Risk Analysis

1. Policies like term assurance and annuity policies 2. Some Insurance don't extend the loan facility under money back policies; 3. Children's Deferred Assured policies during the deferment period. Policy is got assigned absolutely in favour of the Insurer at the time of payment of loan.  Assignment in favour of the insurer for the purpose of loan does not cancel existing nomination.  Interest on loan is payable as per terms of sanction of loan by the Insurer. Insurance Policy Document and Legal Implications Any insurance policy is an integrated contract in the form of an Agreement between the insured and the insurer. It is a policy of assurance subject to conditions and privileges of the policy document. A policy document is a standard, formal document which contains all the details of the insurance contract, under different sections. It lists the details of the insured (name, date of birth, address, contact details etc), the policy schedule, key covers under the policy, including the extensions and exclusions. It clearly mentions the free-look period, the benefits under the policy plan, rights of the CFP Level 3: Module 1 – Risk Analysis – India Page 295

insured, details of the policy cover and suicide exclusion clause amongst other general provisions. It also spells out the name of the product, its UIN (unique identification number) as listed under IRDAI. If the policy has been sold through the agency channel or an insurance agent their details are also mentioned in the policy document. The insurance contract is legally enforceable and both the parties to the contract are bound by the terms and conditions listed in the policy document during the entire term of the policy. The policy document is issued by the insurer once the first premium has been paid by the insured. Policy document is, in fact, a bible for the insured and the insurer. Important Segments in a Policy Bond / Schedule The Heading Preamble Operative Schedule Conditions & Privileges Clause Name & It introduces This section Express conditions Address of the parties to information Insurer the contract. It specifies the like SA, Policy related to rights & No., Premium perils covered Rate etc. duties of both the under the parties under the policy contract. 4.1 Preamble Preamble in an insurance policy is the declaration by the insurer. It is an introductory paragraph in a contract that identifies the type of agreement, the date on which the agreement is signed, parties to the agreement, their status (whether they are individuals or entities), and their addresses. It can be said to be a preliminary statement at the beginning of a statute, stating its purpose and explaining the reason for its enactment. In other words, the preamble simply says that the insurers will, in return for the premium, pay the losses or claims made under the policy. Most policies have a distinct preamble although some policies may not. Given below is one such Preamble for reference and understanding. “WHEREAS the insured ______ , named in the Schedule hereto by a proposal and declaration, which shall be the basis of this contract and is deemed to be incorporated herein, has applied to the ______ Insurance Company Limited (hereinafter called the Company) for the insurance hereinafter contained and has paid the premium as consideration for such Insurance in respect CFP Level 3: Module 1 – Risk Analysis – India Page 296

of accident or damage occurring during the period of Insurance stated in the Schedule or during any subsequent period for which the Insured pays and the Company may accept the premium for the renewal of this Policy.” 4.2 Operative Clause Operative Clause: The operative clause of the policy is a promissory clause. It is a promise that the insurer undertakes to pay the benefits of the policy to the insured if the reason(s) for which the policy was incepted happens while the policy is still in force. It is the single most important clause because it defines what is covered by the policy. The operative clause is framed as widely as possible. However, by way of an extension the insurer may offer covers that are wider than those mentioned in the operative clause. A typical Operative Clause in a general insurance policy would read like: “OPERATIVE CLAUSE: The Company hereby agrees subject to the terms, conditions and exclusions herein contained or endorsed or otherwise expressed hereon, to indemnify the Insured to the extent of the intrinsic value of the property of the Insured or member(s) of his family, so lost, destroyed or damaged, by Fire, Riot and Strike, Theft or Accident, from any fortuitous cause, any time during the period of this insurance and within the limits stated in the Schedule hereto, provided that the liability of the Company shall in no case exceed in respect of each item the sum expressed in the Schedule hereto to be insured thereon or in the whole the total sum insured hereby.” 4.3 Proviso Proviso denotes a condition, provision, specification included in an agreement deed, mortgage, lease or contract, the implementation or non-implementation of which affects the instrument’s validity. It usually begins with the word \"…..provided always that... .\". Simply put, it is a clause in a statute or contract upon whose compliance the application or validity of a legal document depends. For example, health insurance companies may impose provisos for additional insurance if they consider an applicant's health to be an unfavorable risk. 4.4 Schedule A schedule of insurance is that part of an insurance contract which sets out the details specific to the policy. It is issued by the insurer as part of the policy. It specifies details of the insured’s policy containing complete description of properties covered which are in force, the time CFP Level 3: Module 1 – Risk Analysis – India Page 297

period of cover against the properties explained, the coverage amount, the exclusions, the deductibles, and the mode of payment and schedule. Policy schedule is also known as a schedule of insurance. The purpose of a schedule of insurance is to clarify for the insurance company and the insured person precisely what is covered. A schedule is not a stand-alone document from the policy wording itself and should always be read in conjunction with the policy wording. A typical schedule in an insurance policy would look like: BASE POLICY – (Policy Name) TYPE OF POLICY – Non-Linked and Non-Participating Single Premium Group Term Insurance Plan OFFICE – POLICY NO: PROPOSAL NO: DATE OF PROPOSAL: DATE OF COMMENCEMENT OF RISK (Effective Date of Coverage): MASTER POLICYHOLDER: IDENTIFICATION SOURCE & I.D NO.: Details of Insured as at the Effective Date of Coverage: As per Register of Members provided by Master Policyholder ADDRESS (For all communication purposes): TEL. NO.: MOBILE NO.: EMAIL: Maturity Date: Date on which Survival Benefit is payable: NAME OF THE INSURANCE AGENT/ INSURANCE Intermediary: INSURANCE AGENT/ INSURANCE Intermediary LICENSE NO.: INSURANCE AGENT/ INSURANCE Intermediary CODE: ADDRESS: TEL. NO.: MOBILE NO.: EMAIL: Details of Sales Personnel (for direct sales only): 4.5 Attestation Attestation is the act of witnessing the signing of official document and then also signing it to verify that it was properly signed by those bound by its contents. Many a times, an attestation clause is a provision given in a legal document, normally located after the original signature. By signing the attestation clause, the signatories declare and confirm that everything within the clause is true and the document's legal requirements have been met. Mostly, an attestation is a third-party identification of a documented validity of the agreement. Attestations are usually related with agreements of great personal and monetary significance, especially legal documents. CFP Level 3: Module 1 – Risk Analysis – India Page 298

Insurance companies mandate attestation as a legal acknowledgement of the authenticity of a document and a verification that proper processes were followed in order for the document to be effective. 4.6 Conditions and Privileges All policy documents list down, under different sections, the terms and conditions of the policy to be followed by the policyholder. It also lists their rights and privileges as a customer of the policy. The motive is to educate the policy holder on all aspects of the product purchased by him. By doing this, the insurer expects the policy holder to maintain his policy for the entire term in a rightful way so that there are no claim denials or the policy does not lapse for lack of information. Given below are some of the important sections covered in the life insurance policy document:  Definitions of words and phrases used in the policy document  Benefits covered under the plan  Claim process  Premium payment  Provisions including suicide exclusion, free look period, fraud and misrepresentation  Assignment and nomination  Termination of policy  Dispute redressal process  Communication and notices  Governing laws and jurisdiction  Details of Ombudsman CFP Level 3: Module 1 – Risk Analysis – India Page 299

Chapter 5: General Insurance Definition of 'General Insurance' Definition: Insurance contracts that do not come under the ambit of life insurance are called general insurance. The different forms of general insurance are fire, marine, motor, accident and other miscellaneous non-life insurance. Description: The tangible assets are susceptible to damages and a need to protect the economic value of the assets is needed. For this purpose, general insurance products are bought as they provide protection against unforeseeable contingencies like damage and loss of the asset. Like life insurance, general insurance products come at a price in the form of premium. 1.0 Government and Private Insurance Companies General Insurance in India has its origin in 1850 in Calcutta by the British in the formation of Triton Insurance Company Ltd. In 1907, Indian Mercantile Insurance Ltd. was established, being the first company to transact all types of general insurance business. After that, in 1957 the General Insurance Council was formed which is a division of the Insurance Association of India. The General Insurance Council framed the code of conduct for safeguarding fair conduct and rigorous business practices. In the year 1968, the Insurance Act, 1938 was revised for regulating investments and setting minimum solvency margins. Subsequently in 1972, the general insurance industry was nationalized and 107 insurance companies were merged into four companies namely The New India Assurance Co. Ltd., The National Insurance Co. Ltd., The Oriental Insurance Co. Ltd. And CFP Level 3: Module 1 – Risk Analysis – India Page 300

The United India Insurance Co. Ltd. The General Insurance Company (GIC) was incorporated in 1972 itself and the other four companies became its subsidiaries. In the year 2000, GIC became the Indian Reinsurer and its regulatory role over its subsidiaries came to an end. Since 2003, GIC's role as a holding company of its subsidiaries also ended and the ownership of the subsidiaries was assigned to the Government of India. (Refer www.financialservices.gov.in) Till 1999, in India private insurance companies were not there. The government then introduced the Insurance Regulatory and Development Authority (IRDA) Act in the year 1999, thereby de-regulating the insurance sector and allowing private companies by setting a limit on Foreign Direct Investment (FDI) to 26%, which was later on increased in 2014 to 49% with the safeguard of Indian ownership and control. At present, there are four general insurance companies in the public sector and 30 private sector companies in India. Non-Life Insurance Put simply, non-life insurance is any type of insurance other than life insurance. While life insurance is broken down into permanent and term life policies, non-life insurance includes many types of other insurance policies. Non-life insurance may cover people, property or legal liabilities. Some common examples of non-life insurance include:  Auto insurance  Property insurance  Health insurance  Accident insurance CFP Level 3: Module 1 – Risk Analysis – India Page 301

