INDORE INSTITUTE OF LAW

(Affiliated to DAVV & BCI, New Delhi)

Insurance Law
CRASH COURSE
LL.B. (Hons) II

Q.1. Explain the history and growth of Insurance in India

Q.2. Write a note on IRDA?

Q.3. Explain the concept of Risk in Insurance ?

Q.4. Explain Life Insurance Policy ?

Q.5. Explain General Insurance Policy?

Q.6. Write a note on Marine Insurance?

Q.7. What is Insurance ? What are the elements of contract of Insurance ?

Q.8. What are the characteristics of Fire Insurance ?

Q.9. What is Insurable interest ? State the insurable interest in life insurance.

Q.10. Importance of Social Insurance in India?

Q.1. Explain the history and growth of Insurance in India
Insurance is of primary importance both in the national economy and
international trade. Insurance premium cash-flows generate funds for investment
in the economy. The development of the insurance sector depends on the general
level of economic development and prospects for the immediate future. 1
Generally, there is a positive correlation between the economic development of a
country and the amount the people spend on insurance. Hence, this chapter deals
with the history and origin of insurance in India; definition of insurance as a
contractual, financial and legal aspects of insurance.
Being a multi-dimensional subject, it is difficult to point out the origin of
insurance. In the beginning, the thinker Hardy Ivamy started understanding
insurance as a contractual relation between insurer and the assured through which
the former undertakes to indemnify the loss caused to the latter due to an uncertain
risk involved or to pay a certain sum of money in the event of an incident
happening or not happening, against a consideration called as premium. 2
Everything in this universe is subject to accident, destruction and
perishment. A businessman used this idea of risk as the substance of his business.
He undertakes the burden of risk against a consideration by a probability study
and affixation of an adequate consideration. He therefore earns profit on the trade
of risk whereas the insured is entitled to receive the indemnification or a fixed
sum on the happening of the uncertain event causing loss. Hence, the contract of
insurance then is described as a mechanism of risk distribution and sharing

The contract of insurance thus serves two main purposes as follows 4:

i. There is an element of safety in insurance as there is distribution of loss
among a large number of persons through the medium of risk sharers.
ii. In the long run it leads to an economic development and industrial growth
in the country. This is due to the fact that there is a large number of people
also invest their funds in the medium of insurance which may be utilized
to start industries or even to underwrite the securities of companies which
ultimately lead to the economic development of the country.
2.1 HISTORICAL BACKGROUND:
The risk protection has been a primary goal of humans and institutions
throughout history. Insurance is all about protecting against such risks.
Over 5000 years ago, in China, insurance was observed as a preventative
measure against piracy on the sea. Piracy, in fact, was so rampant, that as a way
of spreading the risk, a number of ships would carry a portion of cargo so that if
one ship was captured, the entire shipment would not be lost 5. In the other part of
the world, nearly 4,500 years ago, in Babylonia, traders used to bear risk of the
caravan trade by giving loans that had to be later repaid with interest when the
goods arrived safely. In 2100 BC, the Code of Hammurabi granted legal status to
the practice and that formalized the concepts of “bottomry (maritime contracts)”
referring to vessel bottoms and “respondentia” referring to cargo. These provided
the foundation for marine insurance contracts. Such contracts contained three
elements: a loan on the vessel, cargo, or freight; an interest rate; and a surcharge

to cover the possibility of loss. In effect, ship owners were the insured and
lenders were the underwriters.6
Life insurance came about a little later in ancient Rome, where burial clubs
were formed to cover the funeral expenses of its members, as well as help
survivors monetarily. With the fall of Rome, around 450 A.D., most of the
concepts of insurance were abandoned, but aspects of it did continue through the
Middle Ages, particularly with merchant and artisan guilds. These provided
variety of insurance covering risks like fire, flood, theft, disability, death, and
even imprisonment.7
Insurance in India can be traced back to the Vedas. For instance,
“Yogakshema” the name of LICI's corporate headquarters is derived from the Rig
Veda. The term suggests that a form of "community insurance" was prevalent
around 1000 BC and practised by the Aryans. And similar to the Ancient Rome,
burial societies were formed in the Buddhist period to help families, build houses,
and to protect widows and children.8
The object of insurance is to mitigate the suffering on the happening of a
contingent event. To achieve this end, the principle of co-operation is employed,
the loss suffered by a few being distributed over the community at large. Records
of the origin and early history of insurance are practically non-existent. It is
therefore difficult to trace the beginning of insurance. However an admirable work
has been done by several writers, in particular by Dr. C. F. Trenerry, the author of
"The Origin and Early History of Insurance". 9 According to him, the earliest form
of insurance seems to have been a sort of "marine and land insurance," very much
akin to modern marine insurance. Initially; the travellers by land and sea were insured against the risk
of losing property to which they were naturally exposed in
times when robbery of caravans and piracy on the open sea were considered as
respectable means of livelihood. The efforts to relieve this intolerable situation
were made in Babylonia and India at a fairly early stage of their history. 10
The related provisions in the codes of Hammurabi and of Manu whereby
a trader who was robbed on a journey through no negligence or connivance on his
part was directed to be set free from debt in respect of both capital and interest on
making a solemn declaration.11 The Greeks, too, evolved, somewhere about the
middle of the fourth century B.C., a complex form of maritime contract which
they must have derived from the Phoenicians and Rhodians. These are the first
approaches to the modern system of contracts of insurance, by which the risks of
trade were distributed between different parties. The following summary of the
provisions of the codes of Hammurabi and Manu, already referred to, shows how
clearly the contracts of bottomry and respondentia were approximated12:
1. The contract applied to land traffic only.
2. The contract was for a true loan and not a partnership, and in others for
a loan with a limited partnership.
3. The merchandise or money advanced was under the custody of and used
by the trader and not retained by the lender.
4. The rate of interest was very much higher (usually 100 percent) than
that charged on ordinary loans which was at that time limited to 20
percent, the period of time having no effect.
The trader was free from liability for the debt on the happening of a
contingency provided for in the contract.
According to the provisions of Manab Dharma Shastra13 :
1. The contract applied to sea-borne and land-carried traffic,
2. The rate of interest instead of being 100 percent, in all cases was
arranged with regard to the risks to be run and length of time for which
the money was required,
3. This rate of interest (or price of risk) was fixed by valuers skilled in sea
voyages or journeys by land who were able to proportion the rate to the
time required and to the risk to be incurred,
4. This rate of interest was specified in the contract and
5. The borrower was excused from payment not only if he was robbed of
his goods but also if the goods did not arrive in good order at the place or
time agreed upon by the contracting parties.
A contract which is so comprehensive as that of the Indian contract and
applying equally to sea and land traffic is not referred to even by the Greeks. The
first reference by the Greeks, about the year 350 B.C., is to a complex form of
maritime contract only.14 Presumably it was got from the Phoenicians and
Rhodians who being initially concerned with the maritime trade modified the
Babylonian land contract to suit their requirements. It is also believed that trade
used to be carried on between Babylonians and Indians, and therefore this
protective principle must have become known to both about the same time and
was developed according to existing needs. It is also possible that the contracts

