g) Parties to the contract should have an intention to create legal relationship A life insurance policy is a contract in terms of the Indian Contract Act, 1872 2.1.6 Performance and Discharge of Insurance Contract Broadly, under a life insurance contract, the insurer makes a ‘promise' to pay the ‘sum assured', on a happening of the ‗insured event'. This promise is subject to performance of certain acts on the part of the ‗assured', such as payment of premiums. On happening of the ‗insured event', the ‘assured' (or the claimant) asks the Insurer to perform his promise; thus a claims arises. Therefore, (in the context of life insurance contract), \"claim is the demand for performance of the promise made by the insurer at the time of making the contract.\" 79

Depending upon the plan of insurance a claim may arise on: Survival of the life insured to the end to the entire policy term-maturity daim; or Survival of the Life assured to the end of a specified interval -survival benefit; or Death of the assured within the policy term-death claim. In addition there may be Rider Claims e.g. Accident Benefit Claim, Critical Illness Claim etc. 2.1.7 Insurance Policy Documents and their Legal Implications As life insurance contacts are long-term contracts, the terms and conditions in various documents should be well defined. The following are some of the important documents which are part of any insurance contract: (a) Proposal Forms (b) Agent Report (c) Medical Report (MR) (d) Personal statement (e) Special Questionnaire (f) Proof of Age (g) Deposit Receipt (h) First Premium Receipt (FPR) (i) Policy Document (j) Renewal Premium Receipt (RPR) (k) Renewal Notices (l) Endorsements (m) Bonus Notices (n) Need Analysis Form (o) Prospectus (p) Other documents Proposal Forms:It is an application form, which the prospective buyer completes for grant of insurance cover. The buyer is called the proposer. The buyer is also called the applicant. Some insurance companies name proposer form as application form. The agent helps the proposer to complete the form. 80

Insurance companies make their own standardized proposal form available through Agents and servicing offices. There are standard guidelines issued by the Regulator as to how to frame the questions in the proposal forms. The questions contained in the proposal form seek information from the proposal in the following areas. The proposer name, address for correspondence, permanent address, sex, occupation, income, date of birth and type of age proof. There are questions about sum assured/plan and term desired, premium payment mode, purpose of insurance, whether any additional benefit required etc. The insurer will also ask the name of nominee and relationship with the life to be assured. Previous insurance particulars are also required for assessing the total risk and also for comparison and authenticity. Some additional questions are asked from the female proposer. It may happen in some cases that the proposer and life to be insured are two different persons, say when father is proposing on the life of his minor son. In such cases the proposal form will be worded differently as questions will be asked to seek information about both the proposer and the life to be insured. The proposer should complete the form in his own handwriting and his signature needs to be witnessed. If someone else completes the proposal form, the person completing the form should make a declaration that the answers to all the questions were written as dictated by the proposer. If the language of the questions and answers differs, then there should be a declaration that answers were written after fully explaining to the proposer in his mother tongue. If the proposer is illiterate or puts his thumb impression then the thumb impression should be attested by a third party who should declare that the questions and answers were explained to the proposer in his own language. The attestation of the thumb impression should be by a person whose identity can easily be established as and when required and who should not be connected with the insurance industry. While completing the proposer form, the company guidelines should be strictly followed by the agent. In other words, all precautions should be taken that the proposer writes answers to the questions truthfully and give correct information about his health, habits and family history. All questions should be replied and answer to no question should be left blank. There should not be any reason for the proposer to say at any time that the answers to questions were written without his knowledge. As the proposer form is the basis of contract, the proposer has to sign a declaration at the end of the proposal form that all statements and answers given in the proposal form are true 81