 Travel insurance  Disaster insurance (fire, flood, earthquake, etc.)  Credit insurance  Mortgage insurance Difference between General Insurance and Life Insurance 1. Applicability of claim General Insurance Arun took a Fire Insurance Policy for his factory. The Sum Insured for the factory was Rs.1 cr and the premium was Rs. 10 lakhs. In case of fire or loss due to any peril, the insurance company will pay the claim amount after the deductible (as applicable). Life Insurance Arun took a Life Insurance Policy for Rs. 1 crore. He had to give an annual premium of Rs. 20000 for 50 years. After 10 installments, Arun met with an accident and passed away. Arun’s family received an amount of Rs.1 crore. The reimbursement under the life insurance is made either at the time of maturity or death. 2. Amount of Reimbursement General Insurance Sheela got her car insured for Rs.5 lacs. She got her car banged and her car’s bumper came off. The repair charges for the bumper was Rs.15,000/-. The insurance company will pay off the amount after the deductible. General insurance works as per the policy limits and conditions. Life Insurance Sheela chose to buy a Life Insurance Policy worth Rs.50 lakhs. The total time for which she had to deposit the premium was 10 years. After 10 years, she received Rs. 50 lakh. The Life Insurance Policy is an investment policy which is paid on maturity of the policy. CFP Level 3: Module 1 – Risk Analysis – India Page 302

3. Functional Period General Insurance Prakash bought a Fire Insurance for his factory and got the building, equipment, and other fixtures. The policy was issued on 2.03.2019 and will be renewed on 1.03.2020. The General Insurance Policies are issued for a period of 1 year. Life Insurance Prakash bought an Endowment Policy which will pay him some proceeds on the maturity or otherwise pay some amount to his family members in the event of Prakash’s death. The Life Insurance Policy is issued for Life Time or till the time of the maturity period. 4. Payment of Premium General Insurance Madhur bought a car and got its insurance also. The next year, he sold his car. He bought a bike and did not get the renewal for the car. Under the General Insurance Policy, the premium will be paid for one year till the renewal. Madhur sold his car and hence, no renewal or no payment of premium. Life Insurance Madhur bought a Money Back Policy for 20 years. He will have to pay the premium for 20 years with money being received after every 3 years. The premium will be paid till the total term of the policy, that is, 20 years. Under the Life Insurance Policy, the premium will be paid for the total term of the policy. 5. Insurable Interest General Insurance Rikant bought a Tata Safari in the year 2018. He got its insurance at the same time.The next year, he sold the car to Shweta and the policy was renewed again as the vehicle will be in use. The policy was renewed by Shweta and not Rikant. Under the General Insurance Policy, the insurable interest of the policyholder should be present at the time of renewal and the loss. CFP Level 3: Module 1 – Risk Analysis – India Page 303

Life Insurance Rikant took a Term Plan and got his policy issued from ABC Life Insurer. It is important for Rikant to be present at the time of contract. Under the Life Insurance the individual who has the insurable interest should always be present. 1.0 Individual Health Insurance “Health insurance is an insurance, which covers the financial loss arising out of poor health condition or due to permanent disability, which results in loss of income.” A health insurance policy is a contract between an insurer and an individual or group, in which the insurer agrees to provide specified health insurance at an agreed upon price (premium). It usually provides either direct payment or reimbursement for expenses associated with illness and injuries. The cost and range of protection provided by health insurance depends on the insurance provider and the policy purchased. A Health Insurance Policy would normally cover expenses reasonably and necessarily incurred under the following heads in respect of each insured person subject to overall ceiling of sum insured (for all claims during one policy period). a) Room, Boarding expenses b) Nursing expenses c) Fees of surgeon, anesthetist, physician, consultants, specialists d) Operation theatre charges, surgical appliances, diagnostic tests and materials, and similar expenses. Health insurance policy can be obtained by an individual for herself / himself, her / his family, or by a group. An individual health insurance is a cover for an individual that takes care of the hospitalization expenses of the individual covered subject to maximum of overall limit of the policy sum insured.  Sum Insured The Sum Insured offered may be on an individual basis or on floater basis for the family as a whole.  Eligibility The eligibility as per the age factor varies from insurer to insurer, from as young as 3 months to 80 years and above. CFP Level 3: Module 1 – Risk Analysis – India Page 304

 Cumulative Bonus (CB) Health Insurance policies may offer Cumulative Bonus wherein for every claim free year, the Sum Insured is increased by a certain percentage at the time of renewal subject to a maximum percentage (generally 50%). In case of a claim, CB will be reduced by 10% at the next renewal.  Cost of Health Check-up Health policies may also contain a provision for reimbursement of cost of health check up.  Minimum Period of stay in Hospital In order to become eligible to make a claim under the policy, minimum stay in the Hospital is necessary for a certain number of hours. Usually this is 24 hours. This time limit may not apply for treatment of accidental injuries and for certain specified treatments. Portability Portability is the right accorded to an individual health insurance policyholder (including family cover), to transfer the credit gained for pre-existing conditions and time bound exclusions, from one insurer to another insurer or from one plan to another plan of the same insurer, provided the previous policy has been maintained without any break. Moving between policies of the same company itself has been excluded.  Cashless Facility Insurance companies have tie-up arrangements with a network of hospitals in the country. If policyholder takes treatment in any of the net work hospitals, there is no need for the insured person to pay hospital bills. The Insurance Company, through its Third Party Administrator (TPA) will arrange direct payment to the Hospital. Expenses beyond sub limits prescribed by the policy or items not covered under the policy have to be settled by the insured direct to the Hospital. The insured can take treatment in a non-listed hospital in which case he has to pay the bills first and then seek reimbursement from Insurance Co. There will be no cashless facility applicable here.  Pre and Post Hospitalization Expenses Expenses incurred during a certain number of days prior to hospitalization and post hospitalization expenses for a specified period from the date of discharge may be considered as part of the claim provided the expenses relate to the disease / sickness.  Additional Benefits and Other Stand Alone Policies Insurance companies offer various other benefits as “Add-ons” or riders. There are also CFP Level 3: Module 1 – Risk Analysis – India Page 305

stand alone policies that are designed to give benefits like “Hospital Cash”, “Critical Illness Benefits”, “Surgical Cash Benefit”, etc. These policies can either be taken separately or in addition to the hospitalization policy. The Hospital Daily Cash Benefit Policy, provides a fixed daily sum insured for each day of hospitalization. There may also be coverage for a higher daily benefit in case of ICU admissions or for specified illnesses or injuries. A Critical Illness benefit policy provides a fixed lumpsum amount to the insured in case of diagnosis of a specified illness or on undergoing a specified procedure. There are also other types of products, which offer lumpsum payment on undergoing a specified surgery (Surgical Cash Benefit), and others catering to the needs of specified target audience like senior citizens. A few companies have come out with products in the nature of Top Up and Super Top Up policies to meet the actual expenses over and above the limit available in the basic health policy.  Tax Benefits In order to promote health insurance, the Government gives certain tax incentives to policyholders. These benefits could be in the form of a tax rebate or by allowing the premium paid to be deducted from the income for tax calculations. An important incentive is that the premium paid for health insurance policy qualifies for tax benefit under section 80D of Income Tax Act upto the limits specified.  Domiciliary Hospitalization Certain insurance products offer domiciliary hospitalization benefits. This generally refers to medical treatment for a period exceeding three days for such illness / injury which in the normal course would require treatment at the hospital / nursing home, but was actually taken whilst confined at home in India under any of the following circumstances namely: (i) The condition of the patient is such that she / he cannot be moved to the hospital / nursing home or (ii) The patient cannot be moved to hospital / nursing home for lack of accommodation therein It excludes certain chronic diseases like asthma, diabetes, hypertension, or common diseases like cough, cold, flu, dysentery etc. Many companies feel that domiciliary hospitalisation covers are not of much practical use and have withdrawn this cover. Domiciliary hospitalization limit is fixed at a certain percentage of the total sum insured. This amount is within the overall limit of sum insured. CFP Level 3: Module 1 – Risk Analysis – India Page 306