were developed independently, as both the countries must have been carrying on
trade amongst other people.15
The early development of insurance was irregular and usually in fields
other than life. At that time, man's attention was directed against those risks which
at the moment seemed most dangerous and he could see that the vessel in which
he did his trade might never come home, his house might be burnt down or broken
into by robbers and bandits. These were contingencies that might happen any day;
but death and its consequences were matters somewhat remote and beyond his
control and extremely unpleasant to consider. One could provide for one's
dependents by accumulating wealth; and though this method was often
unsatisfactory, the alternative notion of insurance did not cross his mind. 16
But those people averse to thinking about death as an insurance risk had
not the same objection to making arrangements for a proper and decent burial.
They believed that a peaceful departure from this world was necessary to procure
the deceased peace and happiness in his next birth. This religious faith found
expression in the ancient Roman Collegia. 17 Some later institutions, though
chiefly concerned with burial funds, extended their activities so as to protect the
living and organised help for their needy members. The Roman Collegia are an
example of such an institution. It is, however, improbable that life insurance or
annuity business was transacted by the Romans, although during the middle of the
fourth century A.D. an attempt was made by Ulpian, Roman Prefect, to prepare a
mortality table.18
The next important attempt at insurance, in chronological order, was
made by the Anglo-Saxon Guilds, popularly known as the Insurance Associations
of the middle ages. There is evidence that members of these early guilds(unions/
association ), known as the Frith guilds, bound themselves to render mutual
support in the event, particularly, of fire destroying property, or shipwreck, and to
this extent created a definite insurance principle in respect of two important
human needs. "Membership was confined to followers of the common religion.
All classes seem to have been united in the Frith Guilds and each man paid a fixed
amount to the common fund which was expended on feasts, fines, mass for the
dead, burials and brothers in need”. 19 During the middle ages the mediaeval
craftsman not only made his own wares but was his own agent in selling them,
and thus had a dual capacity as manufacturer and merchant. Such people when
they became numerous, in the Merchant Guilds, separated and formed Craft
Guilds. With the progressive specialization in trade such Crafts Guilds grew up all
over Europe.20
Modern life insurance commenced first in England and Europe about the
sixteenth century but the early attempts, though they resembled modern life
insurance, were actually gambling, because the bases of life insurance business,
i.e., mortality tables, were practically unknown. Further, the use of loan capital for
production purposes did not develop on any large scale till about the beginning of
the eighteenth century.21 Investments of life insurance funds were therefore almost
impossible. Thus we can broadly divide the development of life insurance into
two periods, (a) attempts at co-operation prior to the eighteenth century which
may be regarded as the precursors of modern insurance, and (b) the modern period
of scientific insurance which began in the eighteenth century. 22
Life insurance business, as it is known today, is a heritage from England.
The industrial revolution accelerated the pace. The continent of Europe, America
and Canada followed the same. The early insurance companies in India issued
policies in sterling on the lives of Europeans who were engaged in the services of
the East India Company and later on in those of the Government of India. 23 A few
companies who attempted to write business on Indian lives either came to grief
sooner or later or were absorbed by others. The failure of two large English
companies, the European and the Albert, about the year 1870, affected a large
number of persons in this country who had reposed their faith in them.
Consequent upon this, an attempt was made to float companies in India to
underwrite business on Indian lives also. Thus the “Bombay Mutual" was
established in 1871. It was closely followed by the "Oriental" in 1874. The
Colonial Life Assurance Company also decided, in 1870, to extend its business. 24
Consequent upon this, an attempt was made to float companies in India to
underwrite business on Indian lives also. Thus the “Bombay Mutual" was
established in 1871. It was closely followed by the "Oriental" in 1874. The
Colonial Life Assurance Company also decided, in 1870, to extend its business to
Indian lives and it is from this year that modern Indian insurance may be dated 25.
There are several reasons for the slow development of the modern system of
insurance in India and few of them were 26 :
(1) The joint family system of the Hindus applies the principle of
insurance to its maximum advantage. It automatically provides for minors
and widows whenever necessary,
(2) For centuries very little had happened to disturb the Indian way of
thinking, and thus tradition had secured an unusual stronghold on the
people. Life assurance appeared to conflict with their spiritual and
philosophical ideas which were thousands of years old, and the notion of
providing for one's dependents by means of an instrument which functions
on the death of a person was a most disturbing one,
