RAIP Workbook

RISK ANALYSIS & INSURANCE PLANNING WORKBOOK



Exam Specification and Pattern as prescribed by FPSB The topics of the Module: Introduction to Financial Planning are structured into five distinct sections as follows. The weights of these individual sections in relation to the Module as well as each of Exam 1 – 4 are given along with testing objective and the nature of testing. A summary of distribution of marks of the Module: Introduction to Financial Planning is provided in the table below: Pattern of Question Bank – 20% of “Introduction FP” Module Embedded in Exam 1/2/3/4 Section-I Section-II Section-III Section-IV Section-V No. of Marks No. of Marks No. of Marks No. of Marks No. of Marks Items Items Items Items Items 12 2 4 4 1 1 2 2 1 1 Marks 2 1 2 0 0 0 0 1 2 1 2 0 Category 30 0 1 3 1 3 0 0 0 40 0 0 0 2 8 0 0 0 0 Total 3 4 5 7 4 12 3 4 2 3 Total Items: 17 / Total Marks: 30 The topics are structured into five distinct sections as follows. The weights of these individual sections in relation to the Module “Investment Planning” are given along with testing objective and the nature of testing. A summary of distribution of marks is provided in the table below: Pattern of Question Bank IP Module – 80% in Exam 1 Section-I Section-II Section-III Section-IV Section-V No. of Marks No. of Marks No. of Marks No. of Marks No. of Marks Items Items Items Items Items 1 10 10 3 3 3 3 4 4 8 8 Marks 24 8 2 4 2 4 2 4 2 4 Category 3 0 0 5 15 5 15 2 6 0 0 Total 4 0 0 1 4 4 16 3 12 0 0 14 18 11 26 14 38 11 26 10 12 Total Items: 60 / Total Marks – RAIP Module: 120 Total Marks – Exam 1: 150

Testing of Competency – Exam Specification and Pattern Pattern of Question Bank Exam 1/2/3/4 Section-I Section-II Section-III Section-IV Section-V No. of Marks No. of Marks No. of Marks No. of Marks No. of Marks Items Items Items Items Items 1 12 12 7 7 4 4 6 6 9 9 Marks 2 5 10 2 4 2 4 3 6 3 6 Category 3 0 0 6 18 6 18 2 6 0 0 Total 4 0 0 1 4 6 24 3 12 0 0 17 22 16 33 18 50 14 30 12 15 Total Items: 77 Total Marks: 150 The weights of individual parts in each of Exam 1-4 along with distribution of marks is: Percentage Section-I Section-II Section-III Section-IV Section-V Distribution 22% 21% 23% 18% 16% No. of items 15% 22% 33% 20% 10% Marks Part II, III & IV cover 62% of total items which account for 75% of total marks Indicative Difficulty Grade and Mapping of Exam Duration The mark categories would broadly determine the nature of question items contained in those categories along with a commensurate difficulty grade. Marks Significance Grade Total Total Weight Expected Total Category 1 items marks (%) Time/per Expected 2 1-Marks Theoretical testing 38 38 25% Item Time 2-Marks knowledge 3 15 30 20% 35 22 4 3-Marks Theoretical 14 42 28% Seconds Minutes 4-Marks (predominantly) testing 10 40 27% 90 23 clarity of concepts or numerical testing basic 77 150 100% Seconds Minutes skills 150 35 Numerical testing Seconds Minutes analytical skills 240 40 Numerical testing Seconds Minutes advanced analytical skills, strategy evaluation & 120 synthesis Minutes Total

Theoretical related to Inroduction to Financial Planning Theoretical Areas covered under “Introduction to Financial Planning” and asked to the extent of 20% in each of Exam 1-4 are: 12 Marks Financial Planning Process Code of Ethics and Professional Responsibility Models Rules of Conduct CFP Marks usage Brief Overview to Financial Markets Economic Environment Analysis Behavioral Finance Pattern of Question Bank – 20% of “Introduction FP” Module Embedded in Exam 1/2/3/4 Section-I Section-II Section-III Section-IV Section-V No. of Marks No. of Marks No. of Marks No. of Marks No. of Marks Items Items Items Items Items 12 2 4 4 1 1 2 2 1 1 Marks 2 1 2 0 0 0 0 1 2 1 2 0 Category 30 0 1 3 1 3 0 0 0 40 0 0 0 2 8 0 0 0 0 Total 3 4 5 7 4 12 3 4 2 3 Numerical related to Introduction to Financial Planning Numerical Areas covered under “Introduction to Financial Planning” and asked to the extent of 20% in each of Exam 1-4 are: 14 Marks Time Value of Money calculations Personal Financial Statement Analysis – Cash Flow Management Loan Schedules and Refinancing of Loans Net Worth Calculation Computation of Returns – CAGR, IRR, XIRR, etc. Savings Ratio and Liquidity Ratios Pattern of Question Bank – 20% of “Introduction FP” Module Embedded in Exam 1/2/3/4 Section-I Section-II Section-III Section-IV Section-V No. of Marks No. of Marks No. of Marks No. of Marks No. of Marks Items Items Items Items Items 12 2 4 4 1 1 2 2 1 1 Marks 2 1 2 0 0 0 0 1 2 1 2 0 Category 30 0 1 3 1 3 0 0 0 40 0 0 0 2 8 0 0 0 0 Total 3 4 5 7 4 12 3 4 2 3

Numerical problems testing Analytical skills, Advanced Analytical skills, Strategy Evaluation & Synthesis 1. Risk Analysis & Insurance Planning Workbook 68 Marks 19 Section-II: Marks Insurance provisions – basis-Depreciation, Market/Reinstatement value Cost-benefit Analysis and Claim Settlement. 31 Marks Section-III: Economic value of human life 18 Replacement of future income of the insured Marks Replacement of expenses and financial liabilities of the family Provision in life cover of certain financial goals/liabilities Review of coverage for changes in income, assets/liabilities Investment Linked Insurance and Insurance Linked Annuities Return on Savings Component Section-IV: Basis of property cover – Reinstatement, book or market value Personal umbrella policy – Mortgage cover Use of excess/deductible and franchise

CONTENTS 1 6 BASIC RULES OF TIME VALUE OF MONEY 10 18 SECTION - I 33 CONCEPTS OF INSURANCE AND RISK MANAGEMENT 42 46 SECTION - II: INSURANCE CONTRACT AND LEGAL LIABILITY SECTION - III: LIFE INSURANCE - ANALYSIS OF LIFE COVER, STRATEGIES AND PRODUCTS SECTION - IV: GENERAL INSURANCE- PROPERTY, HEALTH AND LIABILITY INSURANCE SECTION - V: REGULATORY FRAMEWORK OF INSURANCE ADDITIONAL PRACTICE QUESTIONS



