complaints which originated in the National Commission. Also, the period prescribed for preferring appeals has now been made more stringent. The Consumer Protection Act, 2019 is a positive step towards further reformation and development of consumer laws in India. (Reference http://egazette.nic.in/WriteReadData/2019/210422.pdf, and https://consumeraffairs.nic.in/acts-and-rules/consumer-protection). 1.3.5 Doctrines of Waiver and Estoppels A waiver is the voluntary relinquishment or surrender of some known right or privilege. Estoppel prevents a person or organization from adopting a position, action or attitude inconsistent with an earlier position if it would result in an injury to another person. Estoppel is a set of doctrines in which a court prevents a litigant from taking an action the litigant normally would have the right to take, in order to prevent an inequitable result. Estoppel occurs when a party \"reasonably relies on the promise of another party, and because of the reliance is injured or damaged\". Estoppel is essentially a rule of evidence whereby a person is barred from denying a fact that has already been settled. A waiver is a voluntary relinquishment of a known right, whereas estoppels prevents a person from asserting rights because he or she has acted previously in such a way as to deny any interest in preserving the rights. A waiver usually involves a statement to an insured that he or she need not worry about compliance with some conditions in the contract or in disclosing certain information. Many courts appear to use the doctrine interchangeably e.g. it is common to read that the insurer waived his rights and is, therefore, estoppels from asserting this right at a later date. A waiver may be implied by the conduct of the insurer or it may be expressly stated. We shall try to understand the concept with the help of simple illustration. A policy contained a condition that all losses shall be intimated to the insurer within 7 days of occurrence of loss. The insured intimated a loss after 15 days and explained the reasons for delay. The insurance company wrote back to the insured to complete other documentary formalities so that the claim could be processed without mentioning about the delay in claim reporting. It will be presumed that the insurance company has waived the breach of condition and the waiver is implied by the act of the insurer. On the other hand if the insurance company writes back to the insured that looking into the genuineness of his problem they are condoning the delay, this is an express waiver. Now once the insurers have waived the delay they cannot deny their liability on the grounds of delay in reporting the claim because of the Doctrine of Estoppel’. CFP Level 3: Module 1 – Risk Analysis – India Page 195
The following examples will give you an idea of how these doctrines are applied to various insurance situations. Waivers There are several types of waiver. Each is often raised in the insurance context. (1) Express Waivers: may be oral or written. In either case, they are clear statements that a right is being given up. If your insurance company, for example, notifies you that it has not lapsed your policy for non-payment of premiums, even though it had the right to do so, it has expressly waived that right. (2) Implied Waivers: are not created by words, but rather through the conduct of the waiving party that clearly indicates that a right will not be enforced. For example, if your insurance company accepts a premium from you that is delivered after the expiration of the grace period, it has impliedly waived its right to assert that your policy has lapsed. (3) Waiver by Silence: is created when there is a duty to speak. If, for example, your insurance company learns of facts showing that you are no longer disabled but continues to pay you disability benefits, it is possible that a court might hold that the insurance company has created a waiver by silence when the insurance company later attempts to recoup the benefits it erroneously paid. Another example: if your insurance company receives an incomplete application from you but fails to inquire about the missing information, courts will ordinarily rule that your insurance company has waived its right to deny benefits on the basis of missing information. Similarly, if, when processing a claim from you, your insurance company fails to state all known grounds for denial of your claim, courts will usually rule that it has waived those grounds it has not asserted. So, if the grounds it has asserted fail, it is out of luck. It cannot then bring up new grounds for denial. Estoppels Estoppel, on the other hand, usually does not require examination of a party’s intent. Instead, the equitable doctrine of estoppel looks to whether the party asserting estoppel would otherwise suffer an inequitable detriment based upon the conduct of the other party. One court, for example, found that an insurance company was estopped (prevented) from asserting a policy’s cancellation provision against its policyholder when the insurance company had a history of accepting late payments from other policyholders. The court stated that the CFP Level 3: Module 1 – Risk Analysis – India Page 196
insurance company had misled its policyholder into thinking that sending late premium payments was acceptable, and it ruled that the insurance benefits were owed. Similarly, if your insurance company has routinely mailed you a notice when each premium is due and it suddenly stops sending premium notices to you without warning or explanation, your insurance company would likely be estopped from asserting that your policy has lapsed because your premium payment was late. In this case, you were misled into thinking a premium notice would always be sent before the policy would lapse for non-payment of premium. The insurance company had created a reasonable basis for you to rely on the premium notice. There have been plethora of cases in India that have discussed the doctrine of Waiver. Some of the important ones are. Jaswant singh Mathura singh & Anr.v. Ahmedabad Municipal Corporation &Ors.[4]– In this case, the court said that everyone has a right to waive an advantage or protection which seeks to give him/her. For e.g. In case of a Tenant-Owner dispute, if a notice is issued and no representation is made by either the owner, tenant or a sub-tenant, it would amount to waiver of the opportunity and such person cannot be permitted to turn around at a later stage. Krishna Bahadur v. M/s. Purna Theatre & Ors.[5] – This case made a differentiation between the principle of Estoppel and the principle of Waiver. The court said that “the difference between the two is that whereas estoppel is not a cause of action; it is a rule of evidence; waiver is contractual and may constitute a cause of action; it is an agreement between the parties and a party fully knowing of its rights has agreed not to assert a right for a consideration”. The court also held that: “A right can be waived by the party for whose benefit certain requirements or conditions had been provided for by a statute subject to the condition that no public interest is involved therein. Whenever waiver is pleaded it is for the party pleading the same to show that an agreement waiving the right in consideration of some compromise came into being. Statutory right, however, may also be waived by his conduct.” 1. Municipal Corporation of Greater Bombay v. Dr. Hakimwadi Tenants' Association &Ors.[6] – This case said that even though Waiver and Estoppel are two different concepts, still the essence of a Waiver is an estoppel and without Estoppel, there cannot be any Waiver. The court also said “Estoppel and waiver are questions of conduct and must necessarily be determined on the facts of each case”. CFP Level 3: Module 1 – Risk Analysis – India Page 197
Chapter 2: Regulatory Infrastructure around Insurance The Insurance Regulatory and Development Authority is the main organization or supervisory body that regulates the insurance sector in the country. It sets rules and regulations for the functioning of the insurance industry. Its sole purpose is to protect the interest of policyholders and to develop the industry on the whole. The IRDA or IRDAI regularly issues advisories to insurance companies in case of changes to the rules and regulations. The regulator guides the insurance industry in promoting the efficiency in the conduct of insurance business all the while controlling the rates and other charges related to insurance. This article dwells on the functioning of the IRDA, features and benefits as well as answers to frequently asked questions at the end of this reading. Establishment of IRDA: The Government of India was the regulator for the insurance industry until 2000. However, to institute a stand-alone apex body, the IRDA was established in 2000 following the recommendation of the Malhotra Committee report in 1999. In August 2000, the IRDA began accepting applications for registrations through invites and allowed companies from other countries to invest up to 26% in the market. The IRDA has outlined several rules and regulations under Section 114A of the Insurance Act, 1938. Regulations range from registration of insurance companies for operating in the country to protecting policyholder’s interests. As of September 2020, there are 31 General Insurance companies and 24 Life Insurance companies who are registered with the IRDA. Objective of IRDA: The main objective of the Insurance Regulatory and Development Authority of India is to enforce the provisions under the Insurance Act. The mission statement of the IRDA is: To protect the interest and fair treatment of the policyholder. To regulate the insurance industry in fairness and ensure the financial soundness of the industry. To regularly frame regulations to ensure the industry operates without any ambiguity. Important Role of IRDA in the Insurance Sector in India: The insurance industry in India dates back to the early 1800s and has grown over the years with better transparency and focus on protecting the interest of the policyholder. The IRDA plays an integral role in CFP Level 3: Module 1 – Risk Analysis – India Page 198
emphasizing the importance of policyholders and their interest while framing rules and regulations. Here are the important roles of the IRDA: To protect the policyholder’s interests. To help speed up the growth of the insurance industry in an orderly fashion, for the benefit of the common man. To provide long-term funds to speed up the nation’s economy. To promote, set, enforce and monitor high standards of integrity, fair dealing, financial soundness and competence of the insurance providers. To ensure genuine claims are settled faster and efficiently. To prevent malpractices and fraud, the IRDA has set up a grievance redress forum to ensure the policyholder is protected. To promote transparency, fairness and systematic conduct of insurance in the financial markets. To build a dependable management system to make sure high standards of financial stability are followed by insurers. To take adequate action where such high standards are not maintained. To ensure the optimum amount of self-regulation of the industry. Functions of IRDA: Below are the important functions of the IRDAI in the insurance industry in India: Grant, renew, modify, suspend, cancel or withdraw registration certificates of the insurance company. Protecting the interests of the policyholder in matters concerning the grant of policies, settlement of claims, nomination by policyholders, insurable interest, surrender value of the policy and other terms and conditions of the policy. Specify code of conduct, qualifications and training for intermediary or insurance agents. Specify code of conduct for loss assessors and surveyors. Levying fees and charges for carrying out the provisions of the Act. Undertaking inspection, calling for information, and investigations including an audit of insurance companies, intermediaries, and other organizations associated with the insurance business. Regulate and control insurance rates, terms and conditions, advantages that may be offered by the insurance providers. Apart from the above-mentioned core functions of the IRDA, there are several functions that the regulator performs keeping the policyholder’s interest as its priority. CFP Level 3: Module 1 – Risk Analysis – India Page 199