(3) Insurance means accumulation of funds and their investment on long
term, but until recently opportunities for such investments were limited in
this country,
(4) The influence of Islam, too, is against usury. As the modern system of
insurance allows full play to interest, it was unlikely to find favour among
the Muslims of this country and this is an important hindrance to progress,
(5) The poverty, ignorance and prejudice of Indians have hindered the
growth and expansion of insurance business in India.
The history of Indian insurance may be divided into five periods 27 :
1. The early stage up to 1870, of which little is known,
2. The period of 1870 to 1900 was of stable growth,
3. The years from the opening of the twentieth century to 1912 a
period of mushroom growth under the auspices of the swadeshi
movement, resulting in several failures and the passing of the
Insurance Act in India,
4. The period of 1913 to 1930 was of trial and
5. The present era of modern insurance.
The authoritative history of Indian insurance began to be recorded for
the first time when the Government of India started publishing the returns of Life
Assurance Companies in India in the year 1914. The first issue of this publication
contains a reference and we find the following statement in the preface of the
Indian Insurance Manual (published by Messrs. Thacker Spink & Co., Calcutta) in
1907: "This publication has been called into existence by the entire absence of any
suitable treatise dealing with the business of Life and Fire Insurance in India”. The
name of the same was changed from the ninth issue to "The Indian Life Assurance
Year Book" and from the 15th issue to "The Indian Insurance Year Book”.28
One may quote following to show the extent of ignorance in this subject
including even in Government Departments:
It will be seen that the oldest of the Indian companies were established in Madras about
80 years ago. Bombay has none older than the Bombay Mutual, the Oriental, and the
Bombay Widows Pension Fund which were established about 40 years ago. Life
assurance seems not to have been started in Bengal until much later, and it was not until
1906 that many companies were established either in that Presidency or elsewhere in
India.2
That this statement is obviously not correct and is clear from the
following statement made by Mr. N. R. Sirkar, Chairman of the Reception
Committee, to the Indian Insurance Conference held in Calcutta in 1937 in his
welcome speech:
As far back as 1818 an insurance company, named Oriental Life Assurance Company,
was started in Calcutta mainly by Europeans. Eventually this company failed in 1834 and
was transformed into 'New Oriental'. Let me add here that this company has no
connection whatever with our premier Indian company of Bombay. It was through the
efforts of Babu Muttylal Sen that the company was prevailed upon to accept Indian lives.
Since then Indian enterprise made very good progress in Bengal and leading people of the
province such as Dwarkanath Tagore, Ramtanu Lahiri and Rustomji Cowasji took an
active part in the development of insurance business in this country. It was also left to a
great reformer and eminent son of Bengal, Raja Ram Mohan Roy, to direct the nation's
attention to the need of protection of widows and orphans, and as early as 1822 he issued
an appeal through the columns of the Calcutta Journal requesting the wealthy Hindus of
Calcutta to start an institution for the maintenance of the poor widows
One can find a reference to this company and also to another Indian life
insurance office in the Insurance Encyclopedia by Walford published in 1872-80:
Bombay Life Assurance Company was founded in Bombay on 1 st May 1823. The
company issued no whole-term life policies. It had three classes of short-term insurance,
viz., for one year, not renewable without the certificate of health premium - aged 30 years.
For 3 years renewable without fresh certificate of health annual premium -aged 30 years.
For 5 years renewable without fresh certificate of health annual premium - aged 30 years.
Nothing more is known about that company. Later came Madras
Equitable (established in 1829) and Madras Widows (established in 1834), which
went into liquidation after the war.31
The business of life insurance in India commenced in the year 1818 with
the establishment of the Oriental Life Insurance Company in Calcutta. After a
long break, then in the year 1912, the Indian Life Insurance Companies Act was
enacted as the first statute to regulate the life insurance business. The year 1956
was a historic time in the Insurance sector, when 245 Indian and foreign insurers
and provident societies were taken over by the Central Govt. and nationalized
them. Also LICI was formed by an Act of Parliament in 1956 with a primary
capital contribution of Rs. 5 Crore by the Government of India. 32 The General
Insurance business in India can be traced from the Triton Insurance Company
Ltd.; i.e. the first General Insurance Company established in the year 1850 in
Calcutta by the then British Government. Then in the year 1907 the Indian
Mercantile Insurance Ltd. was set up which was the earliest company to transact
all classes of General Insurance business. Later, in 1972 under the General
Insurance Business (Nationalization) Act, 1972 the general insurance business in
India was nationalized. 107 insurers were merged and grouped into 4 companies
viz. the National Insurance Company Ltd., the New India Assurance Company
Ltd., the Oriental insurance Company Ltd. and the United India Assurance
Company Ltd.