RULE OF TIME VALUE OF MONEY 1. CMPD : a. We can set our calculator either begin mode or end mode when we don‟t use pmt. We can say that in case of using n, I, pv, fv, c/y we can set out calculator either begin or end mode. b. N means number of periods in normal case without considering PMT. For ex. Mr. invested Rs.100 for 10 years 6 months, then n would be 10+6/12 c. I means rate of interest. d. Pv means present value. For ex. I invest Rs.20000 for 10 years. Here pv is 20000. Pv means lump sum payment. Present value can be negative or positive as per situation. e. Pmt means regular payment. For ex. Saving Rs.2000 p.a. for 10 years, therefore 2000 is pmt. It can be positive or negative f. Fv means future value. For ex. If I receive Rs. 1 crore after 10 years. Here fv is 1 crore. Fv is always lump sum payment received or paid after some periods. g. P/y means number of payments in a year. For ex. I invest Rs.1000 p.m. for 12 years. Here p/y is 12 h. C/y means how many compounding in a year. For ex. rate of interest 12% p.a. compounding monthly therefore C/Y=12. 2. When money comes in ( receiving or cash inflows ) consider positive sign, when money goes out (investing or cash outflows) consider negative sign. 3. When there is role of regular payment means PMT in a step, following points should be kept in mind: a. We should always consider set begin or end as per the question. b. If nothing mentioned about regular saving whether in the beginning or end of every of period, we always consider BEGIN, reason in all schemes we have to deposit money in advance. c. During post retirement life if nothing mentioned about the withdrawal of money (begin or end). We should consider always BEGIN as we need money immediately after retirement. d. In case of loan if nothing mentioned about repayment whether is made in the beginning or end of every period, we should consider END as logically first we get money then very next period we make repayment. e. N means total number of payments. Ex1. Mr. Sharma saves or withdraws Rs.2000 p.m. for 10 years. Here n is 10*12 = 120 Ex2. Mr. X saves or withdraws Rs.5000 per quarter for 10 years. Here n is 10*4 = 40 f. P/y means total number of payments made in a year. Ex1. Mr. X saves or withdraws 2000 p.m for 10 years, here p/y=12 but n=10*12=120. 1

(As n means total numbers of payments made.) Ex2. Mr. X saves Rs.2000 per quarter for 15 years. Calculate future value if ROI 10% p.a. compounding half yearly. First we should check whether there is role of regular payment in this question. If yes we should consider first of all set begin or end Here we will consider set=begin ( as if nothing mentioned saving in the beginning or end we always consider BEGIN) N=15*4=60 (as N is total number of payments are made in that period). I=10 Pv=0 (as there is no lump sum payment) Pmt= -2000 P/y=4 (total number of payments in a year) C/y=2 (total number of compounding in a year) Fv=solve=275680.6996 4. If we need to calculate the present value of regular payment which is increasing by inflation or growth like in salary, we should always use real rate of return, otherwise generally we never use RRR. For Ex. Mr. Sharma saves ( or salary ) Rs 5000 now and increasing by 10% p.a. in a scheme of 30 years. Calculate the present value if rate of interest is 12% p.a. SET=BEGIN N=30 I=(12-10)/1.10 Pmt=5000 PV=solve=116921.050 In case of salary we can calculate the net present value of all future income We can solve it by using growing annuity formula also. First we can calculate the future value using growing annuity formula and then discount it by 12% for 30 years. But better to use RRR. 5. We never use real rate of return in the step of investing money. 6. We never use real rate of return in a step of calculating future value of the regular payment. 7. We use inflation when cost of a goal ( Household Expenses, Car, Education, House, Marriage, World Tour Etc) is given in today‟s term ( present cost ) and we want to find the cost of the same in future. Following examples will help you to comprehend this: a. Current cost of house hold expenses Rs.1 lac p.a., inflation 6% p.a. if you calculate cost of HHE p.a. after 30 years, we have to inflate it for 30 years considering it as PV. As we need to know HHE annually we are not adding all expenses in this questions therefore can‟t consider it as pmt. 2

Step to solve: Set = end/begin n=30 I=6 pv = 100000 fv = solve or we can use formulae Fv = Pv(1+r)^n b. Current cost of house hold expenses Rs.50000 p.m. inflation 7% p.a. if you want to know your monthly house hold expenses after 25 years, you simply inflate it by 7% for 25 years. Step to solve : Set = end/begin n = 25 ( don‟t consider 25*12 as you need to know only monthly expenses after 25 years ) I=7 pv = 50000 fv=solve or fv = 50000(1.07)25 8. In CMPD function if n and i in same unit, p/y and c/y must be 1. For ex. Ram saves Rs.2000 per month for 10 years in a scheme that generates 2% p.m. interest, calculate future value? CMPD Set = begin ( as nothing mentioned begin or end, we always consider begin ) N = 10*12 = 120 ( as total number of payments ) I=2 Pmt = -2000 p/y=c/y=1 ( as n and i in same unit, same unit means both are in terms of months ) fv = ? 9. CASH FUNCTION: a. Cash function is always better to use in cases where payments are not constant. b. In cash editor 1 means beginning of first period ( month or year), 2 means beginning of second period or end of 1st year. c. Whenever we calculate future value, we need to take care of last entry. For example Mr. X saves 2000 today and 3000 next year and calculating future value 3

after 2 years. We put 2000 in first entry 3000 in second entry and third entry must be zero as 3rd entry is end of 2 years or beginning of 3rd year. d. When we calculate future value after 10 years or 15 years , 11th entry or 16th entry must be utilized as 11th entry means end of 10th and 16th entry means end of 15th. e. We can use RRR to calculate the net present value of payments which are increasing by some rate. Following examples will help you to comprehend the same: Ex. Current cost of higher education 5lacs p.a. for first 2 years and Rs3 lacs for next 3 years. Inflation 8% p.a. and rate of interest 12% p.a. what is the net present cost of education? i. Case 1 : Higher education starts now. Solution by using cash function: I = (12-8)/1.08 1 = 500000 2 = 500000 3 = 300000 4 = 300000 5 = 300000 Npv = solve ii. Case 2 if higher education starts after 15 years. Solution by using cash function: I = (12-8)/1.08 1 to 15 entries = 0 16 = 500000 17 = 500000 18 = 300000 19 = 300000 20 = 300000 Npv = solve f. Internal rate of return i.e. IRR is used to calculate the rate of interest of uneven cash inflows and outflows. Following examples will help you to comprehend the same: Ex. 1 If I invest Rs.2000 today and receive Rs.1200 after 1 year, Rs.600 after 2 years, Rs.500 after 4 years. Calculate rate of interest (IRR or CAGR )? Sol. We can not use CMPD. We have to use CASH FUNCTION 1= -2000 2 = 1200 3 = 600 4=0 4

Ex. 2 5 = 500 ( as 5th entry means end of 4th or beginning of 5th ) IRR = Solve There is a scheme in which Rs.100000 p.a. to be invested for first 5 years and inflows 1 lac p.a. will start from the end of 10th year (beginning of 11th year) for 10 years. Now in this case you need to calculate the rate of interest (IRR OR CAGR). Sol. We can solve it by using CASH FUNCTION not CMPD 1 to 5 entries = -100000 6 to 10 entries = 0 11 to 20 = 100000 IRR = Solve 5