The premium is related to the age of the person and the sum insured selected. It is based on assessment of risk status of the consumer (or of the group of employees) and the level of benefits provided, rather than as a proportion of consumer’s income.  Factors that Affect Health Insurance Premiums Age is a major factor that determines the premium. Health insurance premiums increase with ageas in older age one is more prone to illness. Previous medical history is another major factor that determines the premium. If no prior medical history exists, premium will automatically be lower. Claim free years can also be a factor in determining the cost of the premium as it might benefit you with certain percentage of discount. This will automatically help you reduce your premium. 1.2 Family Floater Policy Family Floater is one single policy that takes care of the hospitalization expenses of the entire family. The policy has one single sum insured, which can be utilised by any/all insured persons in any proportion or amount subject to maximum of overall limit of the policy sum insured. Quite often Family floater plans are better than buying separate individual policies. Family Floater plans take care of all the medical expenses during sudden illness, surgeries and accidents. Family Floater health insurance policy is a comprehensive health insurance for covering the family members with one sum insured. Floater benefit means the Sum Insured as specified for the proposer under the policy, is available for any or all the members of his /her family for one or more claims during the tenure of the policy. Family includes Self, Spouse, Dependent Children (91 days to 21years), Parents. Some policies also include parents-in-law and siblings. The coverage under the policy is the same as under Individual Health Insurance. Floater policy is suitable for young family with lower health risk. It is less expensive than Individual Policy. For example, a family consists of self, spouse and two children purchases health insurance of ₹5 lakh. Under the floater policy, any or all family member(s) can avail the medical expense claim of upto₹5 lakh. In case of only one claim per year, the family member gets a greater claim amount compared to what he might have on an individual cover in an Individual Health Insurance Plan. But, if there is more than one claim in a family in a year, the other family members are left with little cover. Floater Policy can be renewed only till the senior most member of the family reaches the CFP Level 3: Module 1 – Risk Analysis – India Page 307

maximum age of renewability allowed by the particular insurance company, which is usually 65 to 70 years. 1.3 Critical Illness Policy Critical illness insurance or critical illness cover is an insurance product, where the insurer is contracted to typically make a pre-determined lump sum cash payment if the policyholder is diagnosed with one of the critical illnesses listed on an insurance policy. The policy may also be structured to pay out regular income and the payment may also be on the policyholder undergoing a surgical procedure, for example, having a heart bypass operation. The contract terms contain specific rules that define when a diagnosis of a critical illness is considered valid. This policy can be either taken as a standalone policy or in addition (as a rider) with a health or life insurance policy. 1.4 Group Health Insurance Policies The Group Health Insurance Policy is available to any Group / Association / Institution / Corporate body of more provided it has a central administration point and subject to a minimum number of persons to be covered. The group policy is issued in the name of the Group/Association/Institution/Corporate Body (called insured) with a schedule of names of the members including his/her eligible family members (called insured persons) forming part of the policy. The details of insured person are required to furnish a complete list of Insured Persons in the prescribed format according to sum insured. Any additions and deletions during the currency of the policy should be intimated to the company in the same format. However, such additions and deletions will be incorporated in the policy from the first day of the following month subject to pro-rata premium adjustment. No change of sum insured for any insured person will be permitted during the currency of the policy. No refund of premium is allowed for deletion of insured person if he or she has recovered a claim under the policy. CFP Level 3: Module 1 – Risk Analysis – India Page 308

The coverage under the policy is the same as under Health Insurance Policy with the following differences:-  Cumulative bonus and Health Checkup expense are not payable.  Group discount in the premium is available  Renewal premium is subject to claims made during the previous policy .  Maternity benefit extension is available at extra premium. Group Discount The group discount is allowed according to scale depending upon the total number of insured persons covered under the group policy at the inception of the policy. Low Claim Ratio Discount (Bonus) Low Claim Ratio Discount is allowed on the total premium at renewal only depending upon the incurred claims ratio for the entire group. High Claim Ratio Loading (Malus) On the same basis of incurred claims ratio, loading is applied to the renewal premium for adverse claims experience. 1.5 Pre-Existing Disease Clause and Other Provisions Pre-existing Disease Clause It is a medical condition/disease that existed before you obtained health insurance policy, and it is significant, because the insurance companies do not cover such pre-existing conditions, within 48 months of prior to the 1st policy. It means, pre-existing conditions can be considered for payment after completion of 48 months of continuous insurance cover. Exclusions The following are generally excluded under health policies: a) All pre-existing diseases (the pre - existing disease exclusion is uniformly defined by all non-life and health insurance companies). b) Under first year policy, any claim during the first 30 days from date of cover, for sickness / disease. This is not applicable for accidental injury claims. CFP Level 3: Module 1 – Risk Analysis – India Page 309

c) During first two year of cover – cataract, Benign prostatic hypertrophy, Hysterectomy for Menorrhagia or Fibromyoma, Hernia, Hydrocele, Congenital Internal diseases, Fistula in anus, piles, sinusitis and related disorders. d) Circumcision unless for treatment of a disease e) Cost of specs, contact lenses, hearing aids f) Dental treatment / surgery unless requiring hospitalization g) Convalescence, general debility, congenital external defects, V.D., intentional self-injury, use of intoxicating drugs / alcohol, AIDS, Expenses for Diagnosis, X-ray or lab tests not consistent with the disease requiring hospitalization. h) Treatment relating to pregnancy or child birth including cesarean section i) Naturopathy treatment. The actual exclusions may vary from product to product and company to company. In group policies, it may possible to waive / delete the exclusions on payment of extra premium. Taxation Aspect of Health Insurance Policies – Individuals, Family and dependent Senior Citizens Every individual can claim a tax deduction under Section 80D of the Income Tax Act, 1961, for his health insurance which is paid from his total income in any given year. One can also take the benefit of tax deduction by purchasing the health insurance policy to insure their spouse, dependent children and parents. These policies can be individual plans or a family floater. The children must be dependent on the parents for their insurance premium to be eligible for deduction. Health insurance premiums paid by parents for children who are not dependent on them are not allowed as a deduction for the parent. Section 80D: The quantum of tax benefit depends on the age of the individual who is insured. Explained below is the limit available under section 80D as applicable across various age groups. No one over 60: In case no one in the family i.e. self, spouse and children, is over the age of 60, then deduction is available up to Rs. 25,000 only. For health insurance premium paid for the parents below the age of 60, the deduction is available up to Rs. 25,000. Hence total deduction which one can claim in income tax is up to Rs. 50,000. Either parent over 60: In case only one of the parents is over the age of 60, deduction of up to Rs. 50,000 paid towards health insurance premiums for the parents is allowed. Also, premium paid for the family i.e. self, spouse and children, continues to be deductible up to Rs. 25,000, thereby making the total deduction available up to Rs. 75,000 in a year. CFP Level 3: Module 1 – Risk Analysis – India Page 310

Eldest family member over 60: Where one family member i.e. self, spouse or children, is over the age of 60, one can claim up to Rs. 50,000 in tax benefit on health insurance. Additionally, for parents over the age of 60, health insurance is also allowed up to Rs. 50,000 in deduction. So, total deduction in this case can be up to Rs. 1 lakh a year. Super-senior citizens (80 years or above): Such citizens who do not have any health insurance policy can claim a deduction up to Rs. 30,000 every financial year towards medical check-ups and treatments. Preventive Health Check-up Any payment made towards preventive health check-ups entitles the taxpayer to a deduction of up to Rs. 5,000, above the overall limit of Rs. 25,000 / Rs. 50,000 as the case may be. This deduction can be claimed by either individual for himself, spouse, children who are dependent or parents. Cash payment is also accepted for preventive health check-up. One can claim a health check-up deduction up to Rs. 5,000 inclusive of all the dependents in his or her family. However, this facility is not available independently for every individual family member. HUF Just like individual taxpayers, an HUF can also claim a deduction under section 80D for a health insurance taken for any of the members of the HUF. This deduction will be Rs. 25,000 for the insured member whose age is less than 60 years, and will be Rs. 50,000 for the insured of 60 years of age or more. The above deductions can be summarized as below: Persons Covered Exemption Limit Health Check –Up Total Exemption Rs. 25,000 Self and Family Rs. 25,000 Rs. 5000 Rs. 55,000 Rs. (25,000 +25,000) = Rs. Rs. 5,000 Rs. 60,000 Self and Family + 50,000 Rs. (25,000 +30,000) = Rs. Rs. 5,000 Rs. 65,000 Parents 55,000 Rs. 5,000 Self and Family + Rs. (30,000 +30,000) = Rs. 60,000 senior citizen parents Self (senior citizen) and family + senior citizen parents Section 80DD – Deduction for Rehabilitation of Handicapper’s Dependent Relative CFP Level 3: Module 1 – Risk Analysis – India Page 311

Deduction under this section is available to a resident individual or a HUF on: (a) Expenditure spent on medical treatment (which includes nursing), training and rehabilitation of a handicapped dependent relative (b) Deposit or payment to stated scheme for care of handicapped dependent relative: (i) Where disability is between 40% and less than 80% – fixed deduction of Rs. 75,000. (ii) Where disability is 80% or more – fixed deduction of Rs. 1,25,000. Disability certificate shall be required from an approved medical authority for claiming deduction under this section. Section 80DDB - Deduction for Medical Expenditure either on Self or Dependent Relative a. For individuals and HUFs whose age is below 60 years: A deduction up to the extent of Rs. 40,000 can be availed by a resident individual or a HUF. The deduction can be availed for the expenses incurred for the treatment of specified medical diseases or illnesses for himself or his dependents. In case of an HUF, such a deduction is available for medical expenses incurred for these prescribed ailments for any HUF members. b. For senior citizens and super senior citizens: In case the individual on behalf of whom such expenses are incurred is a senior citizen, including super senior citizens, the deduction up to Rs. 1 lakh can be claimed by HUF or individual taxpayer. However, one needs to get a prescription for such medical treatment from the concerned doctor / specialist in order to claim such a deduction. The deductions can only be claimed if one pays the premium for his or her dependent children and not for independent children. Also, the premiums paid for health insurance availed by brothers/sisters do not qualify for tax deductions. Whereas the deduction can be claimed even when the parents and spouse are not dependent. Single Premium Health Insurance Policies Under Section 80D, where the taxpayer has made a premium payment in lump sum in a year for a policy which is valid for more than one year, he can claim a deduction of the proportionate amount. The appropriate fraction is arrived by dividing the lump sum premium paid, by the number of years of the policy. However, this is subject to the limits of Rs. 25,000 or Rs. 50,000 as the case may be. CFP Level 3: Module 1 – Risk Analysis – India Page 312