Q.2. Write a note on IRDA?

Role and Functions of IRDA – Economics Study Material and Notes

Brief History of IRDA

 1991: Government of India begins the economic reforms program and financial sector
reforms
 1993: Committee on Reforms in the Insurance Sector, headed by Shri R. N. Malhotra
(Retired Governor, Reserve Bank of India) set up to recommend reforms in insurance
sector.
 1994: Malhotra Committee recommends reforms after studying the insurance sector and
taking inputs from all the stakeholders. Key recommendations of Malhotra Committee
are:
o Private sector companies should be allowed to promote insurance companies
o Foreign promoters should also be allowed
o Government to vest its regulatory powers on an independent regulatory body
answerable to Parliament
 1996: Setting up of an interim body called the Insurance Regulatory Authority
  1999: Enactment of the Insurance Regulatory and Development Authority (IRDA) Act,
1999
 2000: Formation of the Insurance Regulatory and Development Authority as an
autonomous regulatory body on 19.4.2000

Since 2000, IRDA has been serving as an independent regulatory authority for the insurance
industry and to instill confidence among the policyholders in the financial viability of the
insurance companies. IRDA has been playing a pivotal role in the insurance sector with a
fundamental commitment to discharge its mandate for orderly growth of insurance sector.

IRDA has played a very important role in the growth and development of the sector by
protecting policyholders' interests; registering and regulating insurance companies; licensing and
establishing norms for insurance intermediaries, regulating and overseeing premium rates and
terms of non-life insurance covers; specifying financial reporting norms, regulating investment
of policyholders' funds and ensuring the maintenance of solvency margin by insurance
companies; ensuring insurance coverage in rural areas and of vulnerable sections of society;
promoting professional organisations connected with insurance and all other allied and
development functions.

Insurance Regulatory and Development Authority (IRDAI) of India consists a Chairman, Five
Whole time Members and Four Part time members in the administration. However, the
regulations are enacted under the guidance of a statutory advisory committee.

First of all, let us take note of the fact that,  Insurance is listed as a Union subject in the Seventh
Schedule of the Constitution of India. Therefore, only Union Government has the authority to
formulate laws on insurance sector and a State Government cannot.

 The Insurance Regulatory and Development Authority (IRDA) is a Statutory,

autonomous and apex body to regulate the insurance sector in India.
 It was created upon the recommendations by the Malhotra Committee report of 1994.
The report recommended that a independent authority to regulate the insurance industry
in India should be established.
 By the IRDA Act, 1999 this authority was setup. In 2000 it  received the staus of a
Statutory body by the Parliament.
 Therefore, IRDA was setup in 2000 as an autonomous body with its headquarters at New
Delhi.
 In 2001, the headquarters of IRDA were shifted to Hyderabad, Telangana.
 New Development: Since July 2014 the FDI limit in the insurance sector has been raised
to 49% by the government. Earlier it was 26 percent.
 The members and the Chairman of IRDA are appointed by the Government of India.

Mission of Insurance Regulatory and Development

Authority (IRDA)
The IRDA has a mandate to fulfill the following :

 To protect the interests of policyholders and ensure fair treatment to them.

 To facilitate speedy and orderly growth of the insurance industry sector in Indian
economy, for the benefit of  common man, and to give long- term funds which will
accelerate growth of our economy.
 To ensure that the customers of insurance receive clear and correct information about the
products as well as  the services.

Organisational setup of IRDA

The Insurance Regulatory and Development Authority (IRDA) is a ten member team, appointed
by the Government of India, consisting of the following:

 One Chairman 
 Five whole-time members
 Four part-time members

Functions of Insurance Regulatory and Development

Authority
The Insurance Regulatory and Development Authority (IRDA) is a national apex regulatory
agency of the Government of India. It performs the following functions with respect to the
insurance sector in India.

 It issues the certificate of registration or renewal to Insurance companies, insurance

agents or surveyors, Insurance brokers. To function in the insurance sector, a company
has to register with the IRDA.
 IRDA Protects the interests of the policyholders in matters like, nomination by
policyholders, assigning of the policy, insurable interest, surrender values of the policy,
settlement of insurance claim, and various other terms involved in the conditions of
contracts of insurance.
 It specifies the requisite qualification, practical training, and code of conduct for agents,
insurance brokers, and surveyors.
 IRDA is involved in promoting efficiency in insurance business conduction.
 It promotes and regulates professional organisations that connect with the insurance and
re-insurance business.
 IRDA also specifies the code of conduct for surveyors and loss assessors.
 It regulates the fees and other similar charges levied by the insurance companies, brokers,
agents, surveyors, etc.
 IRDA controls the rates, advantages, and terms and conditions which are offered by the
insurers.
 It specifies the form and manner in which books of accounts are to be maintained by the
insurers and other insurance intermediateries.
  It regulates the investment of funds made by the insurance companies and firms.
 IRDA settles disputes between insurers and intermediateries, whenever they arise.
 It also regulates the maintenance of margin of solvency(To possess sufficient funds to
settle insurance claim amounts).
 It specifies the percentage of premium income of the insurer that can go to finance
schemes for promotion and regulation of professional organisations.
 It also specifies the percentage of life insurance business and general insurance business
that can be undertaken by the insurer in the social and rural sector.
 It supervises the working of the Tariff Advisory Committee also.
 IRDA has the power to frame regulations regarding the Insurance market.
 It promotes competition among the insurance companies and insurers in order to enhance
customer satisfaction, by providing increased choice to consumers. Like it allowed
Health Insurance Portability.
 IRDA is also involved in the field of Consumer education and assistance.

What is the Grievance Redressal Procedure to be followed?

The Insurance Company is committed to extend the best possible services to its customers. But there
could be some situation wherein the insured may not be fully satisfied with the level of service or the
decision made by an insurance company on a particular claim. If this is the case, then the insured, can
lodge a complaint with the insurance company at their 24X7 Toll free number provided on the policy
certificate, policy wordings (terms and conditions) or available on the company website. The insured can
also choose to send an email to the customer service desk at the email id specified. After investigating
the matter internally and subsequent closure, the insurance company will ideally send a response within
a period of 10 days from the date of receipt of the complaint by the Company at its Head office or any of
the branches. In case the resolution is likely to take longer time, the insurer will inform the insured of
the same through an interim reply.

For lack of a response or if the resolution still does not meet the insured’s expectations, they can write
to the Head - Customer Services at the insurance company. After examining the matter, they will send
their final response within a period of 7 days from the date of receipt of your complaint. Within 30 days
of lodging a complaint with the insurance company, if the insured still does not get a satisfactory
response from the insurer, they can pursue other avenues for redressal of grievances, as well as directly
approach Insurance Ombudsman appointed by IRDA under the Insurance Ombudsman Scheme.