Section - I: Concepts of Insurance and Risk Management 1 - Mark Questions 1. Which of the following is not a characteristic of Insurance? a) Insurance builds the risk capacity of businesses especially in large environmental projects b) Insurance allows financial security against future risk, accidents and uncertainty c) Insurance helps in reducing anxiety and fear before and after the loss occurs as the loss compensation is provided for d) Insurance protects and prevents the asset from loss due to the peril 2. What empirically is closest to Self Insurance? a) One can buy insurance online b) An insurance company not reinsuring for excess risk covered c) Managing risk by investing a corpus to be used in case of loss d) One can retain the risk by not insuring against it 3. Principle of Indemnity is not applicable to: I. Property insurance II. Life insurance III. Motor insurance a) Only II b) Only I c) Only I and II d) Only II and III 4. Ms. Neelam runs her own business at a small level where she finds that there exists a risk that occurs frequently but its severity is very low. Which device of risk management should she use to handle such a risk? a) Under-Insurance b) A voidance 6

c) Co-insurance d) Retention 5. A human being is: a) A perishable asset b) An economic asset c) Both of the above are true d) None of the above is true 6. Which of the following pairs do not have insurable interest in each other's lives? a) Fiancé - Fiancée b) Husband-Wife c) Insurer-Insured d) Employer-Employee 7. In case of life insurance policies, the principle of Utmost Good Faith is to be adhered to at the time of: a) The proposal b) The claim c) The change of nominee d) None of the above 8. Betting and Gambling are examples of __________. a) Pure Risk b) Dynamic Risk c) Static Risk d) Speculative Risk 9. In Pure risk there is a chance of: I. Loss II. No Loss III. Profit IV. Only Loss 7

a) Only I b) Only I & II c) Only I & III d) Only IV 10. The existence of insurable interest is decided by: a) The extent to which the proposer is financially dependent on the object of insurance b) The relationship between the proposer and the object of insurance c) Both of the above factors d) None of the above factors 2 - Marks Questions 11. Which of the following statement is nearest to the concept of insurance? a) Insurance helps business entities to recoup some of the losses incurred in the normal course of their business operations b) Insurance helps in regular savings by reducing income tax liability c) Insurance helps restore the former financial position of the insured in the vent of loss due occurrence of the perilous event d) Insurance helps individuals to be carefree of contingencies affecting their life and assets 12. Hazards is the factor that __________ the risk. a) Reduces b) Enhances c) Doubles d) Halves 8

13. Insurance is possible: a) When an adverse happening is unlikely b) When an adverse happening is likely c) When an adverse happening is certain d) In all the above three situations 14. All of the following statements regarding insurable interest are correct except: a) Generally, the person to have an insurable interest must give his or her consent before a policy is issued, even if the applicant has an insurable interest b) A party has an insurable interest in a life insurance contract when he or she is subject to a loss upon the death of an insured c) Only immediate family members can have insurable interest in each other‟s lives d) Persons are presumed to have an insurable interest on themselves 15. Which of the following statements may tantamount to breach of the Principle of Utmost Good Faith? I. A proponent mentions that his father died a natural death at age 60, even though he had died earlier at age 40 on account of heart failure II. A proposer mentions his own age wrongly which is found to be higher later on when a proof of age is submitted a) Only I b) Only II c) Both I and II d) Neither I nor II 1 (d) SOLUTIONS 11 (c) 2 (c) 6 (a) 12 (b) 3 (a) 7 (a) 13 (b) 4 (d) 8 (d) 14 (c) 5 (b) 9 (b) 15 (c) 10 (c) 9

Section - II: Insurance Contract and Legal Liability 1 - Mark Questions 1. The premium actually paid by the policyholder depends upon: a) The status of the person to be insured b) The wealth of the person to be insured c) The level of risk as assessed by the underwriter d) None of the above 2. Which of the following is not relevant element for a valid contract: a) Consensus ad idem b) Proposal and acceptance c) Consideration d) Indemnity 3. A material fact is that circumstance that would __________ an underwriter's judgment. a) Weaken b) Influence c) Hamper d) Not influence 4. Which of the following statements is correct? a) In Group Insurance, the proposal is made by the representative of the group b) In Group Insurance, proposals are made by each of the insured belonging to the group c) Both the statements above are correct d) Any of the two can make the proposal 5. Which one of the following statements is correct: a) The First Premium Receipt issued by the insurer is a proof of commencement of risk b) Risk does not commence till the policy document is issued by the insurer c) Both the statements are correct d) Both the statements are wrong 10

2 - Marks Questions 6. Tabular premium rates printed by an insurer include the loading of: a) Risk premium for payment of death claims or losses b) Interest likely to be earned by the insurer c) Office expenses of the insurer d) All of the above 7. The practice of charging level premiums has the benefit of: a) Making it easy for the policyholder to know the cost and to continue the insurance policy b) Increasing the returns to the policyholder c) Helping the agent in his sales effort d) All of the above 8. Which of the following is not barred to have played a role in case of a Free Consent? a) Undue influence b) Fraud or Misrepresentation c) Mutual interest d) Coercion 9. The classification of insurance contract as aleatory contract means that __________. a) The value admissible as benefit or compensation to the insured is not equal even if the perilous event is same and simultaneous b) The entire book of business written by the insurer is based on the premise that the values exchanged by contracting parties are unequal c) The insured stands to benefit on a reducing scale if the perilous event is shifted away from the date of contract d) The values exchanged by the contracting parties are not necessarily equal and may change reciprocally in the event of loss 10. The principle of indemnity does not provide against one of the following: a) Morale Hazard b) Profiteering from insurance c) Escalation in the value of goods insured 11

d) Moral Hazard 11. The principle of proximate cause helps in insurance in ascertaining __________. a) The principal cause that sets in motion a chain of events inflicting the loss b) The most immediate cause which inflicts the loss irrespective of the chain of events c) The most severe cause in the chain of events leading to the loss d) The nearest cause in a chain of events which can be identified for admissibility of insurance claim 12. The deductible is __________. a) The amount that is deducted from the premium as mortality charge b) The amount of unpaid premiums deducted from the amount of claim c) The sharing of costs incurred between the insurer and the insured according to a specific formula d) The expenses borne by the claimant before an insurer will pay any compensation 13. Which of the following is not a regulatory objective of rate making? a) Expanding insurance density b) Insurer solvency c) Non-discriminatory premiums d) Consumer protection 14. Under __________ an insurance company notifies you that it has not lapsed your policy for non-payment of premiums, even though it had the right to do so. a) Express Waiver b) Implied Waiver c) Waiver by Silence d) Estoppels 15. If a policy is kept alive by advancing premiums from surrender value: a) The death claim will be the full SA less premiums till the current policy year b) The death claim will be the full SA less premiums advanced with interest c) The death claim will be the full SA without any deduction d) All the three above are wrong 12