in every respect to best of his knowledge and if any statement and information is found to be untrue then the insurer is entitled to declare the contract null and void and forfeit the money already paid. Hence the proposal form is a very important document and should be filled very carefully to safe guard the interest of both the insured and insurer. A sample proposal form is attached as Appendix 4 in Topic 3 on \"Gathering Client Data and Ascertaining Needs\" Other forms/documents required to be obtained along with the proposal form are as under: Agent Report: The Agent procuring the business completes this report. If sum assured is high and when agent is related to the insured, then such report may be completed by some higher rank official also. The report focuses on the financial status, general health, and insurance need of the proposer to rule out any type of moral hazard. Agent should complete the report after personally meeting the proposer and verifying various details about him. As agent is the primary underwrite, he should complete the report truthfully and diligently. Medical Report (MR):Every proposer need not undergo the medical examination. Every insurance company lays down the guidelines for its sales force as to under what type of cases medical reports are required. The proposals where medical reports are not required are called non-medical cases. A great deal of insurance business is procured without any medical examination. Under such cases, the Agent has to probe more closely and give elaborate report about the proposer. Personal Statement:In the personal statement the applicant is asked to give his age, history of illness, accidents, operations and surgery undergone and the present state of health and family history. If the proposal is being considered without medical examination then the proposer has to give his basic medical measurements i.e. height, weight etc. If medical examination is conducted then the medical examiner corroborates the replies to questions with his independent investigation during the examination wherever necessary. Wherever medical examination is needed the Doctor appointed by the insurer conducts the same. The agent renders help to the proposer for conducting the examination. The medical examiner submits the report direct to the Company. If there is history of accident or operation or surgery, the treating/operating Doctor may be asked to complete a form giving details of accident/operation. Special Questionnaire:Such a form is called when the applicant is having some hazardous occupation. The proposer completes the form giving details of his occupation. The Agent should have the knowledge as to under what type of occupations such a form is required. This form should be obtained at the time of filling the proposal form to avoid any delay in the completion of the case. 82

Proof of Age:Knowing correct age is important to assess the risk of the proposer. Hence proper age proof must be insisted upon. There are standard age proofs like school certificate, Municipal birth certificate, Passport etc. Non-standard age proofs may include horoscope, age in voter list/ration card, elder declaration etc. For nonstandard age proof some extra premium may be charged, called ₹Age Extra'. The Agent should ensure that the age proof is authentic. Types of Standard and Non-Standard age proofs are discussed in Topic 10 on \"Policy Conditions\". Deposit Receipt:The Agent submits the proposal form, personal statement, age proof, Agent report, special questionnaire and other forms along with the first premium to the office. On receipt of the forms and first premium, a deposit receipt is issued. This is the provisional receipt. The Agent should hand over this receipt to the proposer for any future reference. First Premium Receipt (FPR):After the underwriter accepts the case, the First Premium Receipt is issued. The risk commences from the date of issue of the receipt. First Premium Receipt contains all the important information about the completed case and is an important document in support of acceptance of risk by the insurer. The agent should ensure that this receipt is issued without any unreasonable delay. The insured should keep the receipt in safe custody till he receives the policy document. Policy Document:After the issue of First Premium Receipt, the insurer focus its attention to issue the Policy Document also called Policy Bond to the insured at the earliest. The Policy Bond contains all the terms and conditions of the contract in simple language. All the policy privileges/ concessions, restrictive clauses are incorporated in the Policy Band for the information of the insured. The Policy Bond is the evidence of contract while the proposal form is the basis of contract. Policy Bond should be kept at a safe place. The insurer will also send to the insured a copy of the proposal form along with the Policy Bond of separately. This document should also be kept at a safe place by the policyholder. Renewal Premium Receipt (RPR):The insured has to pay the subsequent premiums at regular interval as per the mode of payment chosen. In case of yearly mode the premiums are to be paid every year, in case of half- yearly mode the premiums are to be paid every six months and so on. On receipt of the premium the insurer has to issue the receipt. Such receipts are called Renewal Premium Receipts. Renewal Notices:The insured/ policyholder is reminded to pay the subsequent premiums. Such reminders are called renewal notices. Though the renewal notices are not mandatory to issue yet all the insurers send such notices so that policies remain in force. Endorsements:Most of tine important terms and conditions are printed at the back of the policy document. If some modificatian/deletians are required in the terms and conditions it is done by endorsement to be pasted or attached at the back of the policy document. Some 83