The Insurance Ombudsman operates under Territorial jurisdiction and hence the insured will have to
approach the appropriate Ombudsman with the details of grievance.

Summary of IRDA – Short Note

The primary aim to form IRDA has been to create a regulator, that will be able to regulate and
develop the insurance industry in the country, while also controlling all organizations
or individuals who are directly or indirectly involved in the insurance sector.

The Insurance Regulatory and Development Authority has been given the powers to issue such
regulations that are related to the insurers, the insurance intermediaries, the surveyors, or any
third party administrators. It canframe provisions for their registration, or renewal of their
licenses as well as to review their functioning for smooth working of the insurance sector.

The Insurance Regulatory and Development Authority is also entrusted with responsibilities of

protecting the interest of the policyholders, for whom the insurance companies and
intermediaries are issuing the policies. Even after these powers to regulate the insurance sector,
the Authority remains accountable to the Central Government for its actions and inactions.

Q.3. Explain the concept of Risk in Insurance?

THE CONCEPT OF RISK The term may be defined as the possibility of adverse
results flowing from any occurrence Risk arises therefore out of uncertainty.
It can also represent the possibility of an outcome being different from the
expected. The nation of an in terminate outcome is implicit in the definition
of risk because the outcome must be in question. When risk is said is exist,
there must always be at least two possible outcomes. It is known for certain
that a loss will occur, there is no risk. At list one of the possible outcome is
undesirable. This may be a loss in the generally accepted sense in which
something an individual possesses is lost or it may be a gain smaller that the
gain that was possible. The term risk is used in insurance business is also
mean either a peril to be insured against.(e.g. fire is a risk to which property
is exposed) or a person or property protected by insurance.

DEFINATION OF RISKThe word “Risk” has been defined in many different

ways be economists, insurance manager, and scholars. According to
Knight-“Risk as measurable uncertain”. According to Willett “Risk as the
objectified uncertainty regarding the occurrence an undesirable event” 1.
According to M. Ahamad “ Capability to estimate risk factor in a way to
overcome any kind of uncertain burden and manage the organisation for the
sake of future survival”. According to P feffer “Risk as a combination of
hazards measured by probability”. According to above definitions it is
evident that the risk involves nature of uncertain losses. As it can be viewed
in a physiological phenomenon that is meaningful in term of human
experiences and reaction. Another way it can also be viewed as objective
phenomenon that may be or many not be recognized as we are uncertain
about many types of losses that may or may not occur for causes yet to be
recognized.

3 Types of Risk in Insurance

 Financial and Non-Financial Risks.

 Pure and Speculative Risks.
 Fundamental and Particular Risks

Financial and Non-Financial Risks

Financial risks are the risks where the outcome of an event (i.e. event giving birth to a loss) can
be measured in monetary terms.

The losses can be assessed and a proper money value can be given to those losses. The common
examples are:

 Material damage to property arising out of an event. We may consider the damage to a
ship due to a cyclone or even sinking of a ship due to the cyclone. Damage to the motor
car due to a road accident which may be of partial or total nature. Damage to stock or
machinery etc.
 Theft of a property which may be a motorcycle, motor car, machinery, items of
household use or even cash.
 Loss of profit of a business due to fire damage the material property.
 Personal injuries due to the industrial, road or other accidents resulting in medical costs,
Court awards, etc.
 Death of a breadwinner in a family leading to corresponding financial hardship.

All such losses, i.e. the outcome of unforeseen untoward events can be measured in monetary
terms.

The losses can be replaced, reinstated or repaired or even a corresponding reasonable financial
support (in case of death) can be thought about.

We would call all such financial risks as insurable risks and these are indeed the main subjects of
insurance.

Non-Financial risks are the risks the outcome of which cannot be measured in monetary terms.

There may be a wrong choice or a wrong decision giving rise to possible discomfort or disliking
or embarrassment but not being capable of valuation in money terms.
Examples can be:

 Choice of a car, its brand, color, etc.

 Selection of a restaurant menu,
 Career selection, whether to be a doctor or engineer etc.
 Choice of bride/bridegroom,
 Choice of publicity etc.

Since the outcome cannot be valued in terms of money, we shall call these non-financial risks as
uninsurable.

Pure Risk and Speculative Risks

Pure risks are those risks where the outcome shall result in loss only or at best a break-even
situation. We cannot think about a gain-gain situation.

The result is always unfavorable, or maybe the same situation (as existed before the event) has
remained without giving birth to a profit (or loss).

As opposed to this, speculative risks are those risks where there is the possibility of gain or
profit. At least the intent is to make a profit and no loss (although loss might ensue).

Investing in shares may be a good example. Pricing, marketing, forecasting, credit sale, etc. are
yet examples falling within the domain of speculation.

Consider another example where we can have the existence of both pure risks and speculative
risks. A garments factory may be in our mind. Here we have:

 Cyclone damage possibility to the factory building,

 Fire damage possibility to stock,
 Machinery breakdown possibility to Machinery,
 Theft possibility to removable items,
 Personal accident possibility of factory workers etc.

Also, we have:

 the question of pricing of the product to remain in the competitive market,

 the question of fashion changes leading to a drastic fall in the demand of the product,
 the question of withdrawal of quota system,
 the question of credit sale

The students should appreciate that in the first set of examples we are indeed talking about the
possibility of certain losses emanating from certain untoward events or unforeseen contingencies
(like cyclone, fire, theft, accident etc.) and for convenience we shall call them the risks of trade.
These are identified as pure risks and as such insurable. Notice that these losses can also be
measured in monetary terms.

As opposed to this, if we refer to the second set of examples we notice that the outcome of the
trade or business is not the result of pure risks but indeed the result of economic factors, supply
& demand, change of fashion, trade restriction or liberalization, etc. and for convenience we call
them trade risks.