Key Points o Contribution towards health insurance plan has to be made to a scheme as specified by the Central Govt. /IRDAI. o All premium payment modes are accepted by the insurer, except cash. Also, third party premium payments are not acceptable. o Senior citizen is defined as an individual resident of India whose age is 60 years or more during the related financial year. o The deduction cannot be claimed if the premium is paid for grandparents, brother, sister, aunts, uncles or any other relative. o Premium paid for working children is not eligible for claiming deduction under this section. o In the case of part payment by the insured and a parent, both can claim a deduction to the extent paid by each. o The deduction has to be taken for the premium without showing the GST from the premium amount. o For claiming deduction, premium payment receipt and policy copy which confirms the family member’s name and age and their relation should be preserved. Taxation Aspect of Group Health Insurance Policies for Corporates A group or corporate health insurance policy is purchased by an employer for eligible employees of a company as one of the key employee benefit packages. In certain instances, health insurance policy is part of an employer’s statutory obligations. Group health insurance plans may also provide cover to family members of employees. These plans are designed to include and exclude members as they join and leave the company. These policies are generally low in premiums due to the reduced risks involved. These plans allow lenience in covering pre-existing illnesses amongst other things. Tax benefit: Employers get taxation benefits on a group health insurance, as the policy can help in decreasing their tax liability. The employee should be in active employment for being eligible for taking policy benefits under group health. The tax deduction can be availed for the premium CFP Level 3: Module 1 – Risk Analysis – India Page 313

being paid by the employer. The company lists this amount as an expense for employee benefit in their financial statements. However, Group Health Insurance premium provided by the company is not eligible for deduction by the employee. 1.6 Personal and Group Accident Insurance Personal accident insurance is an insurance cover that provides fixed compensation for death or disablement resulting from accidental bodily injury. The personal accident insurance policy provides that, if at any time during the currency of this policy, the insured (person who has taken the policy) shall sustain any bodily injury resulting solely and directly accident caused by external violent and visible means, then the insurance company shall pay to the insured or his legal personal representative(s), as the case may be, the sum or sums set, forth, in the policy, if resulting in specified contingencies such as death, permanent disablement etc. Let us understand the words highlighted in bold above:  Bodily injury: Any disease due to accident is known as bodily injury but does not include any disease due to natural cause. Mental shock or grief does not amount to accident unless and until some physical injury is caused. However, it is noticed that due to grief if some disablement i.e paralysis is taking place and the same is covered under this policy.  Solely & Directly: The bodily injury shall have been caused solely and directly by an accident and the bodily injury must directly and independent of any other cause result in death or disablement. Example: (i) A person while riding a horse, fell on the ground and had his leg broken, he was lying on the wet ground for a long time before he was taken to hospital. Because of lying on the wet ground, he had fever that developed into pneumonia and he died. Though he died because of pneumonia but the actual cause was an accident and it covered under personal accident insurance policy. (ii) If a person meets with an accident and was taken to hospital where he contracts an infectious disease from another patient which results in to death and the same will not be covered under the personal accident insurance policy. CFP Level 3: Module 1 – Risk Analysis – India Page 314

 Accident: An accident is an event which is wholly unexpected not intended or designed. For eg: Snake biting, drowning suicide and unprovoked murder are covered under this policy.  External, violent and visible means: The cause of accident i.e. the means must be within the definitions as a whole but the result may not be external. In other words the means or cause of accident must be within the definitions but the result or effect need not be external or visible so long as it is bodily injury e.g. injury may be internal i.e. inside the body but the result must be death or disablement.  Disablement: When a person is prevented by an accidental bodily injury from engaging in any occupation or business he is said to be disabled and his ability to attend to any occupation or business is call disablement. Scope of Cover Personal Accidental policy covers accidental death, loss of limbs, permanent total and partial disablement as selected and granted by the insurance companies based on the underwriting norms.  Permanent Total Disablement: Disablement is of permanent and irrecoverable nature and is absolutely total, in the sense that the insured person is prevented from engaging in gainful employment of any kind (e.g. paralysis).  Permanent Partial Disablement: This is similar to permanent total disablement with the difference that, the disablement is not total but is only partial (e.g. loss of a toe or a finger).  Temporary total disablement: This is a disablement which is total but for a temporary period only (e.g. fractures). Sum Insured Sum insured is based on various factors such as income from gainful employment, type of occupation, age as on date of proposal, period of insurance, Conditions prevailing at the place from where the proposal is made etc. The sum insured offered by a company can be a fixed amount like ₹5 lacs for death or ₹2 lacs for loss of both legs. It can also be based on the insured’s income. Some insurance companies may give a benefit equal to 60 times or 100 times of the insured’s monthly income for a particular disability. Some other policies may instead give 8 to 10 times of yearly income. There could be an upper limit or cap on the maximum amount payable. The dependant family members can also be covered for [a certain percentage of the total sum insured could be fixed]- CFP Level 3: Module 1 – Risk Analysis – India Page 315

dependent child / dependent spouse. The terms of P.A. policies and compensations can vary from company to company and policy to policy. It is very difficult to put a value to human life; hence the principle of indemnity cannot be strictly applied in PA policies. However it becomes necessary to apply some yardstick for fixing the sum insured so that human lives are not overvalued for ulterior motives. Being a benefit plan, principal of contribution does not apply to PA policies. Thus, if a person has more than one policy with different insurer, in the event of accidental death, PTD, PPD, claims would be paid under all the policies. As the value of a lost life or a lost limb cannot be estimated or indemnified, the amounts payable for such disabilities are termed as `benefits’ or ‘compensations’. Premium The premium calculation may depend on various factors like age, number of family members and occupation of the insured which may be classified as low, medium and high risk levels by the insurers depending on the hazard involved. For instance, doctors and office executives are considered low risk while someone working on a construction site would be considered as high risk. Medical Expense Extension Policy can be extended to cover medical expenses on payment of additional Premium. Special Features The cover is for 24 hours and on a worldwide basis. Additional Benefits without Additional Premium  Education Fund: in case of death or permanent total disablement of the insured person due to accident, in addition to the compensation certain percentage of the sum insured is paid towards the education of the dependent children.  Expenses for Carriage of dead body: in case of the death of the insured away from his/her place of residence due to accident, such expenses for carriage of the dead body to the place of residence are paid upto the specified maximum limit. CFP Level 3: Module 1 – Risk Analysis – India Page 316

 Cumulative bonus: at the time of renewal of the policy, in case of no claim having been reported under the earlier policy, then the policyholder is entitled to an increase in the compensation payable for death and permanent disablement by 5% each year up to a maximum of 50% of CSI. Exclusions (Not Covered Under Personal Accident Insurance Policy)  No compensation is payable in respect of death, injury or disablement of the insured  From intentional self-injury, suicide or attempted suicide.  Whilst under the influence of intoxicating liquor or drug  Whilst engaging in Aviation or Ballooning whilst mounting into, dismounting from or traveling in any balloon or aircraft other than as passenger (fare paying or otherwise) in any duly licensed standard type of aircraft anywhere in the world  Directly or indirectly caused by venereal diseases or insanity  Arising or resulting from the insured committing any breach of law with criminal intent.  From service in the armed forces  Resulting directly or indirectly from child birth or pregnancy. Group Personal Accident Policy Personal Accident Policies are also issued to group of persons that are already in existence for a common purpose, which is other than insurance. These groups must have a centre that can administer the cover. For instance, employees of a company are a group that has been constituted for a purpose other than insurance. The employer is the administrator of the policy. In such group policies, the insured is usually an entity like an employer, a bank, a society or the like. Insured persons would be employees, deposit holders, registered members etc. For example, a bank may take a personal accident cover for all its account holders. For group policies, the sum insured is fixed separately for each insured person. The coverage, exclusions, provisions are usually similar to that of individual covers except cumulative bonus and education grant do not apply. However, medical expenses and war risks extensions are available. Many insurers give group discounts to group policies, depending on the size of the group. CFP Level 3: Module 1 – Risk Analysis – India Page 317

AGRICULTURE INSURANCE Agriculture sector holds a significant position in the Indian economy. Conditions like variations in weather, pest attack, erratic rainfall and humidity affecting agricultural produce is a common problem in India. Thus, it is important to get a coverage in the form of crop insurance for the yield and yield-based losses. Crop insurance is a way to reduce farmers’ distress and to promote their welfare. What is Crop Insurance? Crop Insurance is a comprehensive yield-based policy meant to compensate farmers’ losses arising due to production problems. It covers pre-sowing and post-harvest losses due to cyclonic rains and rainfall deficit. These losses lead to reduction in crop yield, thus, affecting the income of farmers. In India, crop insurance is offered in the form of Pradhan Mantri Fasal Bima Yojna. What is Pradhan Mantri Fasal Bima Yojna? Pradhan Mantri Fasal Bima Yojna is a crop insurance scheme sponsored by the Government of India. The policy was launched in 2016. It aims to provide financial aid to farmers in case of crop loss or damage. Thus, it helps to reduce farmers’s stress and keep them motivated to continue with farming as an occupation. The risks covered in the scheme include prevention of sowing or planting of seeds, damage to the standing crop due to non-preventable risks like drought, flood, landslide, etc. along with post-harvest losses. Types Of Crop Insurance Crop insurance is categorised into 3 types:  Multiple Peril Crop Insurance: Provides financial coverage to manage risks arising from weather-related losses, such as a flood, drought, etc.  Actual Production History: Covers losses due to wind, hail, insects, etc. Also includes coverage for lower yield and compensates for the difference between the estimate and the real  Crop Revenue Coverage: This is based not only on the crop yield but on the total revenue generated from this yield. In case of a drop in crop price, the difference is covered by this type of crop insurance What Crop Insurance Covers? Following stages of the crop loss are covered under crop insurance: CFP Level 3: Module 1 – Risk Analysis – India Page 318