How Does IRDA Work? The apex body of the insurance industry, the IRDA, ensures it frames rules and regulations without any ambiguity towards any particular insurance company. To ensure fairness and the financial soundness of the industry, the main work of IRDA revolves around the policyholder’s interests. Refer to the following roles that the IRDA is mainly involved in: Issues certificate of registration to new insurance companies. Sets rules and regulations to ensure the interests of the policyholder are taken care of. Monitors all claims are settled in all fairness and that no insurer will deny any claim on their own free will. Regulates the code of conduct of the insurance companies, insurance intermediaries, and others associated with the insurance industry. Provides solutions in case of disputes through the IRDA ombudsman. Controls and regulates the rates of insurance to prevent unwanted price hikes in the insurance premium. The apex body is responsible for setting the minimum percentage limit of insurance companies for General and Life Insurance, thereby developing both urban and rural sectors. Features & Benefits of IRDA: Following are the salient features of the apex body, the Insurance Regulatory and Development Authority of India: Acts as a regulator for the insurance industry. Protects the policyholder’s interests. Rules and regulations are framed by the apex body under Section 114A of the Insurance Act, 1938. It is entrusted under the Insurance Act to grant the certificate of registration to new insurance companies to operate in India. Oversees the insurance industry’s activities to ensure sustained development of insurers and policyholders. Types of Insurances Regulated by the IRDAI: Insurance is mainly divided into Life and Non-Life/General Insurance. These are further classified into other types of insurance. Below are the types of insurance regulated by the IRDAI: Life Insurance Page 200 o Term Plans o Endowment Policies o Unit-linked Insurance Policies CFP Level 3: Module 1 – Risk Analysis – India
o Retirement Policies o Money-back Policies General Insurance Health Insurance Policies Vehicle/Motor Insurance Policies o Car insurance o Bike Insurance Property Insurance Policies Travel Insurance Plans Gadget Insurance Plans 2.0 Insurance Councils and General Insurance Council 2.1 Constitution and Powers The council acts as a forum that brings together the many stakeholders of the sector. It promotes and regulates all the talks between the Government, Regulatory Board, and the Public. It evolves and coordinates all discussions and analysis between the government, regulatory body and the public. It functions through many sub-committees and includes all life insurance companies in India. The General Insurance Council is again a very important link between IRDAI and the non-life insurance industry. The Council not only plays the role envisaged for it by the Insurance Act, but it also facilitates the overall growth of the industry for the best interest of all the stakeholders. The Life Insurance Council and the General Insurance Council have been constituted under section 64C of the Insurance Act, 1938 in the year 2001. The Insurance Council functions through several sub-committees and includes all insurance companies in India. The mission of Insurance Council is to: Function as an effective forum to assist, advise and assist insurers in maintaining high standards of conduct and provide services to policyholders Interact with the government and various bodies on policy matters Actively participate in disseminating insurance awareness in India Take steps to develop education and analysis in insurance (Reference: www.lifeinscouncil.org) CFP Level 3: Module 1 – Risk Analysis – India Page 201
2.2 Self- Regulatory Mechanism The Insurance Councils have been conferred various powers under the Insurance Act, 1938 and the IRDAI Act, 1999. They interact with the government and other statutory bodies on various policy issues and work as an active link between the Indian life insurance industry and the global markets. The Insurance Councils work as a self-regulatory organization. They develop codes of conduct for the member companies, compliance programs to observe rules and regulations etc. They represent the collective interest of the insurance companies and provide help and guidance to members. They are responsible for building a positive image of the insurance industry among people. The Councils aid, advise and assist insurers for rendering efficient service to the policy holders. They also interact with other organizations of the financial service sector. The General Insurance Council also has a Code of good Insurance Practices which lists down general provisions, application of the law, regulations and guidelines, claims handling and grievance redressal amongst other provisions. (Reference: www.gicouncil.in/regulations/self-regulation) 2.0 Insurance Information Bureau of India (IIB) Insurance industry is data-driven. It depends on data for all activities including pricing of the insurance products. With the growth of the insurance industry, and also opening up of the sector to private players, the Insurance Regulatory and Development Authority of India (IRDAI) required strong and credible information support. However, there was no dedicated agency to collect data and consolidate the same into an industry-level pool/repository. In the year 2009, IRDAI constituted the Insurance Information Bureau of India (IIB) supported by an advisory body under the Chairmanship of IRDAI. The Bureau was later registered as an independent society in November 2012. The Bureau works through its insurance verticals of Life, Health, Motor, Property, Fire, Engineering with exclusive support from IT and analytics. The main functional areas of II B includes: Act as sole point for the whole insurance industry data Ensure data is accessible to numerous market players, researchers, policyholders and general public for real time decision making Provide benchmark rates for the industry Publish reports to help IRDAI in regulatory functions and insurers in decision making Publish reports for the advantage of the entire industry Provide the mandated inputs for policy analysis and insurance industry development activities CFP Level 3: Module 1 – Risk Analysis – India Page 202
Take initiative for detection of fraud, identification of vehicles not insured, etc. All the insurance companies submit transaction level data on policies and claims at predetermined frequencies. This data covers demographic, policy and product attributes which is then used by IIB to generate annual reports, thematic reports and customized reports, besides undertaking various research studies. It also provides data to IRDAI for setting the premium rates for third party motor insurance. The Bureau provides a bundle of services associated with motor insurance to various stakeholders like public, police, transport departments and insurers through its service package titled V-Seva. The services are call centre, SMS and web-based and supply data relating to insurance status of the vehicle, stolen vehicles, possession of recovered vehicles, accident record etc. IIB also handles the Central Index Server that acts as a nodal point between any two insurance repositories and helps in de-duplication of demat accounts. The Bureau has also built a repository of insurance salespersons. Through this, based on key identifiers, the de-duplication is expedited to confirm that the applicant is not engaged with any other insurance company or insurer intermediary. (Reference: www.iib.gov.in) 2.4 Insurance Ombudsman 2.4.1 Establishment and Objectives The Insurance Ombudsman was created by a Government of India Notification in the year 1998. The purpose was quick disposal of the grievances of the policy holders in an efficient, economical and impartial manner. For a policyholder, the insurance company is the first point of contact for any complaint. In case of a non-satisfactory reply or no reply, one can approach the Ombudsman. The Executive Council of Insurers, earlier known as Governing Body of Insurance Council (GBIC), has been started under the Insurance Ombudsman Rules, 2017, to set-up and facilitate the insurance ombudsman institution in India. It comprises members of the Life Insurance Council and General Insurance Council formed under Section 40C of the Insurance Act, 1938. They are empowered to entertain complaints on all aspects of insurances including: repudiation of claims by the insurer delay in settlement of claims dispute in regard to premium paid or payable dispute on the legal construction of the policies non-issuance of insurance documents to policyholders after receipt of premium Presently there are 17 insurance Ombudsman in different cities (Reference www.ecoi.co.in) and any person who has a grievance against an insurer can make a complaint in writing to the Ombudsman within jurisdiction over the location of the insurance company office. The institution of Ombudsman is CFP Level 3: Module 1 – Risk Analysis – India Page 203
of great importance for the protection of interests of policyholders for building their confidence in the system. 2.4.2 Appointment, Tenure and Jurisdiction The Executive Council of Insurers issues orders of appointment of the insurance Ombudsman on the recommendations of the committee comprising of Chairman of IRDA, Chairman of LIC, Chairman of GIC and a representative of the Central Government. Eligibility: The incumbents for the position of an Ombudsman are drawn from Insurance Industry, Civil Services, Administrative Services and Judicial Services within India. Tenure: An insurance Ombudsman is appointed for a term of three years or till the age of seventy, whichever is earlier, and is eligible for re-appointment. Jurisdiction: The Executive Council of Insurers has appointed seventeen (17) Ombudsman across the country allotting them different geographical areas. The Ombudsman can hold sitting at different places within their area of jurisdiction in order to expedite clearance of complaints. 2.4.3 Rights and Powers Vide Notification dated 25 April 2017, published in Gazette, the Insurance Ombudsman Rules, 2016 were further revised, and now referred to as the Insurance Ombudsman Rules, 2017. Accordingly, various rights and powers have been provided to the Insurance Ombudsman, as listed below: 1. The Ombudsman receives and take into account complaints or disputes relating to: (a) delay in settlement of claim, beyond the time period stated in the regulations; (b) any repudiation of claims either wholly or part by the insurer; (c) disputes regarding to paid premiums or payable in case of insurance policy; (d) misrepresentation of policy terms and conditions at any time within the policy document or policy contract; (e) legal construction of insurance policies; (f) policy servicing related grievances against insurance companies and their agents and intermediaries; (g) issuance of insurance policy, which is not in conformity with the proposal form submitted by the proposer; (h) non-issuance of insurance policy after the receipt of premium; and (i) any other matter arising from the violation of provisions of the Insurance Act, 1938 or the rules, circulars, guidelines issued by the IRDAI from time to time. CFP Level 3: Module 1 – Risk Analysis – India Page 204
2. The Ombudsman shall act as counsellor and mediator relating to matters provided there is written consent of the parties to the dispute. 3. The Ombudsman shall be prohibited from handling any matter if he is an interested party or having conflict of interest. For policyholders, the insurance ombudsman offices provide hope and the institution has helped to generate faith and confidence amongst the consumers. 2.4 Insurance Institute of India (III) History The Insurance Institute of India (Regd.) formerly known as Federation of Insurance Institutes (J.C. Setalvad Memorial) (Regd.) was established in the year 1955, for the purpose of promoting Insurance Education & Training in the country. The Institute is a professional body serving the cause of the Insurance Industry. The Institute conducts examinations at three levels: Licentiate, Associate ship and Fellowship as also examinations – Certificate in Foundations of Casualty Actuarial Science (General Insurance) and Certificate in Insurance Salesmanship. I.I.I. is the only professional insurance institute in India and is a chartered member in the Institute of Global Insurance Education (IGIE). (www.igie.org). Membership The membership of the Institute is through associated Institutes. There are at present 91 Associated Institutes spread all over the country. The Sri Lanka Insurance Institute, The Sri Lanka Insurance Academy and The R.I.C.B. Insurance Institute, Bhutan are the affiliated Institutes outside India. The members of the Associated Institutes and the Affiliated Institutes automatically become the members of the Institute. The Life Insurance Corporation of India, The General Insurance Corporation of India, The New India Assurance Company Ltd., The Oriental Insurance Company Ltd., National Insurance Company Ltd., and United India Insurance Company Ltd. are corporate members. Objectives To run College and conduct examinations, oral and written, in insurance theory and practice and related subjects for awarding certificates, diplomas and degrees to those interested in insurance. To give oral and postal tuitions, prepare and supply reading materials and similar other educative methods for encouraging and assisting the study of any subject bearing on any branch of insurance. To offer scholarships, grants and prizes for research or any other educational work bearing on insurance. To ascertain the law and practice relating to all matters connected with insurance and to disseminate CFP Level 3: Module 1 – Risk Analysis – India Page 205