3 - Marks Questions 16. Insurance policy for a sum insured ₹1,00,000 is subject to excess clause of ₹10,000. What is the claim amount payable if loss is ₹12,000? a) ₹ 10,000 b) ₹ 2000 c) ₹ 12000 d) Nil 17. Calculate premium payable under collective fidelity guarantee policy for one cashier sum insured ₹ 1,00,000 @ ₹ 7.50/000 & one accountants for ₹ 2,00,000 @ ₹ 5.00/000. a) ₹ 2,750 b) ₹ 1,700 c) ₹ 3,000 d) ₹ 1,750 18. The probability distribution of car accidents is as under: 0.40 Number of Accidents Cumulative Relative Frequency 0.65 0 0.75 1 0.90 2 1.00 3 4 or more What is the probability that not more than 2 cars will meet with an accident? a) 0.35 b) 0.25 c) 0.75 d) 0.10 13

19. If expenses are 20% of the gross (office) premium and the pure premium is ₹5,000, then what would be the office premium? a) ₹6,250 b) ₹6,000 c) ₹4,167 d) None of the above 20. A group of 50,000 persons each aged 35years wishes to apply for term insurance for a one year period for a sum of ₹2,00,000. If the mortality tables show that out of 50 lakh people 30,000 die within a year, find the premium to be paid by each of the 50,000 applicants. a) ₹1,350 b) ₹1,300 c) ₹1,250 d) ₹1,200 4 - Marks Questions 21. A training institute bought 50 computers at a total cost installed for ₹25,00,000. The set up came into operation on 1st April, 2012. The cost of a similar new computer in due course declined to ₹42,000. The industry norm of the depreciation charged on the computers is 30% on written down value basis. At what appropriate value he should insure the set up on next due date 1st April, 2013? a) ₹11,25,000 b) ₹13,30,000 c) ₹14,70,000 d) ₹16,20,000 22. If „l30‟ is 9,83,989; and „l31‟ is 982838, then calculate the risk premium for a group of 5000 persons for a SA of ₹10,00,000 each. a) 5,84,864 b) 5,85,549 c) 58,48,643 d) 58,55,492 14

23. Calculate risk premium at the age of 29 years for a SA of ₹10,00,000 from the data given: Age ‘x’ l ‘x’ 28 986292 29 985142 30 983989 a) ₹1,171.76 b) ₹1,170.39 c) ₹1,169.02 d) ₹1,167.34 24. A businessman bought a piece of land in March 2002 for₹80,00,000. He got a factory built on the land at a cost of ₹90,00,000. The factory became operational on 1st September 2005. The land prices have appreciated at 15% per annum in the period and the construction cost has escalated at 12% per annum since 2005. At what value the factory should be insured in April 2013 on Market Value basis if the depreciation on factory premises is charged at 6% per annum on straight line method? a) ₹1,05,00,008.75 b) ₹1,15,87,507.67 c) ₹1,25,50,007.59 d) ₹1,58,87,690.50 25. The sum insured under insurance policy is ₹10,00,000. Loss is ₹60,000. Market value was ₹15,00,000. What is the amount of claim payable? a) ₹40,000 b) ₹50,000 c) ₹60,000 d) ₹10,00,000 15

SOLUTIONS 1 (c) 2 (d) 3 (b) 4 (a) 5 (a 6 (d) 7 (a) 8 (c) 9 (d) 10 (c) 11 (a) 12 (d) 13 (a) 14 (a) 15 (b) 16 (b) Solution: (12000-10000) 17 (d) Solution: (((7.5/1000)X100000)+((5/1000)X200000)) 18 (c) Solution: (0.75) 19 (a) Solution: (5000/(1-0.2)) 20 (d)Solution: ((((30000/5000000)X50000)X200000)/50000) 21 (c) Solution: Current market price (replacement cost) of the set up: 42000*50 = 2100000; Amount of depreciation chargeable till date: (2100000*30)/100 = 630000; Thus appropriate value to be insured with: (2100000-630000) 16

22 (c) Solution: ((((983989-982838)/983989)X5000)X1000000) 23 (b) Solution: (((985142-983989)/985142)X1000000) 24 (b)Solution: Land  8000000  Mar 2002  +15% p.a.; Factory Premises (Building)  9000000  Sep 2005  +12% p.a.  - 6% SL; Note: Insurance on factory premises only and not on land; Current market price (replacement cost) of the set up: N: Apr 2013 – Sep 2005 i.e. 8, I: 12, PV: 9000000; FV = 22283668.59; Amount of depreciation chargeable till date: ((22283669*6)/100)*8 = 10696160.92; Thus appropriate value to be insured with: (22283668.59-10696160.92) 25 (a)Solution: ((1000000/1500000)X60000) 17

Section - III: Life Insurance - Analysis of Life Cover, Strategies and Products 1 - Mark Questions 1. Which one of the following statements is correct in respect of a Convertible Plan? a) A conversion becomes effective when the policyholder exercises the option b) A conversion option is subject to the insured person being in good health c) Both the statements are correct d) Both the statements are wrong 2. What is the term used for the insured's right to renew their life insurance policy regardless of changes to medical status? a) Right to renew b) Guaranteed renewable c) Right to continue d) Guaranteed continuance 3. Risk on child's life under Children Deferred Assurance plan starts on __________. a) Date of majority b) Deferred date c) Date of commencement d) Date of vesting 4. In Unit-Link policy, market risk is with __________. I. Insured II. Insurer a) Only I b) Only II c) Both I and II d) Neither I nor II 18

5. Under a Term Assurance Plan taken at age 30 for a period of 30 years, Sum Assured is payable: a) On reaching age 60 b) On death before age 60 c) On death during the term or survival up to the end of the term of 30 years d) On death any time after or before age 60 2 - Marks Questions 6. Vinayak, 36 years and married, works for a multinational firm, which provides adequate medical and related covers. He is also able to accumulate sick leave. He already has his own home and savings of ₹35 lakh, which are well invested. Which insurance cover does he require the most? a) Life Cover b) Medical Cover c) Property Insurance d) Temporary Total Disablement Cover 7. Which of the following statements is correct: a) Any policy which promises a payment on a fixed date is an endowment policy b) Any policy which promises a payment on a fixed date is a term policy c) Any policy which promises a payment on a fixed date is a whole life policy d) Any policy which promises a payment on a fixed date can be any of the above policies 8. A client explains that she only wants an insurance policy that will cover her family against financial risk over the next five years, while she still has dependent children and a large mortgage. It is unlikely her income will increase over this period. What type of insurance is she looking for? a) An unit linked insurance plan b) Money back policy c) Level term insurance policy d) Increasing term insurance policy 19