endorsements in support of alterations etc. may be attached after the policy is issued as and when such alterations and modifications are made. The endorsements may also relate to the change of nomination, assignment and reassignment of the policy and so on. Bonus Notices:If the policy is with profit, the insurer intimates the bonus amount to the insurer/policyholder as and when bonus is declared. Such communications strengthen customer relationship with the company and works as a great marketing tool. It also gives great satisfaction to the policyholder on knowing about the amount of bonus attached to the policy. Need Analysis Form:Now insurance companies have directed the Agent to complete a \"Need Analysis\" form before the sale of any product to the prospect. A copy of this form should be obtained by the applicant to be kept along with the policy documents. Prospectus:The IRDA (Protection of Policyholders Interests) Regulations stipulates that the Prospectus of brochure issued by the insurer, should explicitly state the scope of benefits, conditions, warranties entitlements, exceptions, right for participation in bonus, etc., under the insurance plan being offered. It also mentions the guaranteed and nan-guaranteed benefits. The prospectus or brochure should be obtained by the proposer and keep it with the insurance documents for any future reference, in case of dispute. Other Documents:There may be many other documents such as lapse notices, discharge forms issued by the insurer for making periodical payments under money back policy, documents regarding issue of duplicate policy bond etc. In market-linked insurance policies, the insured will receive periodical statement giving status of his policy such as number of units to his credit, various charges deducted, value of his units etc. These documents need to be preserved. 84

List of Insurance Policy Documents Sequence Document Document Significance of Issued/Provided by Issued/Provided by Documents Insured Insurer A– Prospectus – B Proposal Form (Duly – Basic of Contract Field & Signed) C – Money Receipt – D – Additional – Questionnaire E – First Premium Proof of Contract Receipt F – Cover Note – G – Policy Bond / Evidence of Contract Schedule H – Renewal Premium – Notice I – Renewal Premium Evidence of Receipt Continuation of Contract Others – Endorsement – Others Claim Form (Only – Evidence of Change Filled & Signed) in Contract Others – Survey Report – 85

QUESTIONS Q1. The policyholder is given a period of __________ to review the terms and conditions given in the policy document. (a) 10 days from the date of the policy (b) 15 days from the date of the policy (c) 15 days from the date of receipt of the policy document (d) 10 days from the date of receipt of the policy document Q2. Principle of subrogation is a corollary to (a) Principle of Insurable Interest (b) Principle of Indemnity (c) Doctrine of Utmost Good Faith (d) None of the above Q3. Uberrima-fides in insurance refers to (a) Principle of Indemnity (b) Principle of Insurable Interest (c) Doctrine of Utmost Good Faith (d) None of the above Q4. Caveat Emptor means (a) Utmost Good Faith (b) Let the buyer beware (c) Let the seller beware (d) None of the above Q5. Which of the following is not an essential of a valid contract? (a) Offer and acceptance (b) Consideration (c) Capacity of contract (d) Documentary Evidence 86

Q6. Which of the following principles is not applicable to Life Insurance? (a) Principle of Utmost Good Faith (b) Principle of Insurable Interest (c) Principle of Subrogation (d) Doctrine of Adhesion Q7. Which of the following is not true about insurable interest in Life Insurance? (a) Every person has unlimited insurable interest in his own life (b) A partner has insurable interest on lives of other partner (c) An employee has insurable interest on the life of his employer (d) Husband has insurable interest in the life of his wife. Q8. In insurance the principle of Utmost Good Faith is applicable to (a) The insurer only (b) The insured only (c) Both the insurer and insured (d) None of the above Q9. You borrow your friend's car but he says that it does not have insurance. You pay the premium and get the insurance renewed. You meet with an accident and get the car repaired at your cost. You file a claim with the insurance company but the company declines it. As an advisor, what do you feel? (a) The company should pay you as you have paid the premium and therefore have insurable interest (b) The company should pay you because you have got the car repaired and therefore you have insurable interest. (c) The company should pay you because you were driving it. (d) The company is right. You do not have insurable interest in the car and therefore the payment of claim will be to your friend. Q10. A life insurance contract is principally based on the: (a) Principle of Subrogation (b) Principle of Indemnity (c) Principle of Utmost Good Faith (d) Principle of Waiver and Estoppel 87

Q11. An insurance contract is an aleatory contract. (a) True (b) False Q12. Insurance Contracts adhere to Principles laid down in the _________. (a) Contract Act (b) Securities Contracts Regulation Act (c) IRDA Act Q13. The application of the law of Contract does not apply to _________ contracts. A. Insurance; B. Stock market; C. Property Deals (a) A (b) B (c) C (d) None of them Q14. Insurance can be __________ contracts. A. Benefit; B. Indemnity; C. Negotiated (a) Either B or C (b) Only A (c) Only B Q15. The following is not a principle essential for a valid contract: (A) Offer and acceptance (B) Consideration (C) Coerced consents are acceptable. (a) Only B (b) A & C (c) Only C Q16. A contract is₹an agreement designed to have _______________ (a) Political consequences (b) Economical consequences (c) Legal consequences 88