such knowledge among those interested in insurance. The activities and programmes of the Institute, among others, assist people in the insurance Industry, to acquire the skills and expertise to meet the growing needs of multiplicity of customers- the objective being to enhance professional insurance service to the millions in this country. 2.5.1 Authority and Functions The management and control of the Institute, its affairs and business shall be carried on by and vested in the Council subject to the provisions of the Memorandum and Regulations of the Institute. The Council consists of Members from LIC and GIC and elects amongst themselves a President, Deputy President and other executive positions. The President holds office for a period of 2 years and the Deputy President and other office bearers shall hold office for 1 year. It shall be the duty of the Council to coordinate and direct the work of the Institute and to present a report on the position of the Institute on the affairs and proceedings during the past year. The Council has power to make Provisions for carrying out the objects of the Institute and for conducting its affairs, make Rules or Bye-laws. The main functions of Insurance Institute of India are: To run college and conduct examinations within the insurance field and related subjects for awarding certificates, diplomas and degrees to those interested in insurance. To prepare and provide reading materials and similar alternative education methods for encouraging and helping the study of any subject bearing on any branch of insurance. To form and maintain a library. To provide scholarships, grants and prizes for research or any other educational work pertaining to insurance. To ascertain the law and practice relating to all matters connected with insurance and to disseminate such knowledge among those interested in insurance. Assist people in the insurance industry to acquire the skills and expertise. 2.5.2 Education and Training The IRDAI has recognized the Institute as the examining body to conduct pre-recruitment examinations for Insurance Agents, Corporate Agents, Web Aggregators, Insurance Marketing Firm and Renewal of Insurance Broker exams as well as pre-licensing test for Insurance Surveyors and Loss Assessors. The Directorate of Postal Life Insurance, New Delhi has licensed the Insurance Institute of India to develop the course material for Postal Life Insurance Agents and also recognized them as the exam conducting body to organize licensing examination of Postal Life Insurance Agents. (Reference www.insuranceinstituteofindia.com) CFP Level 3: Module 1 – Risk Analysis – India Page 206
Chapter 3: Insurance Intermediation in India In Insurance industries, an insurance intermediary is a person or a company that helps you in buying insurance. Insurance intermediaries facilitate the placement and purchase of insurance, and provide services to insurance companies and consumers that complement the insurance placement process. Traditionally, insurance intermediaries have been categorized as either insurance agents or insurance brokers. Intermediary activity benefits the overall economy at both the national and international levels. The role of insurance intermediaries in the overall economy is, essentially, one of making insurance – and other risk management products – widely available, thereby increasing the positive effects of insurance generally – risk-taking, investment, provision of basic societal needs and economic growth. The various types of insurance intermediaries are: 1. Agents 2. Brokers 3. Surveyors & Loss Assessors 4. Health Third Party Administrators The Role of Various Players of Insurance Market is being discussed hereby: 1. Insurance Agent Section 2(10) of the Insurance Act, 1938, defines an Insurance Agent as an insurance agent licensed under Section 42 of the said Act and who received or agrees to receive payment by way of commission or other remuneration in consideration of his soliciting or procuring insurance business including business relating to the continuance, renewal or revival of policies of insurance. The following are the different types of Insurance Agents recognised under the Regulations: (A) Individual Agent (B) Corporate Agent (C) Micro Insurance Agent CFP Level 3: Module 1 – Risk Analysis – India Page 207
(A) Individual Agent Insurance agents are intermediaries whose activities include soliciting, procuring, and servicing the general insurance market. An agent must fulfill the statutory requirements of his competence prescribed by the regulator and for which he has to pass the stipulated examination to satisfy the regulator after undergoing specified number of hours of training at accredited institutions (online / off-line). Upon the successful completion of the examination, all the agents in the insurance business are given license granted as provided under Insurance Regulatory and Development Authority (Licensing of Insurance Agents) Regulations, 2000, as amended upto date. The following are the different types of licences issued within the Regulations: (a) Direct Life (b) Direct Non Life (c) Composite Licence (both Life and Non-Life) Application for the same are to be made in prescribed form. The contact of agency between the company and agent defines the authority and responsibility and sets forth the agreement of the parties with respect to commissions and other details of the relationship. Renewal of license should be done in time by paying the prescribed fees. However, no license can be granted, if the individual does not meet any of the following requirements: if the person is a minor. if found to be of unsound mind by a competent court. if found guilty of or connived at any fraud, dishonesty or misrepresentation against any insured or insurer. The appointment of agents is governed by Insurance Regulatory and Development Authority (Licensing of Insurance Agents) Regulations, 2000. The IRDA has prescribed both qualifications and disqualification for a person to be given a licence under section42 of the Insurance Act. A person must: a) Be at least of 18 years of age. b) Have passed at least 12thstandard or equivalent examination appointed if he/she resides in a place having a population of five thousand or more as per the last census, or 10th standard otherwise. c) Have undergone a training program of 50 hours in Life or General insurance business or any other pre-recruitment examination recognized by IRDA. (However there CFP Level 3: Module 1 – Risk Analysis – India Page 208
are-reduction in the required hours based on insurance qualifications, etc. of the applicant for Agency.) d) For a composite agency, a person should have completed 75 hours of training in Life and General insurance business spread over 6 to 8 weeks. An agency license is usually given for 3 years, which may be either renewed or cancelled later. But before renewal of the license, it is a prerequisite that the agent should have undergone 25 hours of practical training in Life and General Insurance business or at least 50 hours practical training in subject for a composite agency renewal. The agent is expected to procure a minimum premium amount depending upon the company rules and targets. The agent is paid commission as remuneration for discharge of all his functions, the commission rates are subject to the guide lines issued from time to time by the IRDA. A license issued under the provision of the above Regulations entitles an Insurance Agent to sell on behalf of one life insurer or one General insurer at a time. An identity card is issued by the concerned Insurer for this purpose. An Agent is entitled to change insurer but has to follow the process laid down by IRDA. (B) Corporate Agent Like individual insurance agents, corporate agents are also licensed by the IRDA and governed by the Insurance Regulatory and Development Authority (Licensing of Corporate Agents) Regulations, 2002. An agent represents only one insurance company (one general, one life or both if a composite agent, apart from a health insurance company). The IRDA (Licensing of Corporate Agents) Regulations, 2002 provides the licensing framework for Corporate Agents similar to the Regulations applicable to Individual Agents. The Corporate Agents regulations recognize agents who are one of the following entities (as against individual agents who are licensed under the IRDA (Licensing of Insurance Agents) Regulations, 2002): (a) Firm (b) Company under the Companies Act, 1956 (c) Banking company (d) Co-operative society (e) Panchay at or local authority (f) Non-Government organisation CFP Level 3: Module 1 – Risk Analysis – India Page 209
The license is issued to the entity as against the individual under licensing of individual agents. However, the persons who are authorised to sell on behalf of a Corporate Agent will have to undergo the training and examination requirements similar to that of an Individual agent. Further a Group to which the applicant Corporate Agent belongs to, can be granted only one corporate agency licence. In other words, any proposal from an applicant, some of whose group entities are already engaged in insurance business, such as corporate agent, broker, insurer etc., shall not be normally granted a corporate agency licence. IRDA does not normally grant any exception unless the entities are licensed by Reserve Bank of India with substantial client base or otherwise have assets, turnover or net worth of ₹15 Crores. The minimum qualifications, practical training and examination requirements are similar to that of an individual agent. A Corporate Agent is allowed to act for only three life insurer (Direct-Life) or three general insurer (Direct-Non-Life) or Composite Corporate Agent (three Life and three General at a time) Qualifications The corporate agent should ensure that depending upon the nature of the entity, the Partnership Deed, Memorandum of Association or any other document evidencing the constitution of the entity shall contain as one of its main objects soliciting or procuring insurance business as a Corporate Agent. The corporate insurance executive shall possess the minimum qualification of a pass in 12th Standard or equivalent examination conducted by any recognized Board/Institution, where the applicant resides in a place with a population of five thousand or more as per the last census, and a pass in 10th Standard or equivalent examination from a recognised Board/Institution if the applicant resides in any other place. Should have completed from an approved institution, at least, fifty hours’ practical training which may be spread over one to two weeks, in either life or general insurance business, as the case may be. Or shall have completed from an approved institution, at least, seventy five hours’ practical training both in life and general insurance business, where such an applicant is seeking licence for the first time to act as a composite corporate agent. CFP Level 3: Module 1 – Risk Analysis – India Page 210