 Localised calamities: It covers localised calamities and risks like hailstorm, landslide affecting isolated farms in the notified area  Sowing/Planting/Germination risk: Any problem in planting or sowing because of deficit rainfall or adverse seasonal conditions  Standing crop loss: Comprehensive risk insurance to cover yield losses because of non-preventable risks, such as dry spells, flood, hailstorm, cyclone, typhoon  Post-harvest losses: It covers losses for up to a maximum period of two weeks from harvesting How Crop Insurance Functions?  Policy seeker can get his food crops, oil seeds, annual commercial crops insured under crop insurance by submitting the required documents and paying the premium accordingly  But one must choose a policy after evaluating the risks and comparing the different policies and companies  Sum insured will be decided on various factors, such as the type of crop, location, and calamity years in that area and historical yield data  In case of crop loss, the insured needs to intimate the insurance company or local agriculture department within 72 hours of calamity  Claims under crop insurance are done on the basis of localised losses, post-harvest loss, mid-season calamity and wide spread calamities. Hence, the pay-out will be calculated taking factors like weather and yield per hectare Eligibility Criteria  Crop Insurance can be availed by the farmers including share croppers and tenant farmers provided they are growing the notified crops in the area  Non-Loanee farmers are also eligible to avail benefits under crop insurance upon providing land documents  Two more categories are identified in which the farmers can receive the perks. These are also called Types of Coverage Components and they are: Compulsory Component: If farmers have applied for Seasonal Agriculture Operations (SAO) credit or loans from the financial institution for the notified crops, they will be covered compulsorily CFP Level 3: Module 1 – Risk Analysis – India Page 319

Voluntary Component: Crop Insurance is option for those farmers who fall under non-loanee farmers. If they wish to, they can register and avail benefits from the government scheme Claim Process There are two scenarios in which the claim can be processed – I) Wide Spread Calamities and II) Local Calamities, In the first case, the company would work out the claim settlement once the government puts forth actual yield data. The company would directly settle the claim with the insured without any intimation from the policyholder. In the case of local mishap, the insured (i.e. the farmer) is required to intimate to the company not later than 24 hours of the event. This can either be done via concerned financial institution or directly. Trade Credit Insurance Trade Credit Insurance also known as Credit insurance is a risk management tool that covers the payment risk resulting from the delivery of goods or services. Under this policy credit insurer usually covers a portfolio of buyers and pays an agreed percentage of an invoice or receivable that remains unpaid as a result of insolvency, bankruptcy or protracted default. For e.g. An Indian toy manufacturer sells toys on credit to International Clients. It seeks protection against payment delays and non-payment by its buyers. A “Whole turnover” trade credit insurance policy, which covers all of the toy manufacturer’s buyers, the “good, the bad”, is the solution . In exchange for a premium, which is based on the annual turnover and credit risk of its buyers, the toy manufacturer receives protection up to an agreed percentage of any losses incurred against late payment or the failure to pay by its buyers. COVERAGE: The policy has been designed to cover insured against the commercial risks of their buyer’s default . Under this policy we will cover the portfolio of buyers and pay an agreed percentage of an invoice or receivable that remains unpaid as a result of covered causes of loss. The causes of loss covered under this policy are:  Insolvency - protect your business against the risk of non-payment if a buyer becomes insolvent.  Protracted Default – when buyer fails to pay the receivable within a pre-defined period calculated from the due date of payment of the receivable. CFP Level 3: Module 1 – Risk Analysis – India Page 320

 Political Risks - In case of exports cover, the Insured also has an option to cover Political Risks which covers non- payment due to:  Moratorium  Transfer Restriction / Inconvertibility  War  Import/ Export Restriction  Natural Disaster License Cancellation What’s not covered? Radioactive Contamination Disputes with the buyer resulting withholding of partial or full payment . Cost incurred in resolving disputes between the insured and the buyer. Any penalties or damages buyer entitled to pay. Any interest accruing after the original due date of payment Banking cost, unless contractually agreed to be part of the amount owing from the buyer Benefits of Trade Credit Insurance Protects the company’s P&L and Balance Sheet against bad debt Potentially reduce and quantify bad debt provisions Better borrowing and financing options Increase profitability Grow sales with confidence Prevent losses before they occur Maintain cash flow, profitability and protect budgets and business plans Information, screening of clients. Improve credit decisions Protects investors and stakeholders CFP Level 3: Module 1 – Risk Analysis – India Page 321

Export Credit Guarantee Corporation of India Limited (ECGC) ECGC Ltd. (Formerly known as Export Credit Guarantee Corporation of India Ltd.) wholly owned by Government of India, was set up in 1957 with the objective of promoting exports from he country by providing credit risk insurance and related services for exports. Over the years it has designed different export credit risk insurance products to suit the requirements of Indian exporters. ECGC is essentially an export promotion organization, seeking to improve the competitiveness of the Indian exports by providing them with credit insurance covers. The Corporation has introduced various export credit insurance schemes to meet the requirements of commercial banks extending export credit. The insurance covers enable the banks to extend timely and adequate export credit facilities to the exporters. ECGC keeps its premium rates at the optimal level. ECGC provides (i) a range of insurance covers to Indian exporters against the risk of non – realization of export proceeds due to commercial or political risks (ii) different types of credit insurance covers to banks and other financial institutions to enable them to extend credit facilities to exporters and (iii) Export Factoring facility for MSME sector which is a package of financial products consisting of working capital financing, credit risk protection, maintenance of sales ledger and collection of export receivables from the buyer located in overseas country. REINSURANCE: Reinsurance means an-insurance for insurance companies. Insurance companies cover the risks for individuals and businesses. Reinsurance covers the risk of excessive claims due to different reasons for insurance companies. Insurance is an agreement between two parties where one party agrees to compensate the other party in case of specified loss or damage. For term life insurance, the benefits are paid out when the policyholder dies. For other general insurance policies such as crop insurance, motor insurance, travel insurance, fire insurance, the sum assured is paid out when the specified loss or damage occurs. An insurance company works on the concept of collective risk. It collects premium from a number of parties on the assumption that only a certain percentage of the population will lodge claims in a particular year. These depend on actuarial calculations which determine the risk that the company agrees to underwrite. In some cases, the insurance company estimates a higher than normal payout, and spends a portion of the premium to get reinsurance. CFP Level 3: Module 1 – Risk Analysis – India Page 322

But what is reinsurance? Reinsurance is insurance but for insurance companies. It is a type of insurance that an insurance company takes to mitigate and reduce their exposure to a particular risk. If a general insurance company takes reinsurance against loss due to floods in the monsoons in India, and if it incurs claims on that account, it can claim from the reinsurance company. In reinsurance, the party that is sharing the loss is called the ceding party. The party that is covering the loss is called the reinsurer. Types of reinsurance: There are two types of reinsurance: 1. Treaty reinsurance: Under this type of reinsurance, the reinsurer agrees to cover all risks of the insurance company for a specified period. These apply to policies written and to those that have not been written. Treaty reinsurance can be risky for the reinsurer especially if they have not assessed the risks carefully. 2. Facultative reinsurance: Under facultative reinsurance, the reinsurer underwrites the risk for each policy as a single transaction. The policies are not grouped together. This works out in the favour of the reinsurer since they can evaluate the risk for each policy separately and then insure a part or whole of the policy. Treaty reinsurance and facultative reinsurance can be either proportional or non-proportional. Under proportional reinsurance, the reinsurer agrees to receive a portion of the premium collected for the policies whose risk it assumes. If the proportion is 60%, it would mean that 60% of the premiums collected by the ceding party have to be paid to the reinsurer to insure the risk. Most of the treaty reinsurance policies are proportional reinsurance policies. Non-proportional reinsurance is also called “excess of loss” type of insurance. This is activated when the losses from a particular policy or a particular loss or damage exceed a particular amount. How does reinsurance maintain the stability of the insurance industry? Reinsurance helps insurance companies to restrict the loss to their balance sheets, and in that sense, helps them to stay solvent. By sharing the risk with a reinsurer, insurance companies ensure that they can honour all the claims related to a particular risk. Reinsurance helps insurers to manage their risks and to better their underwriting practices, especially since reinsurers can opt for facultative reinsurance and cherry pick insurance policies. CFP Level 3: Module 1 – Risk Analysis – India Page 323

The main reason for opting for reinsurance is to limit the financial hit to the insurance company’s balance sheet when claims are made. This is particularly important when the insurance company has exposure to natural disaster claims because this typically results in a larger number of claims coming in together. A major disaster such as a cyclone, earthquake or flood can cause a large number of claims from a certain area. If the insurance company has a reinsurance contract, it will get some portion of the claim reimbursed from the reinsurance company, and thus will avoid huge losses. Liability Insurance – Legal Liability Policies Liability insurance provides protection to an individual and/or business against the risks that they may be held legally liable. Liability insurance offers protection to the insured against claims resulting from malpractice, injury, negligence and damage to people or property. The insurance company compensates the costs for which the insured party would be responsible if found legally liable. A liability insurance policy is most suitable to cover the business owners, professionals and self-employed people. It covers two main financial risks – (a) the legal cost of defending a claim, and (b) the compensation required to be paid. There are three forms of liability insurance:  Public liability  Professional indemnity  Product liability 2.0 Public Liability Public liability insurance covers costs from legal action if any individual or entity is found liable for injury or death of another person, economic loss, or damage of property of another person resulting from any negligence on their part. Though liability insurance is optional it is recommended for businesses as the likelihood of being sued for negligence is very high, and costly as well. So, purchasing this policy proves prudent. For example, in public events, liability insurance is compulsory and is also checked by the licensing authority. CFP Level 3: Module 1 – Risk Analysis – India Page 324