These may be identified as speculative risks and usually not insurable.

Fundamental Risk and Particular Risks

Now coming to the last stage of classification of risk we may consider the subject from the
viewpoint of the cause of risk and its effect. We call such classifications as fundamental risks
and particular risks.

Fundamental risks are the risks mostly emanating from nature. These are the risks which arise
from causes that are beyond the control of an individual or group of individuals.

The losses arising out of such causes may be catastrophic in dimension and felt by a huge
number of populations, the society or by the state although an individual may be a part of that
catastrophe. The common examples are:

 Flood & Cyclone, Subsidence & landslip,

 Earthquake & volcanic eruption, Tsunami,
 The convulsion of nature and other natural disasters,
 Famine, Draught

We may also add in the list perils like war, terrorism, riots & other political activities which are
neither created by nature nor by an individual but resulting in colossal losses.

But one thing is certain which are this that all such perils are of impersonal nature not being
caused or contributed by an individual or even a group of individuals.

Normally fundamental risks were not supposed to be insurable because of the magnitude and
these were considered to be the responsibility of State. Now because of demand and insurers’
strength, these risks are easily insurable.

Particular risks are; as opposed to what has been narrated hereinbefore, there are risks which
usually arise from actions of individuals or even group of individuals.

These may be identified as causes arising from personal (or group) behavior and effects (losses)
not being of that magnitude.

These are mostly man created because of their negligence, error in judgment, carelessness, and
disregard for law or respect.
We may even go onto suggesting that these are indeed the cases (both cause and effect) where
there has been an omission to do something which should have been done or there has been done
something which should not have been done.

We may call these as risks of personal nature. The common examples are:

 Fire, Explosion,
 Burglary, housebreaking, larceny, and theft,
 Stranding, Sinking, Capsizing, Collision in case of a ship, including cargo loss,
 Machinery breakdown and deterioration of stock due to machinery breakdown,
 Motor accidents including death and bodily injuries, Industrial accidents,
 The collapse of bridges, Derailments.

Particular risks are insurable risks and most of the insurances relate to these risks.

However, the students should appreciate that risk is a dynamic concept and may be modified
because of the ever-changing situation.

So it may not be unlikely that risk under one classification is changing its character and
identifying itself under another classification.

Levels of Risk in Insurance

Having identified the risk, the question of its frequency or magnitude would be very much
relevant in insurance.

Consider a factory by the bank of a river causing regular floods and consider another factory near
the same river but situated uphill.

Is the risk of flood damage the same for both the factories?

Simple common sense would dictate that the risk of the flood would be more with regard to the
first factory (by the bank of the river) as opposed to the second factory (uphill).

To take yet another example to consider a house in a comfortable residential area near to a fire
brigade office and another house in a very crowdy locality surrounded by lanes and alley bounds
and far from any fire brigade office.

Certainly, the possibility of a fire loss would be far higher in the second house as opposed to the
first house.

What we are indeed suggesting here is this that in the study of risk we are not simply to contend
with the uncertainty as to causation of an event, we should also know the behavioral pattern or
risk frequency and its severity as well.

Extend the example of the house by another hypothesis which gives a value to the houses.
The first house in the posh area values $1 million whilst the second house in the crowdy area
values $100K.

Now our imagination is a bit changed because we shall have to bring the severity of loss into our
scenario.

Because it is the magnitude or cost of a loss also which is of concern to insurers.

Frequency & Severity

As has been indicated in the extended example above, an insurer and risk bearer no doubt we are
interested in loss (event) frequency, but at the same time, we are also interested in the severity
(cost) of loss.

This is so because ultimately we shall have to pay a loss and our premium generation should be
such that would enable us to pay all such claims insured.

Therefore, a correlation is to be established between frequency and severity.

Is it that the more frequent the events are the more is the cost or severity?

This necessarily follows that a distinction is to be drawn between these two.

If we now go through the extended example again can we possibly visualize that although the
possibility (frequency) of fire in the house situated at the crowdy fire-prone locality is higher as
opposed to the house situated at posh area but the severity of loss, should there be a fire
engulfing the house of the posh area, will be much more in comparison to the house of the
crowdy area simply because of the higher value involved?

Having said these, when we go for measuring a risk which is necessarily required from the
viewpoint of both insurer and the insured we start realizing that a distinction between frequency
and severity of risk assumes importance.

This helps insured to decide whether to go for insurance or not.

Similarly, it helps insurer to decide as to what premium would be reason enough to cover loss
payment and other incidental expenses, such as, administrative cost, dividend etc.

Let us recall our previous understanding of uncertainty and lack of knowledge about future
causation of an event.

The more and more an event occurs our knowledge about future causation of the same event
increases and our uncertainty gradually diminishes giving way to certainty.

When uncertainty turns into certainty our prediction about the future becomes stronger and
stronger and our forecast for future becomes more and more accurate.
This is what an insurer’s objective is and when this point is struck we sit on the driving seat and
take the control of forecasting future events as masters thereof.

Going back to the issue of frequency and severity, if a person finds from experience that in his
trade or profession the frequency as to the causation of an event is quite high with low cost or
severity he might consider retaining the risk of loss on his own shoulder.

On the other hand, if it is found that the frequency as to the causation of an event is rather
substantially low with high severity and cost he may transfer the risk to insurers.

Clandestine thefts in private dwelling houses may be one example of high-frequency losses with
low cost or severity. Shipping risks, Aviation risks, Petrochemical risks etc.

Maybe examples of low-frequency losses with commendable severity and costs involved.

Q.4. Explain Life Insurance Policy ?