Banc assurance Banks and insurance companies collaborate to make a partnership within which the bank sells the insurance firm’s product to its clients. This arrangement of selling an insurance product by the insurance company through a bank is known as Banc assurance. The Banc assurance channel helps to: improve the channels through which insurance policies are sold/marketed so as to make them reach to the common man widen the area of working of the banking sector increase in competition and better servicing, better pricing for the customer This arrangement works well for both the bank and the insurance company, because the bank earns a commission amount from the insurance company whereas the insurance company widens its market share and customer base. Being the mixture of the banking and also the insurance sector, banc assurance comes beneath the scope of both RBI and IRDAI. As per RBI, any scheduled commercial bank is allowed to undertake insurance business as an agent of the insurance company without any risk participation. Banks cannot become brokers, as RBI does not allow banks to promote separate insurance broking business. As per IRDAI (Licensing of Banks as Insurance Brokers) Regulations, 2013 banks can act as corporate agents for solely one life and one non-life insurance firm for a commission and no alternative pay except commission. The current architecture of one-bank-one-insurer helps banks sell the product of their own insurer and might lead to conflict of interest in some cases. IRDAI has recently drafted guidelines to promote open architecture in banc assurance. In the new model, the banks will have to have multiple tie-ups and sell products of multiple insurers. 2. Brokers Regulation 2(i) of the IRDA (Insurance Brokers) Regulations, 2002, defines Insurance Broker as a person form the time being licensed by the Authority under Regulation 11, who for remuneration arranges insurance contracts with insurance companies and/or reinsurance companies on behalf of his clients. CFP Level 3: Module 1 – Risk Analysis – India Page 211
Licensing of Insurance Brokers Every Insurance Broker shall possess a valid and subsisting licence to act as an Insurance Broker issued by IRDA. The framework for licensing of an Insurance Broker is similar to that of a Corporate Agent. However, as we have seen earlier a Broker differs from an Agent in the sense that a Broker represents customers interests and is required to select the best product amongst all insurance companies, while an agent represents an insurer at any point in time (one in life and one in general insurance) and will present the product of only such insurer(s) with whom the agent is attached with. Categories of Insurance Brokers (a) Direct Broker (Life) (b) Direct Broker (General) (c) Direct Broker (Life & General) (d) Reinsurance Broker (Reinsurance Life or General) (e) Composite Broker (Life and/or General + Reinsurance) A Direct Broker is authorised to recommend the products of any of the life insurance companies or general insurance companies to their clients, as the case may be. A Reinsurance broker arranges for reinsurance contracts between direct insurers and reinsurance companies. Reinsurance is a contract under which insurance companies can pass on the risk they assume under the policies issued by them, to yet another insurance company (called reinsurer). Therefore, the insurance company which issues the policy becomes the Policyholder under the reinsurance contract entered into with a reinsurer. A broker can be an intermediary who can arrange reinsurance contracts with reinsurance companies. Except for GIC, the National Reinsurer, all the other reinsurance companies doing business in India are located abroad. Therefore the role of reinsurance brokers in getting a best deal for insurance companies cannot be undermined. A Composite Broker is one who arranges for both insurance contracts both for retail and institutional clients as a Direct Broker as well as for insurance companies as a reinsurance broker. The insurance regulator IRDAI has doubled the capital requirements for setting up different categories insurance broking companies in the country. The new regulations, which have been unveiled on Wednesday, have specified Rs 75 lakh(earlier Rs 50lakh), Rs 4 crore(Rs 2 cr) and Rs 5 crore(Rs2.5 cr) of capital for direct broker, reinsurance broker and composite broker CFP Level 3: Module 1 – Risk Analysis – India Page 212
Role of an Insurance Broker Regulation 3 of the IRDA (Insurance Brokers) Regulations, 2002 summarises the functions of a Direct Broker: a) Since a Broker represents a client, he is expected to obtain detailed information on client’s business and risk management philosophy and familiarise himself with the client’s business b) Render proper advice to the client in selecting the appropriate insurance as well as terms of insurance c) Possessing a detailed knowledge of insurance markets to be in a position to advice his client d) Submitting quotation received from insurance companies for consideration of a client e) Providing the information required about the client or the subject matter to be insured, to enable insurer to properly assess the risk and give a premium quotation f) Updating customer about the progress of the proposal submitted and providing written acknowledgements g) Assisting clients in paying premiums under Section 64VB of the Insurance Act, 1938 h) Assisting clients in negotiation of claims and maintenance of claim records The Regulations also prescribe a code of conduct in matters related to sales practices wherein every insurance broker shall: confirm that he is a member of the Insurance Brokers Association of India (IBAI) or any other body of insurance brokers; confirm that he does not employ agents to bring in business by canvassing, call centers; ensure that the client understands the type of service he can offer; ensure that the policy proposed is suitable to the needs of the client; give guidance only on those matters in which it is conversant recommend other specialist for guidance when required; not make inaccurate or unfair criticisms of any insurer; explain why a policy is proposed and provide comparisons; CFP Level 3: Module 1 – Risk Analysis – India Page 213
explain when and how the premium is payable. 3. Surveyors & Loss Assessors A Surveyor or a Loss Assessor is relevant for general insurance business, where assessment of the loss of the subject matter insured is very important for deciding the claim amount. As general insurance contracts are indemnity contracts in nature, the amount paid by the insurance company cannot exceed the amount of actual loss incurred. The job of the Surveyor or a Loss Assessor is therefore to arrive at the exact amount of loss incurred and his role is critical to a general insurer. Every person who is a student-member of the Institutes of Surveyors and Loss Assessors intending to act as a Surveyor or Loss Assessor is required to be licensed by IRDA before he starts performing his functions foray general insurer. A license issued for a Surveyor or a Loss Assessor shall be valid for a period of 5 years after which it is required to be renewed. A Surveyor and Loss Assessor shall be categorized into 3 categories, The three categories are Licentiate, Associate ship and Fellowship which is awarded by the Institute of Surveyors and Loss Assessors. The nature of surveyor or loss assessment work which can be undertaken would depend upon the categorisation. Further IRDA shall also allot the department or the area work for the Surveyor and Loss Assessor from time to time. Role of a Surveyor and Loss Assessor The primary responsibility of a Surveyor or a Loss assessor is to estimate the liability of the loss incurred by the Policyholder who has taken an insurance cover, to enable the insurance company to arrive at the amount to be indemnified to the Policyholders under the terms of insurance contract. The following are the specific duties and responsibilities as enshrined under the Regulations: a) Declaration of conflicts of interest: In case the surveyor is interested in the subject matter under loss assessment or in the policyholder whose subject matter is being assessed, he must declare the conflict to the insurer and stay away from the assessment exercise. For example, if the Surveyor is the son of the Policyholder whose car has been damaged in a fire accident, such a Surveyor cannot assess the loss of the car of his Father, in view of the conflict of interest. He must declare this relationship to the insurer concerned and not conduct the survey proceedings in such cases b) Maintenance of confidentiality and neutrality in the loss assessment exercise. He has to keep the interests of both the insurer and the policyholder in mind CFP Level 3: Module 1 – Risk Analysis – India Page 214
c) He must investigate the causes and circumstances of the loss in question d) He must personally conduct a spot survey and comment upon excess insurance or under insurance e) Advise the insurer about loss minimisation or loss control efforts or security and safety measures which can be adopted to ensure that the incidence of loss is reduced or avoided in future f) Pointing out discrepancy in policy wordings, if any g) Satisfying the queries of the insured or the insurer in connection with the claim or loss h) Recommending applicability of depreciation and its percentage and quantum Commenting on salvage and its disposal Every Surveyor and Loss Assessor have to follow a code of conduct wherein they shall: behave ethically and with integrity, strive for objectivity in professional judgment, act impartially, conduct with courtesy and consideration to all people not accept or conduct survey works in areas for which he does not hold a license, not accept or perform task which he is not competent to accept, carry out his professional task with due diligence, keep himself informed about all developments pertinent to his professional practice, maintain a proper record for the work done by him and comply with all relevant laws. 3.1 Medical Examiners Underwriting is a very important aspect for the insurers at the time of sale of a policy. Any mis-statement or willful concealment of material information leads to disputes at the time of claim settlement. Health is one of the important parameters for the insurer to decide the premium rates. It is utmost important for the insurer to know the factual health condition of the person proposing to buy the policy, especially in case of health insurance and life insurance (term) plans. CFP Level 3: Module 1 – Risk Analysis – India Page 215
Insurers engage the facilities of reputed doctors and hospitals for carrying out health check-ups of the applicant. A medical test is done which includes a detailed health check-up of the applicant. It usually includes two parts: A questionnaire where the doctor asks a series of questions. It could be verbal or written down. Basic sample collections of urine and blood to determine vital medical parameters. These tests indicate whether any medical conditions and illnesses exist which the insurer should be aware of, at the time of sale of the insurance policy; and then provide the most suitable cover. However, in India, most times the insurers ask for such medical tests only for applicants over a specific age or a high sum assured. Web Aggregators Insurance Web Aggregators compile and supply information regarding insurance policies of different companies on a website. Web aggregators are licensed to supply data relating to insurance products, comparison of comparable products offered by different insurance companies and have linkages to websites of various insurers from where customers will choose and get policies on-line. They are governed under IRDAI (Insurance Web Aggregators) Regulations, 2017. The Insurance Web Aggregator has to: Exhibit information in their designated website describing the insurer’s products Ensure that the data systems, together with the aggregation website(s)/portals, Lead Management System and the Data Centers hosting the website(s)/Portal(s)/Lead Management System are in compliance with the data security standards and procedures Ensure that the leads and other information is transmitted to the insurers and others using secured layer data encryption technologies Use solely RBI registered payment gateways for assortment and transfer of premium to insurers CFP Level 3: Module 1 – Risk Analysis – India Page 216