Irrespective of whether it is mandatory or not, many companies procure liability insurance to avoid financial risk. Most times small industries do not purchase these policies as the premium amount could be high. Further, in all cases where risk is exceptionally high, insurers either refuse to insure these liabilities or charge an excessive premium. Public liability insurance does not cover people or establishments involved in hazardous and criminal activities. 2.1 The Public Liability Insurance Act, 1991 Hazardous industries pose risks from accidents not only to the persons employed but also to the public living in the vicinity. While the employees are protected under various laws, members of the public have to go through a long legal process for any compensation. More often, such people are from economically weaker sections of the society. To bring some relief to the sufferings of the public due to accidents in hazardous installations, Public Liability Insurance was made mandatory and Public Liability Insurance Bill was introduced in the Parliament. The Public Liability Insurance Act, 1991, provides for mandatory Public Liability Insurance. Under Section 4 of the Act, every owner, before starting to handle any hazardous substance, has to take Public Liability Insurance policies covering liabilities. This is meant to provide immediate relief to any person suffering injury or death or damage to property and for other incidental and connected matters. Some of the provisions under the Act are as below: Application for Relief: An application for relief shall be made by the victim to the Collector within 5 years of the accident. He shall also give notice to the owner and the insurer, while giving them an opportunity of being heard. The Collector shall make the award determining the amount of relief payable. The victim can approach the Court for higher compensation. Establishment of Relief Fund: The Central Government is empowered under Section 7A of the Act to establish an Environment Relief Fund by notification in the official Gazette. This fund is utilised for the payment of relief under the awards made by the collector. CFP Level 3: Module 1 – Risk Analysis – India Page 325

Power to Call for Information, Entry and Inspection: The Act empowers the Central Government to call for information, entry, inspection, search and seizure of the premises of the hazardous installation wherein the owner is obligated to submit all such information to the inspecting agencies. Offences and Penalties: The Act provides for the penalties of not taking a public liability insurance policy. Furthermore, failure to comply with the directions issued with regard to regulation of handling of hazardous substances etc. is punishable with imprisonment or fine or both depending on the circumstances. 2.2 Environmental Impairment Liability (EIL) Environmental damage refers to the injurious presence of solid, liquid, gaseous, or thermal contaminants, irritants, or pollutants on land, atmosphere or water body. Sometimes, the damage caused by the pollution can be immediate, while other times it becomes evident years after the event. Also called pollution legal liability plan, Environmental Impairment Liability (EIL) covers pollution and environmental damage. An EIL policy covers for injury, property damage, natural resource damage, clean-up costs and others resulting from pollution emanating from a site or location. As such companies at risk for losses associated with pollution purchase such policies. Organizations buy EIL cover because they might hold environmental risk due to their operations. Some examples would be:  chemical companies handle substances which can go underground and poison an entire drinking water supply.  By-products from a manufacturing company’s operations can find their way through agriculture fields and water bodies leading to damage of natural resources.  Tanning industries might dispose their waste in open plots thereby leading to mass infection and spread of disease The liability associated with these risks is high and so companies look to transfer such risks by purchasing EIL cover. EIL policies are written on a claims-made basis. The claim must be first reported during the policy period, and the pollution condition in the claim must have occurred after the retroactive date of the policy. CFP Level 3: Module 1 – Risk Analysis – India Page 326

2.3 Product Liability In general terms, law requires that every product should meet the ordinary expectations of the consumer. When a product has a defect or danger, it cannot be said to have met the ordinary expectations of the consumer. Product liability governs the liability of manufacturers, and sellers in the distribution chain, for injury to a person or property by the consumption or use of the product sold. Product liability law is to help protect consumers from dangerous or defective products, and hold the manufacturers and sellers responsible for placing such defective products in the hands of a consumer. Product liability insurance, therefore, covers the risk faced by the manufacturers and others in the distribution chain for third party damage, injury or harm, illness, accidental death or to a business or property by their product or service. It also covers liabilities which may arise out of packaging defects, absence of warning labels/precautions etc. which might affect the performance or quality of the product. People might also take action against the manufacturer if they believe that they have been injured by a particular product. Product liability insurance can be taken by the product manufacturers, and all partners in the seller chain. This policy also extends to cover vendors of the manufacturers or the sellers. The laws relating to product liability, in India, have been constantly evolving for the protection of consumers. The Courts are adopting a pro-consumer approach by awarding compensation and damages which are more punitive than compensatory in nature. 2.4 Professional Indemnities Professional indemnity policies are designed to protect various professionals such as doctors, engineers, architects, lawyers, financial consultants etc who provide advice or service to their clients. It is designed to protect such professionals from legal costs and claims which could arise from monetary loss or damage of property after following the advice or receiving service. Along with the business, such policies should also cover any director, partner, employee or related entity when they act within the scope of their overall duties. Such policies cover all amounts which the insured professional becomes legally liable to pay as damages to the third party. Sometimes it also provides for the defence cost of the lawyer subject to the overall limit CFP Level 3: Module 1 – Risk Analysis – India Page 327

of the indemnity selected. In all such policies, only civil liability claims are covered while any liability arising out of any criminal act or act committed in violation of any law is not covered. In professional liability, the claim amount is unknown. So, insurers set a limit to liability to which they will bear the loss and the balance has to be borne by the person taking such a cover. The basic rate of premium for a professional indemnity policy ranges from 0.30% to 1% of the amount insured. To a large extent the premium depends on factors such as profession, experience, income limits, jurisdiction and claim experience. 2.5 Employer’s Liability Insurance Employers are responsible for the health and safety of their employees while they are at work and may be held liable for an accident arising out of the general course of employment. For example, a worker may get injured due to the chemicals in his factory, or an employee might get food infection from the canteen food. Employers’ liability insurance enables the employers to compensate the cost of injuries, illness or fatality of their employees’ on account of workplace conditions or practices, whether they are caused on site or off site. Through Employers’ liability insurance, the employers not only indemnify themselves against any such unfortunate events but also save themselves from the financial losses and legal cases. Public liability insurance is different. It covers claims made by members of the public or other businesses, but not the claims made by the employees. Employer’s Liability Act, 1938 Employer’s Liability Act, 1938 was enacted for the protection of workmen at their workplaces and to safeguard their related interests. Employers’ Liability Act, 1938 clearly defines the employer with respect to the workers deputed either by the contractors or by the manpower supply agencies. So, the Act comes handy when doubts are raised by the employers with regard to their liability towards the workmen, especially when they are engaged through contractors or when they are outsourced. The Act restricts the events and the extent to which employers shall be liable to their employees occurring in the course of their employment. It abolishes the common rule that the employer is not liable if the injury is caused by the fault or negligence of a fellow employee. CFP Level 3: Module 1 – Risk Analysis – India Page 328

3.0 The Workmen’s Compensation Act, 1923 The Workmen’s Compensation Act, 1923 was formed primarily to give compensations to workmen, and their dependants, in case of injury and accident (including certain occupational diseases) in the course of employment resulting in disablement or death. The Act aims to ensure that workmen have a meaningful life post-accident while performing their duty. The Act is recognized all over India. It applies to all workmen, including casual workers, in factories, construction work, mines, circuses, plantations, transport, railways, ships and any other potentially dangerous occupations as specified in Schedule II of the Act. It is also applicable to workmen of Indian companies who are sent to work abroad. The Act is not applicable to defence personnel. The Act offers relief to the workers who would otherwise go to court to seek compensation if they get injured during their employment. The compensation paid to a workman is in the form of a relief and social security measure provided by the Act. The Act also defines the amount to be paid depending on the intensity of the injury. For an employer to pay compensation, the injury or death suffered by the workman must be on account of an ‘accident arising out of and in the course of his employment’. Employee State Insurance Corporation Scheme The Employee State Insurance Corporation Scheme provides members financial protection in case of an untimely health-related eventuality. The scheme offers medical benefits, disability benefits, maternity benefits, unemployment allowance, etc. In a time, when the industry was still in its nascent stage, the people of India was still heavily dependent on a large assortment of imported goods and services. These goods and services were provided by either the developed or developing parts of the world. So, India being the self-dependent country it is, started developing the working class sector so ensure that manufacturing and labor jobs remained in the country. A workforce was developing in the country, dedicated to ensure that industry in India begins to grow and thrive. To ensure that these workers were protected in terms of health and finances, the Parliament implemented the Employees’ State Insurance Act, 1948 (ESI Act). It was the first major legislation that was meant to garner social security for workers. The ESI Act encompasses health related eventualities which workers are exposed to on a daily basis. This could include CFP Level 3: Module 1 – Risk Analysis – India Page 329