9. If the life insurance policy is endorsed under MWP Act, 1874 then __________. a) Creditors have claim only to the extent of outstanding principal, on policy proceeds b) Creditors have first claim on policy proceeds c) Creditors have no claim on policy proceeds d) Creditors have residual claim on policy proceeds 10. Which amongst the following is a benefit that arises when a life insurance policy is purchased? I. It serves as an immediate source of funds for the repayment of loans. II. It acts as collateral for loans. III. It frees properties from leasehold encumbrances. IV. It creates an immediate estate if the insured dies. a) OnlyI&II b) OnlyI, II&IV c) OnlyI, II&III d) All of the above 3 - Marks Questions 11. The life assured under an endowment without profits policy for 20 years for ₹1,00,000 SA with DAB rider died on 30th June 2013 committing suicide. The policy was taken on 21st March 2013 and was backdated to 1st April 2012. Determine the amount of claim payable. a) ₹1 lakh b) ₹2 lakh c) Nil d) Return of premium 12. One of your clients has taken an endowment policy with a term of 20 years for ₹4 lakh in which premium payment is limited for 10 years. If revisionary bonus is 7.5% per annum and terminal bonus is ₹150 per mile, what is the maturity claim amount? a) ₹10,60,000 b) ₹10,00,000 20

c) ₹6,10,000 d) ₹4,00,000 13. Find the yield on the total amount to be received by the insured on maturity on the basis of „Total Premium‟ method in the following case: Sum Assured: ₹5,00,000; Simple level reversionary bonus (p.a.): ₹50 per thousand SA; Plan & Term: Endowment participating plan for 20 years; Premium (p.a.): ₹23,000 a) 6.52% b) 6.93% c) 7.54% d) None of the above 14. Calculate cost per thousand of the risk amount of Mr. Ashok‟s life insurance policy which he had bought for SA of ₹20 lakh. He pays a premium of ₹15,000 p.a. The Surrender value of the policy is ₹6,00,000 currently. If he continues it, the surrender value would increase by ₹25,000. Assume interest rate of 7.5% pa. a) ₹26.27 b) ₹20.31 c) ₹2.63 d) None of the above. 15. Mr. Mohan is the sole income earner in the family. Mrs. Mohan is a homemaker. They are aged 38 and 35 years respectively. Life expectancy is another 36 and 40 years respectively. They have no children. Other information is as follows: Current investment portfolio – ₹18 lakh; Estimated final expenses – ₹1.5 lakh; Present annual expenses – ₹3.75 lakh (including ₹1 lakh of Mr. Mohan‟s personal expenses); Assume an inflation rate of 5% and an interest rate of 8%. Calculate the additional insurance requirement under the Needs Based method for Mr. Mohan. a) ₹73,00,182 b) ₹50,41,833 c) ₹48,55,948 d) None of the above 21

16. Calculate half yearly premium from the following data: SA ₹1,00,000 Tabular Premium ₹30.40 per thousand SA Rebate for Half yearly mode @ Re. 1.00 per thousand SA Large Sum Assured rebate ₹1.50 if the SA is equal to or more than ₹50,000 Double Accident Benefit Rider premium @ Re. 1.00 per thousand SA Health extra @ ₹1.50 per thousand SA a) ₹3,040 b) ₹1,520 c) ₹1,500 d) None of the above. 17. Calculate Paid Up Value on the basis of the data as under: Sum Assured ₹50,000 Plan & Term Participating Endowment for 12 years Date of commencement 01.11.2014 Due Date of last premium paid 01.11.2016 Mode of premium payment Half-yearly Consolidated bonus rate ₹100 per thousand SA a) ₹10,417 b) ₹12,500 c) ₹15,417 d) None of the above 18. On the basis of the data given below, calculate the amount of claim payable: Date of commencement 16.06.2012; SA ₹40,000 with DAB rider; Non-participating endowment policy for 20 years; Annual premium ₹3,000; Last premium paid was due on 16.06.2016; Death occurred on 08.07.2017 due to road accident. a) ₹77,000 b) ₹20,000 c) ₹97,000 d) ₹1,00,000 22

19. Calculate Cost per thousand of an existing policy of life insurance on the basis of the following data if the policyholder expects to earn 5% interest on his savings: Current surrender value: ₹50,000; Annual Premium: ₹12,000; Sum Assured: ₹1,00,000; If he continues the policy, the surrender value will increase to ₹65,000 at the end of the current year. a) ₹3.25 b) ₹2.86 c) ₹2.35 d) None of the above 20. Calculate annual premium of a policy of SA ₹1,00,000 for a person aged 35 years on the basis of the following data: Tabular premium ₹25 per thousand SA Rebate for annual mode of payment @ 2% of the tabular premium Rebate for Sum Assured of ₹50,000 or above @ ₹1.50 per thousand SA a) ₹1,075 b) ₹2,150 c) ₹2,300 d) None of the above 21. Calculate the Paid-up value based on the following information: Plan and Term Endowment 20 Years Mode of Premium Yearly Sum Assured ₹1,00,000 Date of Commencement 18.03.2008 Last Premium Paid 18.03.2017 Vested Bonus ₹35,000 a) ₹85,000 b) ₹80,000 c) ₹50,000 d) None of the above 23

22. The insured, who had taken a participating endowment policy for ₹30,000 on 13.12.1997, died on 27.06.2013. The half-yearly premium of ₹900 was paid due up to 13.06.2013. The policy term is 30 years. Bonus already allocated to the policy is ₹800 per. Calculate the amount of claim payable. a) ₹54,450 b) ₹54,000 c) ₹56,250 d) None of the above 23. A money back policy for SA of ₹1,00,000 matured after 25 years. Survival benefits of 15% each had been paid at the end of 5th, 10th, 15th and 20th years. Bonus had accrued at ₹965 per ₹1000/- SA. Interim bonus @ ₹25 per thousand SA is payable. What is the maturity claim amount? a) ₹1,98,000 b) ₹1,69,000 c) ₹1,68,000 d) ₹1,39,000 24. Derive the „Policy Cost Per Thousand‟ with following data: Interest rate = 8%; Dividend or Bonus = ₹13,000; Death benefits = ₹20,00,000; Annual Premium = ₹23,000; Cash surrender value at the end of current policy year = ₹6,00,000; Cash surrender value at the end of the previous policy year = ₹5,70,000. a) ₹28.07 b) ₹19.60 c) ₹13.24 d) ₹31.15 25. Calculate the half yearly Premium of a policy of SA ₹1,50,000; Tabular premium ₹55 per thousand SA; Rebate for SA above ₹50,000 ₹2 per mille, DAB premium ₹1.50 per thousand SA (DAB guaranteed upto₹5,00,000 only); Extra premium for occupational hazards ₹2.50 per thousand SA. a) ₹4,035 b) ₹4,275 c) ₹4,175 d) ₹4,025 24

4 - Marks Questions 26. A participating money back policy taken for a period of 20 years provides 3 survival benefits @ 20% of the SA of ₹1,00,000 at the end of fixed intervals of 5 years each. If the insured person dies after 12 years, calculate the amount of death claim payable? a) ₹60,000 and bonuses for 12 years b) ₹60,000 and bonuses for 20 years c) ₹1,00,000 and bonuses for 12 years d) ₹1,00,000 and bonuses for 20 years 27. Calculate the internal rate of return as on the date of maturity of a Money Back Policy with SA of ₹1,00,000 for a term of 20 years which provided three survival benefits @ 20% payable at the end of every 5 years and an annual simple reversionary bonus of ₹50 per thousand SA. The annual premium amounted to ₹5,100. a) 6.59% b) 6.05% c) 9.34% d) None of the above 28. Sunil‟s present age is 43 years and he wishes to retire at age 58. His current salary is ₹4,00,000 p.a. Total life insurance premiums paid by him is ₹30,000 p.a. for a SA of ₹8 lakh. Income tax amounts to ₹45,000 and medical expenses are being reimbursed by the company. Self-maintenance expenses are ₹36,000 p.a. (including entertainment, club membership, sports). Find additional insurance requirement @ 8% interest p.a. a) ₹24,73,689 b) ₹18,71,584 c) ₹16,73,689 d) None of the above 29. Calculate the monthly premium (rounded off to the next higher rupee) based on the following information: SA ₹60,000 Date of maturity 28.09.2045 Policy term 39 years Date of birth of the insured 26.12.1976 25