Ensure to get the information systems (both hardware and software) audited by CERT-In empanelled Information Security Auditing organizations Submit a certificate from the statutory auditor every year For conduct in matters relating to client relationship every web aggregator shall: handle all its transactions with clients with utmost good faith and honesty act with care and diligence ensure that the customer understands his relationship with the Web Aggregator and on whose behalf the Web Aggregator is acting consider all the information supplied by the prospective customers as totally confidential avoid conflict of interest Every web aggregator is also expected to follow guidelines in relation to complaint handling wherein he shall have a system of recording and monitoring complaints, ensure that the website contains details of complaints handling procedure and ensure that the grievance is resolved to the fullest satisfaction of the customer in a reasonable time bound manner. 3.2 Insurance Marketing Firms An insurance marketing firm is an entity registered with the Irdai, which works like a market place for financial products and can also sell insurance products. As per regulations, it can sell products of two life, two non-life and two health insurers. The firm can also sell other financial products such as mutual funds, National Pension System (NPS), banking and financial products of banks and non-banking financial companies that are regulated by the Reserve Bank of India, post office savings schemes and other products distributed by investment advisers who are licenced by the Securities and Exchange Board of India. They are regulated under the Insurance Act, 1938, the IRDAI Act, 1999, the IRDAI (Registration of Insurance Marketing Firm) Regulations, 2015 and various Regulations, Circulars, Guidelines and instructions issued thereunder. CFP Level 3: Module 1 – Risk Analysis – India Page 217
The registration which is issued under these Regulations is valid for three years. The Insurance Marketing Firms can undertake the insurance servicing activities of only those insurers with whom they have an agreement. Within the insurance marketing firm, there are two kinds of licenced individuals: an insurance salesperson (ISP), who is responsible for soliciting the insurance business; and a financial service executive (FSE), who handles distribution of other financial products. An ISP needs to have passed Class 12, cleared the insurance marketing firm examination and be domiciled in the area where the firm is registered. IMFs are allowed to solicit or procure: all kind of products sold on individual and retail basis, including crop insurance group personal accident, group health, property, GSLI and term insurance policies for Micro, Small and Medium Enterprises (MSME) IMFs shall: ensure that ISPs are competent, qualified, and have undergone the required training and passed the examination as specified by IRDAI not divulge any confidential information about its client except where such disclosures are required to be made in compliance with any law act in the public interest and in fiduciary capacity be accountable for the omissions and commissions of their own employees/persons engaged by them maintain at all times a professional indemnity insurance cover throughout the validity of the period of the registration TPAs or Third Party Administrators TPA or Third Party Administrator (TPA) is a company/agency / organisation holding license from Insurance Regulatory Development Authority (IRDA) to process claims - corporate and retail policies in addition to providing cashless facilities as an outsourcing entity of an insurance company. CFP Level 3: Module 1 – Risk Analysis – India Page 218
TPAs function as an intermediary between the insurance provider and the insured. The stakeholders involved are as follows: Insurance companies Healthcare providers Policyholders Introduced by the IRDA in 2001, TPAs handle various pertinent aspects of insurance as listed below: Processing of claims and settlement includes the following: Accepting intimations Approving cashless claims Disbursing the claims Utilization review Provider network Enrolment Premium collection Cashless processing (if and when a policyholder is admitted to a listed hospital of an insurance provider, the latter pays the bill) Value added services such as the following: Ambulance services Specialised consultation Availability of beds 24-hour toll-free helplines Medicine supplies Health facilities Database maintenance According to experts, providing cashless hospitalization of the insured should be the primary service offered by TPAs. It is important to note that some insurance companies have a separate department which performs the functions of TPA instead of outsourcing it to another entity. Insurance Repositories Till now insurance policies were in paper form, whether we submit our proposal application in physical form or through online mode. The Insurance Regulatory and Development Authority (IRDA) launched the insurance repository system on 16 September 2013 to provide better services to policyholders and enhance insurance penetration. CFP Level 3: Module 1 – Risk Analysis – India Page 219
Now, our insurance policies including the existing ones can be converted in an electronic form and held with an ‘insurance repository’. E-policies will eliminate paper and associated risks of storage and loss and provide convenience and safety to the customer. What is an insurance repository? An insurance repository provides the ease of holding insurance policies issued in an electronic form. It maintains data of insurance policies in electronic form on behalf of insurers. Insurance repositories cannot sell insurance policies. They are authorised only to maintain the policies in electronic form and provide a service record of all insurance policies. The insurance repositories will also act as a single point of service for all e-policies held by a policyholder. The IRDA has licensed five entities — A. NSDL Database Management Ltd, B. Central Insurance Repository Ltd, C. SHCIL Projects Ltd, Karvy Insurance Repository Ltd D. CAMS Repository Services Ltd. Role of an insurance repository The objective of creating an insurance repository is to provide policyholders a facility to hold insurance policies in electronic form and to undertake changes in the insurance policy with speed and accuracy. In addition, the repository acts as a single stop for several policy service requirements. The insurance repository system also brings about efficiency and transparency in the issuance and maintenance of insurance policies. All services provided by insurance repositories are free of charge. What is an e-Insurance Account? e-IA stands for e-Insurance Account or “electronic insurance account”, which will safeguard the insurance policy documents of policyholders in electronic format. This e-insurance account will facilitate the policyholder by providing access to the insurance portfolio at a click of a button through Internet. A policyholder can open an e-insurance account with any of the five repositories CFP Level 3: Module 1 – Risk Analysis – India Page 220
approved by IRDA. You can't open multiple demat accounts, as IRDA allows just one e-Insurance Account per person. An e-Insurance Account will be opened within seven days from the date of submission of application complete in all respects. Each e-Insurance Account will have an account number and each account holder will be granted a 'Login ID and Password' to access their e-policies. e-Insurance Account is offered ‘free of cost’ to the applicants. An individual, who doesn’t have an insurance policy, can also open an e-Insurance Account. After buying a policy, the policyholder can give a request for dematerialisation to the insurer or insurance repository. To convert your existing paper policies into electronic form, a service request may be made to the insurance repository or insurer. Benefits of holding e-policies Safety: There is no risk of loss or damage of a policy. The electronic form ensures that the policies are in safe custody and can be easily accessed. A copy of the policy can be downloaded at any time by accessing the e-Insurance account. Single point of service: With the repository as the single point of service, updating details like change of address or nomination will become easier, faster and more reliable. Single KYC: You don't have to go through the KYC process every time you are buying a new policy. Easy payout transfers: Policy benefits would be paid through electronic facility to the registered bank account, thus ensuring speedier and convenient settlement. Role of an Authorised Representative An e-Insurance account holder can appoint an authorised representative to operate his account in case of unfortunate demise or incapability of e-Insurance account holder to operate the account. The authorised representative will intimate the insurance repository about the demise/incapability of policyholder with valid proof. An authorised representative has only access rights to the e-Insurance account in the event of demise of the policyholder. The authorised representative would only to act as a facilitator and is CFP Level 3: Module 1 – Risk Analysis – India Page 221
not entitled to receive any policy benefits unless designated as a ‘nominee’ or ‘assignee’ by the deceased policyholder. How will the authorised person deal with the e-Insurance account? After the demise of the e-Insurance account holder and after settlement of all insurance claims, the authorised representative needs to make a request to the insurance repository to close the e-Insurance account. Grievances redressal mechanism Every insurance repository will have a policyholders’ grievances cell to address the grievances in respect of repository services and electronic policies held by them. Point of Sales Persons (PoSP) To increase insurance penetration in the country and to facilitate growth in the non-life and health insurance business, IRDAI introduced a new distribution model called “Point of Sales Person” (PoSP) in the year 2015. Every PoSP can represent an insurance company or an insurance intermediary. PoSP have a lower qualification compared to other insurance distributors such as agents, brokers and corporate agents. Accordingly, IRDAI has directed these individuals to sell only basic insurance products viz. motor insurance, travel insurance and personal accident insurance which do not require a lot of underwriting. These products also do not require much discussion with the customer at the time of sale and their benefits are simple to explain. Based on the information provided by the customer, the insurance policy is automatically generated by the system. The “Point of Sales Person” is authorized to sell only the following pre-underwritten products: Motor Comprehensive Insurance Policy for Two-wheeler, commercial vehicles and private cars. Third party liability Policy for Two-wheelers, commercial vehicles and private cars. Personal Accident Policy Travel Insurance Policy Home Insurance Policy CFP Level 3: Module 1 – Risk Analysis – India Page 222
Chapter 4: Life Insurance Presently, there are 24 life insurance companies which are operative in India. Life Insurance Corporation (LIC) of India is the only public sector company while there are 23 private sector life insurance companies. Many of the insurance companies are joint ventures either between public or private sector banks and national/international insurance financial corporates. This collaboration with the foreign markets has made the insurance sector grow tremendously in India. The life insurance companies in India have traditionally kept an investment perspective to insurance, with an idea of providing insurance along with a growth in savings. They have also introduced emerging trends like product innovation, multi-distribution and better claims management in the Indian market. The postal department also transacts life insurance business through Postal Life Insurance, which is exempt from the purview of the regulator. The government is also striving hard to provide insurance to individuals below the poverty line by introducing schemes such as: Pradhan Mantri Suraksha Bima Yojana (PMSBY), Rashtriya Swasthya Bima Yojana (RSBY) and Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY). 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 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 CFP Level 3: Module 1 – Risk Analysis – India Page 223
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. 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. 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 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. CFP Level 3: Module 1 – Risk Analysis – India Page 224
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. 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. Income Sources and Rate-fixing Insurance companies mostly generate revenue in three ways: (a) By charging premiums to the customers for insurance cover, which is their underwriting income, (b) Reinvesting such income in low-risk investments, and (c) Unpaid claims on lapsed policies. Underwriting income: Insurance companies fix the premium by calculating the risk on each policy. During the year, the company collects huge premiums and may not have to pay claims on those CFP Level 3: Module 1 – Risk Analysis – India Page 225