any type of sickness, temporary or permanent disability, maternity, diseases contracted from a workplace, death due to employment, and any type of injury that results in the loss of wages or earning capacity. He ESIC Act acts as a financial safety net for workers against these ailments. Who is Eligible for ESI? To come under the vast umbrella of benefits offered by the Employee State Insurance Corporation (ESIC), an individual should meet certain criteria that has been set by the committee. The ESI scheme is applicable to  An individual who is employed in a non-seasonal factory that has more than 10 employees. This criteria applies under Section 2 (12) of the Act.  With effect from 1 January 2017, the wage limit of an employee is set at Rs.21,000 per month for him/her to come under the coverage of the ESI scheme. ESI Coverage: This scheme has also been made extended to hotels, shops, cinemas and preview theatres, restaurants, newspaper establishments, and road-motor transport undertakings. This scheme has also been extended to the Private Educational and Medical institutions that have employed 10 or more people. This is applicable in certain states and union territories only. The ESI scheme has been implemented are-wise throughout the country. This scheme has been implemented in stages in every state in India except Arunachal Pradesh and Manipur. The scheme has also been enacted in all union territories except for Daman and Diu, Dadra and Nagar, and Lakshadweep Islands. The ESI scheme has been notified in a total of 325 complete districts out of a total of 393 districts. Out of these notified districts, 89 districts implemented the scheme partially. Key Features and Benefits of ESI: There are a number of attractive features and benefits that are offered by the Employee State Insurance Corporation. Not only does it provide medical benefits but it also comes with a level of financial security in times of financial hardship like unemployment, etc. Some of these are listed below: CFP Level 3: Module 1 – Risk Analysis – India Page 330

o Medical Benefits: The Employee State Insurance Corporation takes care of an individual's medical expenses by providing reasonable medical care. This cover comes into effect from day one of the individual's employment. o Disability Benefit: In case an employee is disabled, ESIC ensures that the employee is paid their monthly wages for the period of the injury in case of a temporary disablement or for the remainder of the employee's life in case of a permanent disablement. o Maternity Benefit: ESIC helps an employee welcome their baby to a household which has been showered with benefits. ESIC provides a total of 100% of the average daily wages for a period of to 26 weeks from the time of going into labor and 6 weeks in case of a miscarriage. 12 weeks of pay is provided in the case of an adoption. o Sickness Benefit: ESIC ensures that there is a flow of cash coming into the employee's household during medical leave. 70% of the average daily wages of an employee is paid during medical leave for a maximum period of 91 days in two successive benefit periods. o Unemployment Allowance: ESI provides a monthly cash allowance for a maximum period of 24 months in case of permanent invalidity due to a non-employment injury or due to involuntary loss of employment. o Dependent's Benefit: In case the employee meets with an untimely death due to an injury at the place of employment, ESIC will provide monthly payments apportioned among the surviving dependents. When is ESI registration required? When a company employs 10 or more employees, it is mandatory for that company or any other entity to with the ESIC. An employee who earns less than Rs.21,000 per month contributes 1.75% of his/her salary towards the ESI where as the employer pays 4.75% towards the ESI making a total of 6.5%. The company or establishment can apply for an ESI registration within 15 days from the time the ESI Act becomes applicable to that company or establishment. 3.1 The Maternity Benefit Act, 1961 The Maternity Benefit Act, 1961 is designed to protect the employment of a woman during the time of her maternity. It entitles her to a full-paid absence from work at the rate of her average daily wage in the three months preceding her maternity leave. Every establishment having 10 or more employees needs to apply this Act in their workplace/establishment. The law mandates CFP Level 3: Module 1 – Risk Analysis – India Page 331

that employers must inform women in writing about the maternity benefits available under the Act, at the time of their joining the workforce. In order to claim benefits under the Act, a woman must have been working as an employee in the establishment for at least 80 days within the last 12 months. Women having two surviving children are eligible for 26 weeks of paid leave and women having more than two children get 12 weeks of paid leave. Out of the 26 weeks, if desired, a woman can claim up to 8 weeks before the delivery. In case of a miscarriage, a woman can claim 6 weeks of paid leave with average pay from the date of miscarriage. If a woman adopts a child, then also she will get a 12-week long paid maternity leave. The law allows women employees to work from home after the expiry of the 26 weeks' leave period if the nature of work allows and on terms that are mutually agreeable with the employer. As per the Act every establishment employing 50 or more employees also has to provide a mandatory crèche facility. As an additional protection, discharge or dismissal of the women employee by the establishment is not permissible while she is on maternity leave. In all cases of death of the pregnant employee, the maternity benefit shall be paid to the person nominated by such an employee or to her legal representative. The Act imposes punishment/penalty if an employer does not pay maternity benefits as per the Act to an eligible woman. Motor Insurance- Comprehensive and Mandatory Third Party Cover Motor insurance covers the loss of vehicles and the damages to them due to accidents and some other reasons. Motor insurance also covers the legal liability of vehicle owners to compensate the victims of the accidents caused by their vehicles. Motor Vehicles Act in 1939 was passed to mainly safeguard the interests of pedestrians. According to the Act, a vehicle cannot be used in a public place without insuring the third part liability. According to Section 24 of Motor Vehicles Act, “No person shall use or allow any other person to use a motor vehicle in a public place, unless the vehicle is covered by a policy of Insurance.” Classification of Motor Vehicles For purpose of insurance, motor vehicles are classified into three broad categories: CFP Level 3: Module 1 – Risk Analysis – India Page 332

1. Private cars - vehicles used only for social, domestic and pleasure purposes 2. Motor cycles and motor scooters 3. Commercial vehicles, further classified into (i) Goods carrying vehicles (ii) Passenger carrying vehicles e.g. Motorized rickshaws, Taxis, Buses 4. Miscellaneous and Special Types of Vehicles, e.g. cranes, ambulances, publicity vans, etc. Types of Motor Insurance Policies 1. Liability Only Policy (Mandatory Third Party Insurance) As per the Motor Vehicles Act, 1988, it is mandatory for every owner of a vehicle plying on public roads, to take an insurance policy, to cover the amount, which the owner becomes legally liable to pay as damages to third parties as a result of accidental death, bodily injury or damage to property. A Certificate of Insurance must be carried in the vehicle as a proof of such insurance. Third-Party Insurance An insurance policy purchased for protection against the legal actions of another party. Third-party insurance is purchased by the insured (first party) from an insurance company (second party) for protection against another party's claims (third party) for liability arising out of the action of the insured. Third party insurance is called “Liability Insurance” as well. Compulsory insurance in respect of motor vehicles comprises the following liabilities:  Liability arising out of bodily injury or death of the third party or arising out of the damage to his property.  Compulsory insurance of passengers carried on hired vehicles.  Compulsory insurance of passengers carried by reason of a contract of employment.  Compulsory insurance of an employee under workmen’s compensation act considering the factors such as:  Who was driving the vehicle?  Whether working as conductor or ticket examiner/coolies  Nature of goods carried in the goods carriage 2. Comprehensive Policy (Own damage + Third Party Liability) CFP Level 3: Module 1 – Risk Analysis – India Page 333

In addition to the above, the loss or damage to the vehicle insured by specified perils (known as own damage to motor vehicles) is also covered subject to the value declared and other terms and conditions in the policy. Some of these perils are fire, theft, riot and strike, earthquake, flood, accident etc. Some insurers may also pay for towing charges from the place of accident to the workshop. A restricted cover is also available covering the risk of fire and / or theft only, in addition to the compulsory cover granted under Act (Liability) Only Policy. The policy can also cover loss or damage to accessories fitted in the vehicle, personal accident cover under private car policies for passengers, paid driver; legal liability to employees and non-fare paying passengers in commercial vehicles. Insurers also provide free emergency services or use of alternative car in case of breakdown. Exclusions Some of the important exclusions under the policies are wear and tear, breakdowns, consequential loss, and loss due to driving with invalid driving license or under the influence of alcohol. Use of vehicle not in accordance with ₹limitations as to use₹ (e.g. private car being used as a taxi) is not covered. Sum Insured and Premium In case of motor insurance the sum insured is the insured's declared value [IDV]. It is the value of the vehicle, which is arrived at by adjusting the current manufacture's listed selling price of the vehicle with depreciation percentage as prescribed in the IRDA regulations. Manufacturer's listed selling price will include local duties /taxes excluding registration and insurance. IDV = (Manufacture’s listed selling price – depreciation) + (Accessories that are not included in listed selling price-depreciation) and excludes registration and insurance costs. The IDV of vehicles that are obsolete or aged over 5 years is calculated by mutual agreement between insurer and the insured. Instead of depreciation, IDV of old cars is arrived at by assessment of vehicle’s condition done by surveyors, car dealers etc. IDV is the amount of compensation given in case a vehicle is stolen or suffers total loss. It is highly recommended to get IDV which is near the market value of the car. Insurers provide a range of 5% to 10% to decrease IDV to the insured. Less IDV would mean lesser premium. Rating / premium calculation depends on factors like the Insured's Declared Value, cubic capacity, geographical zone, age of the vehicle etc. CFP Level 3: Module 1 – Risk Analysis – India Page 334

3.2 Motor Insurance - No Claim Bonus and Claims No Claim Bonus A certain percentage is given as bonus for every claim free renewal year with a limit to the maximum bonus that can be availed. It is allowed by way of deduction on the total premium at renewal only, depending upon the incurred claim ratio for the entire group. No claim bonus is a powerful strategy to improve underwriting experience and forms an integral part of rating systems. This bonus recognises the factor of moral hazard in the insured. It rewards the insured for not lodging claims by adopting better driving skills. Claims Claims arise when:  The insured’s vehicle is damaged or any loss incurred.  Any legal liability is incurred for death of or bodily injury  Or damage to the third party‘s property. The claim settlement in India is done by opting for any of the following by the insurance company a) Replacement or reinstatement of vehicle b) Payment of repair charges In case, the motor vehicle is damaged due to accident it can be repaired and brought back to working condition. If the repair is beyond repair then the insured can claim for total loss or for a new vehicle. It is based on the market value of the vehicle at the time of loss. Motor insurance claims are settled in three stages. In the first stage the insured will inform the insurer about loss. The loss is registered in claim register. In the second stage, the automobile surveyor will assess the causes of loss and extent of loss. He will submit the claim report showing the cost of repairs and replacement charges etc. In the third stage, the claim is examined based on the report submitted by the surveyor and his recommendations. The insurance company may then authorize the repairs. After the vehicle is repaired, insurance company pays the charges directly to the repairer or to the insured if he had paid the repair charges. CFP Level 3: Module 1 – Risk Analysis – India Page 335