Tabular premium for the age next birthday: 29 years – ₹27.46, 30 years – ₹28.83 & 31 years – ₹29.37 per thousand SA Large SA rebate for ₹50,000 and above ₹1.50 per mile. a) ₹139.35 b) ₹140 c) ₹137 d) ₹132 30. Find out loan available at 90% of surrender value as on 01.09.2016: Sum Assured ₹50,000 Date of Commencement 13.07.2010 Plan & Term Endowment (without profits) & 25 years Due date of last premium paid 13.07.2015 Mode of payment Half Yearly Additional Information: S.V. Factors: 5 years = 23.91%, 6 years = 24.63%, 7 years = 26.48% a) ₹2,621.52 b) ₹2,438.37 c) ₹2,367.09 d) None of the above 31. Ram had taken an endowment plan for 25 years on 20.05.2000 for a sum assured of ₹5 lakh, wherein premium payable is ₹4,000 quarterly. He died on 18.08.2016. Quarterly premium due in august 2016 was paid on 06.08.2016. Bonus vested in the policy is ₹2,88,000. What is the amount of claim payable under the policy? a) ₹7,88,000 b) ₹7,80,000 c) ₹8,06,000 d) ₹11,28,000 32. A with profit life insurance policy with a track record of offering bonuses at ₹50 per thousand sum assured has a premium differential of ₹30 per thousand SA from a similar pure term policy. The corresponding pure term cover of 20 years and SA ₹12 lakh is 26

available at an annual premium of ₹7,860. Your client has recently paid 16th premium in the with profit policy. Evaluate the differential returns from the with profit policy in case of mortality today from the perspective of 8% p.a. return. a) 6.46% b) 5.78% c) -2.22% d) None of the above 33. Raja‟s present age is 45 years and he wishes to retire at age 60. His current salary is ₹3,00,000 p.a. Total life insurance premiums paid by him is ₹30,000 p.a. for a SA of ₹8 lakh. Income tax amounts to ₹45,000 and medical expenses are being reimbursed by the company. Self- maintenance expenses are ₹36,000 p.a. (including entertainment, club membership, sports). Find additional insurance requirement @ 8% interest p.a. assuming that his salary is growing @ 5% p.a. a) ₹58,01,170 b) ₹23,44,897 c) ₹15,44,897 d) None of the above 34. Calculate Surrender Value from the given information: Sum Assured ₹25,000 Plan & Term Endowment (without profits) & 20 years Mode of payment Half Yearly Date of Commencement 10.08.1982 Date of first unpaid premium 10.02.1997 Vested Bonus ₹20,750 Surrender value factor 70% a) ₹38875 b) ₹27213 c) ₹12,850.63 d) None of the above 27

35. Given the following data, calculate the amount of claim payable: Endowment policy for 10 years; Sum Assured ₹40,000; Date of commencement 05.02.2012; Date of death 18.08.2016; Half yearly premium of ₹680 due in February 2016 has been paid. Vested bonus is ₹8,000. a) ₹47,320 b) ₹24,000 c) Nil d) None of the above 36. Mr. and Mrs. Suleiman, aged 45 and 43 years, both have a life expectancy of another 35 years. Calculate the insurance requirement for Mr. Suleiman, based on need based approach. You have the following information: Current investments – ₹25,00,000; Current annual expenses – ₹3,00,000 (including ₹1 lakh of Mr. Suleiman‟s personal expenses); Mr. Suleiman‟s income post tax – ₹3,50,000 p.a.; Final costs – ₹1 lakh; Interest rate – 6% p.a.; Inflation rate – 4% p.a. a) ₹27,57,888 b) ₹26,60,569 c) ₹14,54,879 d) None of the above 37. Your client purchased a single premium deferred annuity for ₹85 lakh when he was of 53 years and had in dependents a non-working spouse of age 48 and a son of age 25. On reaching age 60, he expects at least one, himself or his spouse, to survive till 85 years and contracts an immediate life annuity with return of purchase price at ₹10.15 lakh p.a. vested against the purchase price of ₹1.61 crore. What return is expected from the vesting date? a) 6.30% b) 6.73% c) 8.51% d) None of the above 28

38. A family‟s monthly expenditure is ₹40,000. The earner accounts for 15% of the expense. He wants to cover his family‟s inflation-adjusted expenses for the next 40 years considering average inflation at 5.5% p.a. and the investment return at 7.5% p.a. What is the approximate life insurance coverage needed? a) ₹1,14,84,273 b) ₹1,14,66,315 c) ₹1,14,33,661 d) None of the above 39. A single mother, aged 33, earns ₹7.5 lakh p.a. out of which taxes and self-expenses account for ₹1.5 lakh p.a. Her salary is expected to rise by 10% p.a. whereas taxes and personal expenses are likely to rise by 6% p.a. If she expects to work till 58 years, what economic value can you enumerate on her life, if she is confident of getting a return of 9% p.a. from investments? a) ₹1,82,29,596 b) ₹1,42,66,871 c) ₹1,12,89,653 d) None of the above 40. A company has retirement age as 58 years. An employee at age 35 expected increments of 7% p.a. as per company policy when his annual net earnings were ₹6 lakh. After 5 years, he got next cadre and his annual net earnings became ₹9 lakh. The increments in the revised cadre are at 9% p.a. He had purchased a life cover by income replacement method at age 35. What additional cover is required if he expects his investments to yield 9.5% p.a.? a) ₹52,29,844 b) ₹42,65,871 c) ₹47,56,252 d) None of the above 29

SOLUTIONS 1 (a) 2 (b) 3 (b) 4 (a) 5 (b) 6 (a) 7 (a) 8 (c) 9 (c) 10 (b) 11 (c) Solution: Suicide within 1st year is excluded 12 (a) Solution: (400000+((400000X7.5%)X20)+((150/1000)X400000)) 13 (b) Solution: CMPD  (Set: BEGIN; N: 20; PMT: -23000; FV: 1000000; Solve for I) 14 (a) Solution: (((15000+600000)X1.075)-(625000))/((2000000-625000)X0.001) 15 (b)Solution: CMPD  Set: Begin, N: 40, I: (((1.08/1.05)-1)X100), PMT: (375000-100000); Solve for PV = 6691833; (6691833-1800000+150000) 16 (b)Solution: (30.40-1-1.50+1+1.50) 17 (c) Solution: ((((2+2)+1)/24)X50000)+((100/1000)X50000) 18 (a) Solution: ((40000X2)-3000) 19 (b)Solution: (((12000+50000)X1.05)-(65000))/((100000-65000)X0.001) 20 (c) Solution: (25-(25X(2/100))-1.50)/1000)X100000 21 (a) Solution: ((10000X(((18.03.2009-18.03.2018)+1)/20)+35000) 22 (b) Solution: (30000+((800/1000)X30000) 30