policies for many years ahead. The difference between such premiums collected by the insurer and the money paid out by way of claims is the underwriting income for the insurer. In certain years such income is large on account of few claims paid, while, in other years the income could be less due to high claim amount on account of natural calamities etc. Reinvesting: Insurance companies invest a portion of the collected premiums in low-risk investments such as stocks, bonds, and other interest-bearing accounts hopefully earning a sizable return. Lapsed coverage: A policy lapses when people no longer pay the premium and abandon their policy. Also, many times the insured survives the policy term (i.e. outlives the term). In all such cases while the company has collected all the premiums over the years it has not made any pay out thereby generating income for the company. Since an insurance company is into business, the rate charged should cover expenses and losses, and earn some profit. Rate fixing (also called insurance pricing) is the determination of what rates, or premiums, to be charged for insurance. It is also the process of establishing rates for reinsurance or other risk transfer mechanisms. The rate reflects three major elements: the loss cost per unit of risk exposure, the administrative expenses and the profit. A rate provides for all costs associated with the transfer of risk so that equity among all the insured is maintained. Such rates fulfill these four criteria which are usually used by actuaries: Rates should be reasonable, Rates should not be disproportionate, Rates should be adequate, and Rates should not be unfairly biased. Factors in Fixation of premium, Rate-making The process of premium fixation in life insurance involves various parameters: a. Mortality Rate b. Interest rate c. Expenses CFP Level 3: Module 1 – Risk Analysis – India Page 226
Mortality Rate Mortality rates project the cost of covering death claims as they occur. Interest earnings reflect the income the company expects to receive from the investment of premiums over time that will be added to the reserves, held aside to pay future claims. Expenses include the cost of creating, offering, and maintaining the product to pay all promised benefits. These factors must also provide profit to the insurer. Different products apply these factors in different ways. Term insurance has a pay-as-you-go structure. Premiums increase as mortality increases and the policy does not build cash value. Interest earnings have a smaller impact on the premium than in permanent policies and expenses are largely covered by the policy fee. Mortality > To price insurance products, and ensure the adequacy of reserves to pay claims, actuaries use mortality tables to project the number and timing of future insured deaths. Actuaries study the incidence of deaths in the recent past, and develop expectations about how these events will change over time, allowing them to develop an expectation of the timing and number of such events in the future. A safety margin is built in that increases the mortality rates above what is expected. In participating policies, savings created by these conservative assumptions can be returned as dividends. In non-participating policies, the safety margins must be smaller in order for the premium rates to be competitive. Chapter 8: Insurance Pricing and Premium Calculation A mortality table shows the mortality experience used to estimate longevity and the probability of living or dying at each age, and thus determine the premium rate. Mortality tables may include the probability of surviving any particular year of age, remaining life expectancy for people at different ages, the proportion of the original birth cohort still alive, and estimates of a group’s longevity characteristics. Life mortality tables today are constructed separately for men and women, and are created to distinguish individual CFP Level 3: Module 1 – Risk Analysis – India Page 227
Interest > Insurers invest the premiums they receive and accumulate them for future claims and other obligations, such as policy loans and surrenders. Life insurance company portfolios are traditionally long-term and emphasize safety of principal and predictable rates of return, to accommodate their long-term obligations. Expense > Life insurance companies incur acquisition and administrative expenses in the course of doing business. Acquisition expenses include the costs incurred in obtaining business and placing it in force, such as advertising and promotion fees; commissions; underwriting expenses; costs associated with medical exams and attending physicians’ statements, inspection report and credit history fees; home office processing costs; and an addition to the insurer’s reserve, surplus, and profits. Administrative expenses include the costs associated with collecting premiums and distributing dividends, continuing producer compensation, investment expenses, and home office overhead. Any costs the insurer incurs must be recovered through mortality savings, expense charges, and (or) reduced interest crediting. CFP Level 3: Module 1 – Risk Analysis – India Page 228
Premium Calculation Premium is the price for insurance. It is the consideration amount payable by the insured for the selected suminsured, plan and term of the insurance. Under a life insurance contract, it is payable – at the commencement as a one-time payment; or at the commencement and also at a regular periodical interval as specified in the contract. It is always payable in advance. Default in premium payment leads to the policy being lapsed and benefits there under not being available or only partially available. Risk Premium Amount required to cover the risk of death for a given age for a period of one year. Net Premium/Pure Premium When interest yield is taken into account in the risk premium, it becomes Net Premium or Pure Annual Premium. Office Premium When provision for administrative or operating expenses, unexpected contingencies and fluctuations is made, the calculated amount is called Office Premium. Office Premium = Risk Premium - Interest + Management Expenses Tabular Premium After making modifications in the office premium for certain other factors, (e.g. mortality rate is higher between the ages of 13-18 years & lower at age 20-21), the premium is sequentially graded and the final premium that is arrived at is called Tabular Premium. This is the premium that insurance companies publish as Table of Premium Rates. Generally, it is per thousand sum assured for a given age, term and type of policy. Insurance companies make available to their agents the tables of premiums for each plan of insurance. Illustration: Suppose one person is likely to die out of 1,00,000 at a particular age within one year, the mortality rate in that case will be 0.001% (ldivided by 1,00,000 multiplied by 100) or 0.00001. In the illustration the risk premium for that age for every ₹1000 sum assured would be ₹0.01paisa. CFP Level 3: Module 1 – Risk Analysis – India Page 229
If the policy has a term of 10 years, the risk premium would be increasing every year due to increase in age. But in actual practice, a uniform premium or level premium is charged for all the 10 years. This implies charging premium higher than necessary for the risk in early years and lower than necessary for the risk in later years. This involves complex arithmetic and is taken care of by the Actuaries. Why ‘Level Premium’? Premium amount at higher age of the insured, i.e. during the later part of the policy term, would have considerably increased and the insured may find this beyond his paying capacity. Discontinuance of premium payment would leave the insured without protection of insurance, particularly when he needs it most. For obvious reason, insured persons with good health during the later part of the policy term may discontinue paying increased premium, while insured persons with bad health will tend to continue paying increased premium. This would lead to adverse selection. For the insurer, it is difficult to administer varying premium. Extra Premiums Extra premium is one that becomes chargeable in addition to the normal premium rate ('tabular premium') for a plan of insurance at the given age of the life to be assured. This may arise due to- The insured seeding additional benefits over and above the normal life cover like accident benefit, premium waiver benefit, critical illness benefits etc. (known as’riders') Extra risk on life assured involved by way of hazardous occupation, adverse family history, personal habits and his physical condition. Extra premium is normally charged per thousand sum assured; for example, say, ₹2 per thousand sum assured. Calculation of Age of Life to be Assured Risk of death is closely related to the age of the life to be assured; hence the age at entry into the contract of insurance becomes the most significant factor to determine premium. Months and days over the completed years of age are not taken as such, but the age to be taken is rounded off to the years in integer which may be- Age Nearer birthday, or Page 230 Age Next birth day; or Age Last birth day. CFP Level 3: Module 1 – Risk Analysis – India
This depends upon the practice of the insurance company and the plan of insurance. Example of age calculation: On 19-03-2008, in case of a person having born on 01.04.1985, his age- nearer birthday will be 23 years; last birthday will be 22 years; and next birthday will be 23 years. Calculation of Actual Premium The ‘Tables of Premiums' prescribed by various life insurance companies in India, show their premium amount per thousand per year. However, some insures have adopted ‘quarterly' mode of payment as the basis, while others have adopted ‘yearly' mode as the basis. Simply put - The insurers adopting quarterly basis assumed that the premium for a full year prescribed by them will be received in four quarterly installments. Those adopting yearly basis expect the yearly premium to be received in one installment for the whole year. Premium Payment Mode The policyholder may select yearly, half - yearly, quarterly or monthly mode of premium payment. Insurance companies also allow premium payment through deductions from the policyholder's salary under their salary savings scheme. Insurance companies also have ‘Single Premium' payment plan for some of their products. Rebate or Loading for Premium Payment Mode In case, a policyholder selects a mode involving payment frequency higher that the basis adopted by the insurance company, the tabular premium is loaded with an additional charge. In case, a policyholder selects a mode involving payment frequency lower than the basis adopted by the insurance company, a rebate is allowed on the tabular premium. While ‘rebate' referred to above leads to reduction in the tabular premium, ‘loading' leads to enhancement of the tabular premium. The rates of rebate and loading mentioned above are mere assumptions. For actual application of such rebate or loading, rules of the company concerned will have to be followed. Rebate for Large Sum Assured Page 231 For every new policy there are certain - CFP Level 3: Module 1 – Risk Analysis – India
'Fixed costs' which are uniform for all policies irrespective of sum assured, for example, cost of policy preparation or postal expenses for mailing the policy document. Variable costs' depending on the sum assured; for example stamp duty on the policy document or medical examiner's fee. When the sum assured is large, fixed costs get reduced per thousand sum assured resulting into savings to the insurer. Insurer shares these savings with the policy holders by offering rebate in tabular premium for large sum assured ranges from ₹l to ₹ per thousand varying from company to company and the type of product. Types of Premium Single Premium Payable at the commencement of the policy as a one-time payment. Regular Premium Payable at the commencement & also at a regular periodical intervals throughout the policy tenure. Limited Premium Payable at the commencement & also at a regular periodical intervals as specified in the contract. Illustration of Working Mythology of Sums on Life Insurance Premium Calculation Adjustment Particulars Amount Note (7000) Tabular Premium XXX Less: Large Sum Assured XX If it is expressed as a % then calculate the Rebate same as a % of Tabular Premium XXX Add/ Less: Adjustment for XX If it is expressed as a % then calculate the Mode of Premium same as a % of Tabular Premium Payment XXX Add: Extra Premium XX Add: Rider Premium XX CFP Level 3: Module 1 – Risk Analysis – India Page 232