Introduction
Life Insurance is universally acknowledged as a tool to eliminate risk,
substitute certainty for uncertainty and ensure timely aid of the family in
the unfortunate event of the death of the breadwinner. In other words, it is
the civilized world's partial solution to the problems caused by death. In
other words, Life insurance is protection against financial loss resulting from
insured Individual’s death. In realistic terms, life insurance provides you and
your family the financial security and certainty to deal with the aftermath
of any unseen unfortunate events.
            Life Insurance is a contract for payment of a sum of money to the
person assured (or failing him/her, to the person entitled to receive the
same) on the happening of the event insured against. Usually the insurance
contract provides for the payment of an amount on the date of maturity or
at specified dates at periodic intervals or at unfortunate death if it occurs
earlier. Obviously, there is a price to be paid for this benefit. Among other
things, the contract also provides for the payment of premiums by the
assured.
In a nutshell, life insurance helps in two ways: premature death,
which leaves dependent families to fend for itself and old age without
visible means of support. Any person who has attained majority and is
eligible to enter into a valid contract can take out a life insurance policy for
himself / herself. Policies can also be taken out, subject to certain
conditions, on the life of one’s children.
 The need for life insurance will change as you grow older. When you
are young, you may believe you have no need for life insurance. But as you
grow older, possibly get married and take on more responsibilities, your
desire to take out an insurance policy increases.
What is the reach and significance of Life Insurance as an economic activity?
§  So long as the maintenance of a family depends on the earning power
of the bread-winner.
§  So long as the earning can be destroyed by death, old age or disability.
§  Just so long life as insurance continues to be the keystone of the
individual and those who are dependent on him.
Thus, life insurance is universal and will play a useful role as long as the
family set up survives. Life Insurance caters to an important social need.

Need For Life Insurance

The need for life insurance comes from the need to safeguard our
family. If you care for your family’s needs you will definitely consider
insurance. Today insurance has become even more important due to the
disintegration of the prevalent joint family system, a system in which a
number of generations co-existed in harmony, a system in which a sense of
financial security was always there as there were more earning members.
Times have changed and the nuclear family has emerged.  Therefore you
need to save a part of income for the future too.This is where insurance
helps us.
Factors such as fewer numbers of earning members, stress, pollution,
increased competition, higher ambitions etc. are some of the reasons why
insurance has gained importance and where insurance plays a successful
role. Insurance provides a sense of security to the income earner as also to
the family. Buying insurance frees the individual from unnecessary financial
burden that can otherwise make him spend sleepless nights. The individual
has a sense of consolation that he has something to fall back on. From the
very beginning of your life, to your retirement age insurance can take care
of all your needs. Your child needs good education to mold him into a good
citizen. After his schooling he need to go for higher studies, to gain a
professional edge over the others - a necessity in this age where cut-throat
competition is the rule. His career needs have to be fulfilled. Insurance is a
must also because of the uncertain future adversities of life. Accidents,
illnesses, disability etc. are facts of life which can be extremely
devastating. Disability can be taken care of by insurance. Your family will
not have to go through the grind due to your present inability.
Moreover, retirement, an age when every individual has almost
fulfilled his responsibilities and looks forward to relaxing can be painful if
not planned properly. Have we considered the increasing inflation and
taxes? Will our investment offer us attractive returns under such
circumstances? Will it take care of our family after us? An insurance policy
will definitely take care of these and a lot more. Insurance has become a
necessity today. It provides timely financial as also rewards with bonuses.
Life Insurance has come a long way from the earlier days when it was
originally conceived as a risk covering medium for short periods of time,
covering temporary risk situations, such as sea voyages.
Therefore after going through the discussion let us summarize our
points and understand the need of life insurance :
a) Temporary needs / threats: The original purpose of life insurance
remains an important element, namely providing for replacement of income
on death etc.
b) Regular Savings / Family Protection: Providing for one's family
and oneself, as a medium to long term exercise (through a series of regular
payment of premiums). This has become more relevant in recent times as
people seek financial independence for their family.
c) Investment: Put simply, the building up of savings while safeguarding
it from the ravages of inflation. Unlike regular saving products, investment
products are traditionally lump sum investments, where the individual
makes a one off payment.
d) Old age provision: Provision for later years becomes increasingly
necessary, especially in a changing cultural and social environment. One can
buy a suitable insurance policy, which will provide periodical payments in
one's old age.
e) Children benefit: Provision for the education, marriage and start in
life for the children.
f) Special needs provision: Protection against loss arising out of
accident, disability, sickness, loan repayment on death.
g) Tax benefits: Under the Income Tax Act, premium paid is allowed as a
deduction from the total income under section 80C.
 
Why Is Insurance Superior To Other Form Of Savings?
§  An immediate estate is created in favor of the policy holder
§  Protection in case of death
§  Liquidity in case of need
§  Tax relief – income tax, wealth tax etc.
§  Policies can be offered as collateral security
§  Policies can be taken under M.W.P. Act 1874, to protect against
creditors
Let us take an example to understand the need for insurance:
Mr. Atul is 45 and self-employed. His wife Nandini, who is a housewife, looks
after their two children aged 3 and 7 years. They stay in a rented
accommodation, where the rent is 15,000 rupees per month. Mr. Atul has
taken up a loan of Rs. 2 lakh. His monthly earnings on average are 40,000
rupees. Mr. Atul passes away in an unfortunate road accident. What are
some of the financial implications of his death on his family.
There may be several financial implications on his family. Some of these
are:
a) The monthly income, previously provided by Mr. Atul would stop.
b) His wife and children may have to seek financial assistance from other
relatives.
c) His wife may not have enough money to pay back the loan of Rs. 2 lakhs.
d) The family may have to move into a cheaper accommodation.
e) His widow may have to take up work to earn money.
f) The education of his children may suffer.
 