23 (d) Solution: (100000X((100-(15X4))%)+((965/1000)X100000)+((25/1000)X100000) 24 (b) Solution: (((23000+570000)X1.08)-(600000+13000))/((2000000-600000)X0.001) 25 (b)Solution: (((55-2+1.5+2.5)/100)X150000)/2 26 (c)Solution: No deduction from SA is made on account of money backs paid in case of death benefit for a money back policy 27 (c) Solution: CASH FLOW  (-5100, -5100, -5100, -5100, -5100, -5100+20000, -5100, -5100, - 5100, -5100, -5100+20000, -5100, -5100, -5100, -5100, -5100+20000, -5100, -5100, -5100, -5100, +40000+100000) 28 (b) Solution: CMPD  Set: Begin, N: 58-43, I: 8, PMT: (400000-30000-45000-36000); Solve for PV = 2671584; (2671584-800000) 29 (c)Solution: 28.09.2045-39=28.09.2006-26.12.197630; (((28.83-1.50)/100)X60000)/12 30 (b) Solution: Paid Up Value: (50000X((((13.07.2010-13.07.2005)X2)+1)/(25X2))  11000; Surrender Value Factor: (11000X(01.09.2011-13.07.2005  24.63%))  2709.30  Loan Amount: (2709.30X(90/100)) 31 (b) (500000 + 288000-4000X 2 (as premium for whole year is to be paid) 32 (c) Solution: Price differential in premium per thousand: ₹30; Price differential in premium for a ₹12 lakh policy: ₹36000 ((30X1200000)/1000); Estimated bonuses on maturity of with profit policy: ₹960000 ((50X16X1200000)/1000); Rate expected on maturity proceeds: 5.78% (RATE(16,-36000,0,960000,1)); Return differential from 8% p.a.: (5.78% - 8%) 33 (c) Solution: CMPD  Set: Begin, N: 60-45, I: (((1.08/1.05)-1)X100), PMT: (300000-30000- 45000-36000); Solve for PV = 2344897; (2344897-800000) 34 (b)Solution: Paid Up Value: (25000X((((10.02.1997-10.08.1982)X2)+1)/(20X2))  18125; Surrender Value: (18125+20750)X(.70) 35 (a)(40000+8000-680) 36 (a) Solution: CMPD  Set: Begin, N: 35, I: (((1.06/1.04)-1)X100), PMT: (300000-100000); Solve for PV = 5157888; (5157888-2500000+100000) 37 (b) Solution: Age of client on vesting date: 60 years; Age of spouse on vesting date: 55 years; Thus maximum annuity period expected: 30 years; Effective return expected from annuity: RATE(30,1015000,-16100000,16100000,1) 31

38 (a) Solution: CMPD  Set: Begin, N: 40X12, I: ((((1.075/1.055)^(1/12))-1)X100), PMT: (40000X((100-15)/100)); (Solve for PV) 39 (c) Solution: PV of gross earnings, discounted at growth ratePV((1+9%)/(1+10%)-1,58- 33,-750000,0,1) = 20967027; PV of taxes/expenses, discounted at growth rate  PV((1+9%)/(1+6%)-1,58-33,-150000,0,1) =2,737,432;PV of net earnings = (20967027-2737432) 40 (c)Solution: Insurance coverage by income replacement at age 35  PV((1+9.5%)/(1+7%)- 1,58-35,-600000,0,1) = 10830035; Revised insurance coverage by income replacement at age 40  PV((1+9.5%)/(1+9%)-1,58-40,-900000,0,1) = 15586286; Additional cover needed = (15586286-10830035) 32

Section - IV: General Insurance- Property, Health and Liability Insurance 1 - Mark Questions 1. A loss arising from “indifferent attitude” towards safety because of existence of insurance is __________. a) Un-intentional hazard b) Morale hazard c) Occupational hazard d) Physical hazard 2. A package motor insurance policy will cover: a) Injury to driver/ owner b) Only damage to the vehicle c) Only liability to the third parties d) All of the above 3. Which of the following requirements does not apply for granting cash-in-safe insurance: a) The safe is burglary proof b) The safe is brand new c) The safe is approved make d) The safe is of approved design 4. LALGI is a__________. a) Private contribution guarantee scheme b) Private insurance scheme c) Public benefit guarantee scheme d) Social insurance scheme 5. The pricing of insurance products is based on: a) The law of large numbers b) The law of averages 33

c) Both of the above d) None of the above 2 - Marks Questions 6. State whether the following statements are true in relation to personal accident policy: I. Statement A: Once a claim for permanent total disablement is paid, the policy becomes inoperative II. Statement B: Weekly compensation becomes payable only after the total amount payable is ascertained and agreed a) Only I b) Only II c) Both I & II d) Neither I nor II 7. Mr. Rakesh has a “Package Motor Insurance Policy”. He negligently crashes his car into the back of a taxi, which had stopped at a taxi stand to allow a passenger to alight from it. Which of the following claims would be covered by Mr. Rakesh‟s policy? I. Damage to the taxi II. Bodily injury to the taxi driver III. Bodily injury to the passenger while alighting from the taxi a) I & II only b) I & III only c) II & III only d) I, II & III 8. Premium on Motor Insurance policy doesn‟t depend on which one of the following factors? a) Zone of operation of the vehicle b) Insured Declared Value (IDV) of the vehicle c) Cubic capacity of the vehicle d) Age of the owner of the vehicle 34

9. Which of the following is not covered under personal accident insurance policy? a) Temporary total disability b) Temporary partial disability c) Permanent partial disability d) Permanent total disability 10. Under which of the following insured has to bear a part of loss? a) Prorate average b) Excess c) Franchise d) All of the above 11. The statement that “Work of Art” can be covered in Fire insurance for a valued policy is: a) True b) False 12. Which of the following is not “Permanent Total Disablement” under a Personal Accident Insurance Policy? a) Loss of two limbs b) Loss of both the eyes c) Loss of Hearing of both ears 13. The principle of indemnity is applied through deduction: a) For under insurance b) For depreciation c) Under franchise clause d) Under excess clause 14. Under which of the following circumstances personal accident insurance benefit shall be accepted by the insurer? a) Death due to gunshot b) Self-injury due to insanity c) Breach of law with criminal intent d) Accident under the influence of drugs 35

15. Most health insurance policies cover pre-existing illnesses after _________________. a) 12 months b) 24 months c) 48 months d) 3 months 3 - Marks Questions 16. A person purchased a flat worth₹20,00,000 one year ago. He had insured it for ₹20,00,000 only. The flat has been currently totally damaged by an earthquake. Assuming that the rate of depreciation is 25% p.a. and the insurance policy is a market value basis policy, the insured will get a claim payment of: a) ₹20,00,000 b) ₹15,00,000 c) ₹5,00,000 d) None of the above 17. The declaration policy for burglary insurance is issued for a provisional sum insured of ₹1 crore with rate of premium ₹1/000. Actual declaration made is ₹40 lakh. Calculate provisional premium & refundable amount. a) ₹1000 – ₹500 b) ₹10,000 – ₹5,000 c) ₹10,000 – ₹6,000 d) ₹11,000 – ₹4,000 18. A policy with sum insured ₹10 lakh is with franchise ₹10,000. The loss is ₹15,000. What is the amount of claim payable? a) ₹10,000 b) ₹15,000 c) ₹5,000 d) NIL 36