Section 110 of Motor Vehicle Act, 1939 empowers the State Government in establishing motor claim tribunals. These tribunals will help in settling the third party claims for the minimum amount. Motor Accident Claims Tribunal Motor Accident Claims Tribunal was set up under the provisions of the Motor Vehicles Act, 1988. Its purpose is to provide a speedier remedy to the victims of motor vehicle related accidents. The Tribunals take away jurisdiction of the Civil Courts in all such matters which concerns the motor accidents. The Tribunal can adjudicate upon claims for compensation when the accident, arising out of the use of a motor vehicle, involves death or bodily injury to the person, or damage to the property of the third party. According to the Motor Vehicles Act, 1988, compensation can be claimed by the person who has sustained injury in an accident involving motor accident, or by the owner of the damaged vehicle or property, or by a nominee/heir/legal representatives of the deceased who died in the accident, or by the duly authorized agent of the injured person. There is no time limit for filing the accident claim. But, in cases of an unusual delay in filing the claims, the Tribunal might seek explanations. Claim petition can be filed by the concerned person in that Claims Tribunal which has a jurisdiction over the area in which either the accident occurred, or where the claimant resides/carries on business, or where the defendant resides. Appeals from the Claims Tribunal lie with the High Courts. It has to be filed by the concerned person within 90 days from the date of award of the Tribunal. Policy Document and Legal Implications Any insurance policy is an integrated contract in the form of an Agreement between the insured and the insurer. It is a policy of assurance subject to conditions and privileges of the policy document. A policy document is a standard, formal document which contains all the details of the insurance contract, under different sections. It lists the details of the insured (name, date of birth, address, contact details etc.), the policy schedule, key covers under the policy, including the extensions and exclusions. It clearly mentions the free-look period, the benefits under the CFP Level 3: Module 1 – Risk Analysis – India Page 336

policy plan, rights of the insured, details of the policy cover and suicide exclusion clause amongst other general provisions. It also spells out the name of the product, its UIN (unique identification number) as listed under IRDAI. If the policy has been sold through the agency channel or an insurance agent their details are also mentioned in the policy document. The insurance contract is legally enforceable and both the parties to the contract are bound by the terms and conditions listed in the policy document during the entire term of the policy. The policy document is issued by the insurer once the first premium has been paid by the insured. Policy document is, in fact, a bible for the insured and the insurer. 3.3 Proposal Form A proposal form is the most basic document, required to be completed by the proposer at the time of applying for an insurance policy. It is a legal document which helps the insurance company evaluate all the potential risks in relation to the insurance policy being offered. The form is designed to seek all the relevant information from the proposer which then helps the insurance company in underwriting and deciding the premium amount. Insurance company, therefore, offers a policy on the basis of the proposal form. A proposal form seeks fundamental information of the proposer and also on the subject matter of insurance. This includes the name, age, address, occupation details of the proposer. Some other important elements of information gathered through the proposal form are:  Medical history of the life to be assured and the health status of his or her family members in case of health insurance.  Claim history and details of previous related losses, whether insured or not.  Other past or present related insurances for assessing the moral hazard of the proposer.  Whether any insurance of the proposer was previously declined by any other insurers.  Nominee details.  Some high-value risk policies require income details of the proposer to satisfy the insurer about the proposer's ability to pay for the insurance and the need for his insurance.  Amount of insurance cover required - it must represent the actual value of the property or the subject matter of insurance. CFP Level 3: Module 1 – Risk Analysis – India Page 337

 A declaration stating that responses given in the proposal form are true and nothing has been concealed or misrepresented. Every proposal form is to be signed by the proposer or by the authorized person when the proposer is not an individual. The signature has to be dated as well on the proposal form. 4.0 Policy Component Once the proposer buys the insurance policy, the insurer sends him a printed copy of his policy document, along with the receipt of payment. Every policy document contains standard sections, also called components, which list out the terms and conditions, facts, statements, the do’s and don’ts. The insurance regulator IRDAI and the Insurance Act, 1938 mandate provisions which need to be featured in the policy component. All the important aspects of the insurance contract, framed in a policy, are listed in the policy document under various components. For a general insurance policy, the three crucial components of insurance policies are the premium, the policy limit, and the deductibles. 4.1 Heading The heading of an insurance policy states the name of the policy, such as ‘Private Car Package Policy’ or ‘Standard Fire and Special Perils Policy’ or ‘Burglary Insurance Policy’ etc. The heading might vary occasionally between insurer to insurer, but mostly standard wordings are maintained throughout the industry for the benefit and easy understanding of the policy holder. Below the heading, the UIN number of the product, as provided by IRDAI, is also mentioned compulsorily to avoid any anomaly about the product and its features. 4.2 Preamble Preamble in an insurance policy is the declaration by the insurer. It is an introductory paragraph in a contract that identifies the type of agreement, the date on which the agreement is signed, parties to the agreement, their status (whether they are individuals or entities), and their addresses. It can be said to be a preliminary statement at the beginning of a statute, stating its purpose and explaining the reason for its enactment. CFP Level 3: Module 1 – Risk Analysis – India Page 338

In other words, the preamble simply says that the insurers will, in return for the premium, pay the losses or claims made under the policy. Most policies have a distinct preamble, although some policies may not. 4.3 Operative Clause The operative clause in a policy is a promissory clause. It is a promise that the insurer undertakes to pay the benefits of the policy to the insured if the reason(s) for which the policy was incepted happens while the policy is still in force. It is the single most important clause because it defines what is covered by the policy. The operative clause is framed as widely as possible. However, by way of an extension the insurer may offer covers that are wider than those mentioned in the operative clause. 4.4 Policy Schedule A schedule of insurance is that part of an insurance contract which sets out the details specific to the policy. It is issued by the insurer as part of the policy. It provides details of the insured’s policy including full description of properties covered which are in force, the period of cover against the properties described, the amount of coverage, the exclusions, the deductibles, and the payment mode and schedule. Policy schedule is also called schedule of insurance. The purpose of a schedule of insurance is to provide clarification to the insurer and the insured about what all is covered in the policy. A schedule is not a stand-alone document from the policy wording itself and should always be read in conjunction with the policy wording. 4.5 Signatures Every insurance policy is a legally enforceable contract. As such, a duly constituted attorney or signatory of the insurance company has to affix his signature on each page of the insurance policy document, for and on behalf of the company. The insurance company also puts its seal thereby legalizing the document. If there are any annexures or addendums to the policy document, the same have to be signed and stamped as above. CFP Level 3: Module 1 – Risk Analysis – India Page 339

4.6 Exceptions Exceptions are those situations, circumstances or conditions which are not covered by the insurance company in the contract. So, at the time of buying a policy, the proposer should read in detail the exclusions mentioned in the policy brochure. Exceptions are applicable to all sections of the policy. The insurer clearly states that under the policy the company shall not be liable to the Exceptions mentioned therein. The IRDAI Act, 1999 and the Insurance Act, 1938 mandate that the prospectus of every insurance product shall clearly state the Exceptions where the company can deny claim and call the policy void. General exceptions in a Private Car Package Policy read as: ‘The Company shall not be liable under this policy in respect of 1. any accidental loss or damage and/or liability caused sustained or incurred outside the geographical area; 2. any claim arising out of any contractual liability; 3. any accidental loss or damage and/or liability directly or indirectly caused by or contributed to by or arising from contamination by radioactivity; 3. any accidental loss or damage and/or liability directly or indirectly arising out of war, invasion, hostilities etc.’ 4.7 Conditions All policy documents list down, under different sections, the terms and conditions of the policy to be followed by the policyholder. It also lists their rights and privileges as a customer of the policy. The motive is to educate the policy holder on all aspects of the product purchased by him. By doing this, the insurer expects the policy holder to maintain his policy for the entire term in a rightful way so that there are no claim denials or the policy does not lapse for lack of CFP Level 3: Module 1 – Risk Analysis – India Page 340

information. Given below are some of the important sections covered in the insurance policy document:  Definitions of words and phrases used in the policy document  Benefits covered under the plan  Claim process  Premium payment  Assignment and nomination  Termination of policy  Dispute redressal process  Communication and notices  Governing laws and jurisdiction  Details of Ombudsman CFP Level 3: Module 1 – Risk Analysis – India Page 341

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By doing this, the insurer expects the policy holder to maintain his policy for the entire term in a rightful way so that there are no claim denials or the policy does not lapse for lack of information. Given below are some of the important sections covered in the insurance policy document:  Definitions of words and phrases used in the policy document  Benefits covered under the plan  Claim process  Premium payment  Assignment and nomination  Termination of policy  Dispute redressal process  Communication and notices  Governing laws and jurisdiction  Details of Ombudsman CFP Level 3: Module 1 – Risk Management & Insurance Planning – India Page 343

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