Applicable Premium XXX Upto this all values are considered as 7000 S. No. Particulars Amount Formulae 1 (₹) 2 Premium Payable XXX (AP/1000)*SA per Policy Year PPPY/Number of Installments in a year XXX Installment Premium ILLUSTRATION OF SUMS ON AGE CALCULATION: 1. Date of birth of Ravi is January 7, 1990. He is applying for a life insurance policy today i.e. March 13, 2018. What is his age? Solution: 13. 03. 2018 07. 01. 1990 DOC (Date of Commencement) 06D 02M 28Y Less: DOB (Date of Birth) 28 years AGE 29 years Age last birthday: Age next birthday: (28 + 1) 28 years Age nearer birthday: (since 2M) 2. Calculate age of Hari who is applying for a policy today i.e. 13th March 2018 and was born on 25th February 1985. Solution: 13. 03. 2018 25. 02. 1985 DOC (Date of Commencement) 18D00M 33Y Less: DOB (Date of Birth) 33 years AGE 34 years Age last birthday: Age next birthday: (28 + 1) CFP Level 3: Module 1 – Risk Analysis – India Page 233
Age nearer birthday: (since 0M) 33 years ILLUSTRATION OF SUMS ON PREMIUM CALCULATION: 1. Calculate installment premium with the help of the following information: Sum Assured -₹25000 Term - 35 years Tabular Premium - ₹36.55/ thousand of Sum Assured Large Sum Assured Rebate - ₹1/ thousand of Sum Assured Rebate for Half Yearly Mode - 1.5% of Tabular Premium Premium for Accidental Death Benefit Rider - ₹1/ thousand of Sum Assured Solution: PARTICULARS AMOUNT (HYL) (₹/000) ADJUSTMENT Tabular Premium 36.55 Large Sum Assured Rebate (1.00) Less: 35.55 (0.55) Add/ Less: Adjustment for Mode of Premium Payment 35.00 1.00 Add: Rider Premium 36.00 Applicable Premium AMOUNT SL NO (₹) 1 PARTICULARS 900 2 450 Premium Payable per Policy Year Installment Premium CFP Level 3: Module 1 – Risk Analysis – India Page 234
2. Calculate installment premium with the help of the following information: Sum Assured - ₹50000 Tabular Premium - ₹28.40/ thousand of Sum Assured Large Sum Assured Rebate - ₹1.50/ thousand of Sum Assured Rebate for Yearly Mode - 3% of Tabular Premium Extra Premium - ₹5/ thousand of Sum Assured Premium Payment Modes - Annually/ Quarterly Solution: PARTICULARS AMOUNT AMOUNT (YL) (QTR) ADJUSTMENT Tabular Premium (₹/000) Large Sum Assured Rebate (₹/000) 28.40 Less: 28.40 (1.50) Add / Less: Adjustment for Mode of Premium (1.50) 26.90 Payment 26.90 Add: Extra Premium (0.85) - SL NO Applicable Premium 1 26.05 26.90 2 PARTICULARS 5.00 5.00 Premium Payable per Policy Year 31.05 31.90 AMOUNT AMOUNT Installment Premium (₹) (₹) 1552.50 1595 1552.50 398.75 TWO DIFFERENT TYPES OF LIFE INSURANCE POLICIES— Page 235 d. Participating e. Non-participating policies Highlighted below are some differences between both the types of insurance policies: CFP Level 3: Module 1 – Risk Analysis – India
Participating policy Non-participating policy Meaning A participating policy enables you as a policy In non-participating policies the profits are holder to share the profits of the insurance not shared and no dividends are paid to the company. These profits are shared in the policyholders. This type of policy is also form of bonuses or dividends. It is also known known as a without-profit or non-par policy. as a with-profit policy. The bonus that is given in this policy is not In case of a non-participating policy, there is Payment guaranteed. It is based on the performance of no bonus or dividend paid to the the insurance company. policyholder. Payment The bonuses or dividends are usually paid out There are no payments in non-participating guarantee annually. policies because the profits are not shared. Benefits The most important benefit of participating policies is that it not only provides protection, The premiums are a little lesser than but also provides returns in the form of a participating policies. bonus. Examples Endowment or money back Insurance Plans A term insurance policy is a on-participating that pay bonuses or dividends can be policy. classified as participating policies. Only participating (with-profit) policies qualify for the bonus and the policyholders holding a participating life insurance policy will only qualify for the bonus payout. The participating policies take part in the investment profits of the insurance company which is shared with the policyholders in the form of bonus payment. The amount of bonus payable is not fixed and it may vary depending on the amount of investment income earned by the insurance company. The bonuses are a percentage of the sum assured and these are declared at the end of every financial year. When declared, it becomes guaranteed. The insurance company has the discretion to decide on the rates of bonus. The policyholder receives 90% of the profits as the bonus and the remaining 10% of the surplus is kept for shareholders. Types of Bonuses Page 236 Bonuses are categorized under three types for a participating life insurance policy CFP Level 3: Module 1 – Risk Analysis – India
1. Reversionary Bonus The profits allocated to each participating policy are paid in the form of a Reversionary Bonus. A reversionary bonus adds value to the total amount payable to the policyholder or nominee. A reversionary bonus is usually declared at the end of every financial year and it is payable at the time of a claim. There are two common types of reversionary bonuses, as specified below. Simple Reversionary The simple reversionary bonus is calculated as a percentage of the sum assured. It is declared as per thousand of the sum assured every year. If the Simple Reversionary Bonus rate is Rs 50 per thousand of sum assured and sum assured of the policy is Rs 10 lakhs. Bonus = 50 x (10,00,000/1000) = Rs 50,000 Compound Reversionary The compound reversionary bonus is also computed as a percentage rate, but it applies to the sum assured and to all the accrued bonuses previously available in the policy. The bonus of each year is added to the sum assured and the next year’s bonus is calculated on that the total amount. These bonuses increase with time due to compounding effect. If the compound reversionary bonus of 5% is declared for the entire policy term and sum assured of the policy is Rs 10 lakhs. During the first year, the accrued Compound Reversionary Bonus (CRB) will be Rs 50,000 i.e., (5% of 10,00,000). In the second year, this Rs 50,000 will be added to the sum assured of 10,00,000, and now the bonus would arrive at 52,500 [5% of (10,00,000 + 50,000)].Compound reversionary bonus will increase year by year due to compounding impact. 2. Interim Bonus Bonuses are usually declared at the end of the financial year. But, in case a policy matures or death occurs in between the two successive bonus declaration dates, the interim bonus is then payable. This bonus is calculated for the remaining days from the last bonus date. 3. Terminal Bonus Terminal bonus (final bonus) is declared and added only for policies, which attain maturity. This bonus is offered to the policyholders for keeping the policy till its maturity date. This bonus thus CFP Level 3: Module 1 – Risk Analysis – India Page 237
will not be payable for policies which have been surrendered or for policies which have acquired paid-up value. Types of Life Insurance Policies Term Insurance By definition, all term insurance products provide coverage for a specified period of time, called the policy term. The policy benefit is payable only if (1) the insured dies during the specified term and (2) the policy is in force when the insured dies. If the insured lives until the end of the specified term, the policy owner may have the right to continue the coverage provided by the policy. If coverage is not continued, then the policy expires and the insurer has no liability to provide further insurance coverage. The length of the term varies considerably from policy to policy. The term may be as short as the time required to complete an airplane trip or as long as 30,40, or more years. In general, though, insurers seldom sell term life insurance to cover periods of less than 1 year, 1 year, 5 years, 10 years, 20 years or it may be defined by specifying the age of the insured at the end of the term For example, a term insurance policy that covers an insured until age 65, and the policy's coverage expires on the policy anniversary that falls either closest to, or immediately after, the insured person's 65 birthday. The policy anniversary is the anniversary of the date on which the policy was issued. For example, if a company issues a policy of December 2 of a given year, then every succeeding December 2 is the policy anniversary. Both the expiration date and the policy anniversary date are usually stated on the face page of the policy. Term life insurance protection is usually provided by an insurance policy,but it can also be provided by a rider added to a policy. A policy rider, which is also called an endorsement, is an amendment to an insurance policy that becomes a part of the insurance contract and that either expands or limits the benefits payable under the contract. A policy rider is as legally effective as any other part of the insurance contract. Riders are commonly used to provide some type of supplementary benefit or to increase the amount of the death benefit provided by a policy, although riders may also be used to limit or modify a policy's coverage. Some of the supplementary benefits - including some term insurance benefits - that are commonly provided through riders attached to life insurance policies are described in further Chapter. CFP Level 3: Module 1 – Risk Analysis – India Page 238
Plans of Term Life Insurance Coverage The amount of the benefit payable under a term life insurance policy or rider usually remains level throughout the term of the policy. Term life insurance, however, may also be purchased to provide either a benefit that decreases over the policy's term or a benefit that increases over the policy's term. Level Term Life Insurance By far, the most common plan of term insurance is level term life insurance. A level term life insurance policy provides a death benefit that remains the same over the term of the policy. For example, under a five-year level term policy that provides ₹100,000 of coverage, the insurer agrees to pay ₹100,000 if the insured dies at any time during the five-year period that the policy is in force. The amount of each renewal premium payable for a level term life insurance policy usually remains the same throughout the stated term of coverage. Decreasing Term Life Insurance The amount of the policy benefit payable under a decreasing term life insurance policy decreases over the term of coverage. The policy's death benefit begins as a set face amount and then decreases over the term of coverage according to some stated method that is described in the policy. For example, assume that the benefit during the first year of coverage of a five-year decreasing term policy is ₹50,000 and then decreases by ₹10,000 on each policy anniversary. The coverage is ₹40,000 for the second policy year, ₹30,000 for the third year ₹20,000, for the fourth year, and ₹10,000 for the last year. At the end of the fifth policy year, the coverage expires. The amount of each renewal premium payable for a decreasing term insurance policy usually remains level throughout the term of coverage. Insurance companies offer several plans of decreasing term insurance, including (1) mortgage redemption insurance, (2) credit life insurance, and (3) family income insurance. Each of these plans provides benefits to meet a specific need for insurance, and we describe in this section how these plans operate to meet those specific needs. Mortgage Redemption Insurance Mortgage Redemption Insurance is a plan of decreasing term insurance designed to provide a death benefit amount that corresponds to the decreasing amount owed on a mortgage. If you have ever bought a home, you are probably aware that each payment a borrower makes on a mortgage loan consists of both principal and interest on the loan. The amount of the outstanding principal balance owed on the mortgage loan gradually decreases over the term of the mortgage, although initially the CFP Level 3: Module 1 – Risk Analysis – India Page 239