19. A person purchased a flat worth ₹20,00,000 one year ago. He had insured it for ₹20,00,000 only under a market value basis policy. The flat has been currently totally damaged by an earthquake. Assuming that the rate of depreciation is 25% p.a. and the current market price of the flat is ₹23,00,000, the insured will get a claim payment of: a) ₹23,00,000 b) ₹15,00,000 c) ₹17,50,000 d) None of the above 20. A property has been insured for a sum assured of₹10 lakh, two years ago, under the house holder insurance policy (reinstatement value basis). The entire property is stolen. Depreciation rate is 10% p.a. written down basis. The current market price is ₹13 lakh. What is the amount of claim payable? a) ₹13.00 lakh b) ₹10.53 lakh c) ₹10 lakh d) Nil 4 - Marks Questions 21. Sahib purchased a warehouse. The value of the warehouse was ₹1 million. He wanted to insure his property of Rs.8 lacs. But his insurance agent carefully explained the underinsurance concept. Sahib thus wisely decided to insure the warehouse for the full value that he had paid for. His agent, however, had failed to mention the inflation protection option which upped the amount of insurance he had each year for coverage on the warehouse. The policy also had ₹5,000deductible. As a result of all this when at the end of five years with the warehouse value approximately ₹12,50,000, it had a fire. The fire caused ₹50,000 worth of damage. The insurance company paid the following: a) ₹50,000 b) ₹40,000 c) ₹45,000 d) ₹35,000 37

22. Suryakant has an accident insurance policy which pays Temporary Total Disability (TTD) benefit of ₹3,000 per week for up to 104 weeks. He meets with an accident and is disabled and bedridden for 6 months. He has available leave of 4 weeks, after which he is on loss of pay. What benefit amount will he get from the insurance company? a) ₹60,000 b) ₹72,000 c) ₹66,000 d) ₹78,000 23. An entrepreneur setting up a leather processing unit purchased a land in 2006 for ₹50,00,000 and got specialized construction done in 2007 for ₹1,60,00,000. In March 2008 the processing plant was constructed at a cost of ₹2,00,00,000. The cost of such construction and plant are escalating at 10% p.a. The corrosive nature of chemicals requires depreciation on plant as well as premises at 15% p.a. on written down value basis. As in 2013 what additional reserves should be created by the company apart from depreciation reserves and the residual insured value of plant and premises to reinstate the facility in case it is destroyed in a calamity? a) ₹2,45,55,176 b) ₹2,75,00,556 c) ₹3,54,87,555 d) None of the above 24. A departmental store has rented a space in a Mall. The Store took insurance of goods housed in the shop for a value of ₹2,10,00,000. The surveyor assessed the average value of goods stored at the facility at ₹2,50,00,000. The Store in its quarterly stock taking on 31st December 2012 assessed value of the goods at landed cost of ₹1,80,00,000. On 17th January 2013 the Store had a major fire destroying all goods stored therein. The Store as per sales records had sold goods for ₹35,00,000 in the interim, making a profit of ₹7,50,000. Calculate the admissible amount of claim? a) ₹78,80,000 b) ₹1,28,10,000 c) ₹3,48,65,000 d) None of the above 38

25. Mohan has a house worth ₹20 lakh (replacement cost) insured for only ₹16 lakh under a householders‟ policy. The house is totally destroyed in a fire because of faulty wiring by an electrician. How much would the insurer pay to Mohan assuming no indemnification by the electrician? Assuming that after exercising its subrogation rights against the negligent electrician, the insurer had a net recovery of ₹10 lakh, how much should the insurer now further pay to Mohan? The policy is a replacement cost policy. a) ₹16 lakh, Nil b) ₹12 lakh, ₹4 lakh c) ₹16 lakh, ₹4 lakh d) None of the above 39

SOLUTIONS 1 (b) 2 (d) 3 (b) 4 (d) 5 (a) 6 (c) 7 (d) 8 (d) 9 (b) 10 (b) 11 (a) 12 (c) 13 (b) 14 (a) 15 (c) 16 (b)Solution: In case of market value basis policy the loss is reduced by depreciation and the insurer pays only the reduced, depreciated value The compensation is equal to current market price less depreciation till date; ((2000000-(2000000X0.25)) 17 (c) Solution: ((1/1000)X10000000) and (10000-((1/1000)X4000000)) 18 (b) Solution: (15000-Nil) 19 (b)Solution: 2000000*.75 = 1500000( pro rata clause is not applied on total loss ) 20 (c) Solution: In case of reinstatement value basisno depreciation is deducted 40

21 (d) Solution: claim settlement by the insurer; (1000000/1250000)X50000-5000 = 35000 22 (d) Solution: (((52/2))X3000) 23 (a) Solution: Land  5000000  2006; Specialised construction  16000000  2007  +10% p.a.  - 15% WDV; Processing plant  20000000  2007  +10% p.a.  - 15% WDV; Note: Since residual insured value is same as salvage value (i.e. cost of purchase less depreciation till date) thus total of depreciation reserves and the residual insured value will always be equal to the cost of purchase. Current cost of reinstatement of specialized construction: N: 2013 – 2007, I: 10, PV: 16000000; FV = 28344976; Current cost of reinstatement of processing plant: N: 2013 – 2008, I: 10, PV: 20000000; FV = 32210200; Total current cost of reinstatement of plant and premises:28344976 + 32210200 = 60555176; Thus, additional reserves to be created: (60555176 – 36000000) 24 (b) Landed cost of goods sold after 31st December 2012: 3500000 – 750000 = 2750000; Amount of Loss: 18000000 – 2750000 = 15250000; Proportion of coverage: 21000000/25000000 = 0.84; Amount of claim: (15250000*0.84) 25 (a)Solution: Initial payment made to Mohan would be ₹16 lakh; Further payment to Mohan would be NIL as he has insured his property only for 16 lakh and paid premium accordingly. 41

Section - V: Regulatory Framework of Insurance 1 - Mark Questions 1. The Insurance Act, 1938, in respect of insurer obligations to the rural and social sector provides __________. a) Specific obligations for the rural sector and general obligations for the social sector b) Specific level of obligations to be met in these sectors for life insurers c) Specific obligations to be met in these sectors for all insurers d) Broad directional guidance to focus on these sectors 2. Ombudsmen is a: a) Mediator b) Negotiator c) Any of the above d) None of the above 3. Under section 113 of Insurance Act, a life insurance policy acquires guaranteed surrender value after __________ of the policy. a) 5 years b) 3 years c) 2 years d) 1 year 4. A new life insurer in its third year of operation should bring in following percent of policies from rural sector: a) 10 b) 7 c) 12 d) 15 5. A new non-life insurer in its third year of operation should bring in following percent of premium from rural sector: 42