decrease is fairly slow. (See figure for a graphic illustration of mortgage redemption insurance.) If the borrower purchases mortgage redemption insurance, the amount of the policy benefit payable at any given time generally equals the amount the borrower then owes on the mortgage loan. The term of a mortgage redemption policy is based on the length of the mortgage, which is usually 10, 15, 20, or 30 years. Renewal premiums payable for mortgage redemption insurance are generally level throughout the term. Often, the beneficiary of a mortgage redemption policy uses the policy benefit to pay off the mortgage. The beneficiary, however, typically is not required to do that. In most instances, the life insurance policy is independent of the mortgage - the institution granting the mortgage is not a party to the insurance contract - and the beneficiary is not required to use the proceeds of the policy to repay the mortgage. The following example describes this situation. Example: Balraj Mhatre and his wife, Anjali, purchased a new home and obtained a 30-year mortgage from the New Home Mortgage Company. Balraj decided to purchase a mortgage redemption life insurance policy from the Insurance Company. He wanted to ensure that Anjali could afford to stay in the home if she should outlive him. So, he named Anjali as the beneficiary. Three years later, Balraj died in an accident, and Insurance company paid Anjali a death benefit of ₹72,150 - the loan amount remaining on the mortgage. Anjali invested the policy proceeds in a mutual fund and continued to make monthly mortgage payments. Analysis: Because the contract for insurance was between Insurance company and Balraj Mhatre, Anjali was under no obligation to use the proceeds to pay the balance due on the mortgage. Note that the beneficiary decided not to pay off the mortgage. She apparently had sufficient income after investing the policy proceeds to make the monthly mortgage payments. If she did not think she had enough income to make those monthly payments, she could have used the policy proceeds to pay off the mortgage. In either case, the availability of the policy death benefit fulfilled Balraj’s need to provide Anjali with sufficient financial resources to allow her to continue to live in the house if she outlived him. CFP Level 3: Module 1 – Risk Analysis – India Page 240
Increasing Term Life Insurance Increasing term life insurance provides a death benefit that starts at one amount and increases by some specified amount or percentage at stated intervals over the policy term. For example, an insurance company may offer coverage that starts at ₹100,000 and then increases by 5 percent on each policy anniversary date throughout the term of the policy. Alternatively, the face amount may increase according to increases in the cost of living, as measured by a standard index such as the Consumer Price Index (CPI). The premium for increasing term insurance generally increases as the amount of coverage increases. The policy owner is usually granted the option of freezing at any time the amount of coverage provided by the increasing term life insurance. This coverage may be provided by an increasing term life insurance policy or, more commonly, as a rider to a policy. Renewable Term Life Insurance Renewable term life insurance policies include a renewal provision that gives policy owner the right to renew the insurance coverage at the end of the specified term without submitting evidence of insurability - proof that the insured person continues to be an insurable risk. In other words, the insured is not required to undergo a medical examination or to provide the insurer with an updated health history. Regardless of the insured's health at the end of the term of the coverage, the insurance company must renew the coverage if the policy owner requests a renewal. The following is a sample renewal provision contained in a yearly renewable term life insurance policy. Renewal: You may renew this policy for one year by continuing to pay premiums when due. You need not give proof of insurability. You may renew this policy on (1) the policy anniversary date; (2) each later policy anniversary before the policy anniversary nearest the insured's 75th birthday. When a term life insurance policy is renewed, however, the policy's premium rate increases. The renewal premium rate is based on the insured person's attained age (the age the insured has reached) on the renewal date. As we described in an earlier chapter, mortality rates generally increases as people grow older. Because the insured's mortality risk has increased over the initial term of coverage, the renewal premium rate must also be increased. The renewal premium rate remains level throughout the new term of coverage. Convertible Term Life Insurance Convertible term insurance policies contain a conversion privilege that allows the policy owner to change – convertthe term insurance policy to a permanent plan of insurance without providing evidence that the insured is an insurable risk. Even if the health of the person insured by a convertible CFP Level 3: Module 1 – Risk Analysis – India Page 241
term policy has deteriorated to the point that she would otherwise be uninsurable, the policy owner can obtain permanent insurance coverage on the insured because evidence of insurability is not required at the time of conversion. The premium that the policy owner is charged for the permanent coverage cannot be based on any increase in the insured's mortality risk, except with regard to an increase in the insured's age. Whole Life Policy Two primary characteristics distinguish permanent life insurance products from term life insurance products. Permanent life insurance products offer lifetime coverage. Term life insurance provides protection for a certain period of time and provides no benefits after that period ends. In contrast, permanent life insurance provides protection for the entire lifetime of the insured/ so long as premiums are paid as required. Permanent life insurance products provide insurance coverage and contain a savings element. Term life insurance usually provides only insurance protection. In contrast, permanent life insurance not only provides insurance protection, it also builds cash value that functions as a savings element. Some plans of permanent insurance have been sold for a hundred years; others have been introduced in more recent years. Although both traditional whole life insurance products and the newer plans of permanent insurance share characteristics that distinguish them from term life insurance products, the features and benefits of the various plans of permanent life insurance differ widely. Traditional Whole Life Insurance Whole Life Insurance provides lifetime insurance coverage at a level premium rate that does not increase as the insured ages. Insurers use the level premium system to price life insurance so that the premium rate does not increase as the insured's mortality rate increases. The insurance company invests the excess premium dollars it collects in the early years under the level premium system and accumulates assets that are at least equal to the amount of the policy reserve liability the insurer has established for those policies. As we have described, a permanent life insurance policy contains a savings element that is known as the policy's cash value. A policy that provides a cash value will include a chart that illustrates how the cash value will grow over time. If for some reason the policy does not remain in force until the CFP Level 3: Module 1 – Risk Analysis – India Page 242
insured's death, the insurer agrees to refund the cash value to the policy owner - less any surrender charges and outstanding policy loans. Because the policy owner generally has the right to surrender a permanent life insurance policy for its cash value during the insured's lifetime, the cash value is sometimes referred to as the surrender value or the cash surrender value. We describe the cash surrender value in more detail. Premium Payment Periods Whole life policies can be classified on the basis of the length of the policy's premium payment period. Most whole life policies are classified as either (1) continuous-premium policies or (2) limited-payment policies. Continuous - Premium Policies:- Under a continuous-premium whole life policy (sometimes referred to as a straight life insurance policy), premiums are payable until the death of the insured. Because premiums are payable over the life of the policy, the amount of each premium payment required for a continuous-premium whole life policy is lower than the premium amount required under any other premium payment schedule. Limited - Payment Policies:- A limited-payment whole life policy is a whole life policy for which premiums are payable only until some stated period expires or until the insured's death, whichever occurs first. The policy may describe the stated period over which premiums are payable in one of two ways. 1. The policy may state a specific number of years during which premiums are payable. For example, a 20-payment whole life insurance policy is a policy for which premiums for 20 years. 2. The policy may state an age after which premiums are no longer payable. For example, a paid-up-at- age-65 whole life insurance policy provides that premiums are payable until the insured reaches the policy anniversary closest to or immediately following her 65th birthday, at which time the premium payments cease but the coverage continues. In either case, if the insured dies before the end of the specified premium payment period, the insurer will pay the death benefit to the named beneficiary and no further premiums are payable. Limited-payment policies are designed to meet a policy owner's need for permanent life insurance protection that is funded over a limited time period. The policy owner, for example, may expect that her income will drop considerably when she retires, and yet she anticipates that she will still need life insurance coverage after retirement. CFP Level 3: Module 1 – Risk Analysis – India Page 243
Example: Amrita Saxena who has just turned 42, plans to retire at age 62, at which time her income will be reduced considerably. Amrita wishes to obtain permanent life insurance, but she is concerned that she will not be able to pay the premiums from her retirement income. She has, therefore, purchased a 20-payment whole life policy. Analysis: Amrita will make her last premium payment at age 61, at which time she will have a paid-up policy that will require no further premium payments but will provide life insurance coverage for the rest of her life. The insurer establishes the premium amounts required for a limited payment policy so that, at the end of the premium payment period, it has received sufficient premiums to keep the policy in force for the rest of the insured's lifetime. A policy that requires no further premium payments is said to be a paid-up policy. Because fewer annual premium payments are expected to be made for a limited-payment policy than for a comparable continuous- premium policy, the annual premium for the limited-payment policy is larger than the annual premium for an equivalent continuous-premium policy. Endowment Policy Endowment insurance provides a specified benefit amount whether the insured lives to the end of the term of coverage or dies during that term. Each endowment policy specifies a maturity date, which is the date on which the policy's face amount will be paid to the policy owner if the insured is still living. The maturity date is reached either (1) at the end of a stated term or (2) when the insured reaches a specified age. For example, the maturity date of a 20-year endowment policy is 20years following the policy's effective date; the maturity date of an endowment at age 65 policy is when the insured reaches age 65. If the insured dies before the maturity date, then the policy’s face amount is paid to the designated beneficiary. Thus, an endowment insurance policy pays a fixed benefit whether the insured survives to the policy's maturity date or dies before that maturity date. Endowment policies share many of the features of permanent life insurance policies. For example, premiums usually are level throughout the term of an endowment policy, although an endowment can be purchased with a single premium or with a series of premiums over a limited period of time. Example : Sum assured = 1 lacs, term of the policy = 20 years, premium = Rs.5000 p.a. Guaranteed simple reversionary bonus = Rs.60 per thousand sum assured The maturity of this policy will be = 1 lac + 60/1000 * 100000 * 20 = 220000 CFP Level 3: Module 1 – Risk Analysis – India Page 244
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