This simple example illustrates the impact premature death can have on a
family, where the main earner has no life cover. Had Mr. Atul taken life
cover, his family would not have faced such hardships in the event of his
unfortunate death. A simple life insurance policy could have provided Mr.
Atul's family with a lump sum that could have been invested to provide an
income equal to all or part of his income. In simple words, insurance
protects against untimely losses. Insurance has been found useful in the
lives of persons both in the short term and long term. Short term needs like
 sudden medical costs and long term needs like marriage expenses etc can be
met with using life insurance.
Basic Principles Of Life Insurance Contract.
Life insurance is a contract under which the insurer (Insurance
Company) in consideration of a premium paid undertakes to pay a fixed sum
of money on the death of the insured or on the expiry of a specified period
of time whichever is earlier. So basic principles of life insurance contract
are as follows:
1. Insurable interest: The insured must have insurable interest in the life
assured. In absence of insurable interest, Contract of insurance is void.
Insurable interest must be present at the time of entering into contract with
insurance company for life insurance. It is not necessary that the assured
should have insurable interest at the time of maturity also.Insurable interest
exists in the following cases:
a)      A person has an unlimited insurable interest in his/her own life.
b)      A person has an insurable interest in the life of his/her spouse.
c)      A father has an insurable interest in the life of his son or daughter on
whom he is dependent. Likewise a son may have insurable interest in life of
his parents.
d)     A creditor has an insurable interest in the life of the debtor, to the
extent of the debt.
e)      A servant employed for a specified period has insurable interest in the
life of his employer.
2. Utmost good faith: The contract of life insurance is a contract of utmost
good faith. The insured should be open and truthful and should not conceal
any material fact in giving information to the insurance company, while
entering into a contract with insurance company. Misrepresentation or
concealment of any fact will entitle the insurer to repudiate the contract if
he wishes to do so.
3.  A contract of indemnity: The life insurance contract is not a contract of
indemnity. A Contract of life insurance is not a contract of indemnity. The
loss of life cannot be compensated and only a fixed sum of money is paid in
the event of death of the insured. So, the life insurance contract is not a
contract of indemnity. The loss resulting from the death of life assured
cannot be calculated in terms of money.
Types Of Insurance Policies
Though there are a lot of policies available in the market under
different names and by different companies, the policies can broadly be
classified into the following categories:
 Term Insurance Policy
 Whole Life Policy
 Universal Life Insurance Policy
 Money Back Policy
 Endowment Policy
 Pension Plans or Annuities

§  Joint Life Policy

§  Group Insurance Policy
§  Unit Linked Insurance Plan

Term Insurance Policy

Term insurance provides life insurance coverage for a specific period
of time. Presently one year, five year, ten year, and fifteen year, are the
periods one can buy term life insurance policy. If the insured person dies
during the period the insurance is in force, the insurance company pays off
the face value of the policy. If the insured lives longer than the term of the
policy, the policy is no longer in effect and nothing is paid. Term insurance
is the least expensive form of life insurance. It is commonly used when the
insured needs temporary protection or can’t afford the premiums for the
other forms of life insurance. The other reason an insured may want term
insurance is to purchase life insurance and invest the difference between
the term policy and cash value policy elsewhere.
Term insurance comes in several forms. There is renewable & non –
renewable. Non – renewable means that on the expiry of your policy you
must go under another physical test and filling out another questionnaire.
On the other hand, with renewable policy you don’t need to undergo these
formalities again and you automatically re – qualify to continue your
policy.Then there is convertible & non – convertible policy. Convertible
policy is the one which can be converted into a permanent policy, whereas
non – convertible is the one which cannot be converted into a permanent
policy or in other words the policy cannot be converted to any other form of
life insurance policy.

Whole Life Policy   

The whole life policy provides insurance coverage for the entire life of
the insured regardless of how many years the insurance is paid. Premiums
may be paid throughout the insured’s entire life or for a portion of his life.
Additionally, the premium can be paid in one lump – sum when the policy is
taken out. This is referred to as a single premium whole life policy. When
the premium is paid throughout the life it is known as straight life policy,
but when the premium is paid for a specified period of time it is known as
limited life policy.
            The premiums are higher for Whole life insurance as opposed to
term insurance. The reason for this is that the policy has investment
features as well as death benefits. The cash value portion of the whole life
insurance belongs to the insured. One can take it out in the form of policy
loans or can cash the policy in. Another advantage of whole life insurance is
that the premiums are fixed, i.e. regardless of your age, you pay the same
amount for the coverage each year.

Universal Life Insurance Policy

Universal Life is a type of permanent life insurance based on a cash
value. That is, the policy is established with the insurer where premium
payments above the cost of insurance are credited to the cash value. The
cash value is credited each month with interest, and the policy is debited
each month by a cost of insurance (COI) charge, and any other policy
charges and fees which are drawn from the cash value if no premium
payment is made that month. The interest credited to the account is
determined by the insurer; sometimes it is pegged to a financial index such
as a bond or other interest rate index.

Money Back Policy

Money back policies provide for periodic payments of partial survival
benefits during the term of the policy, as long as the policy holder is alive.
An important feature of this type of policies is that in the event of the death
at any time within the policy term, the death claim comprises the full sum
assured, without deduction of any survival benefit amounts, which may have
already been paid as money back components. Similarly the bonus is also
calculated on the entire sum assured.

Endowment Policy
An endowment policy covers the risk for a specified period, at the end
of which the sum assured is paid back to the policy holder, along with the
bonus accumulated during the term of the policy. This feature of payment
of endowment to the policy holder when the policy’s term is complete is
responsible for the popularity of endowment policies. The amount received
on maturity can either be utilized either to buy an annuity policy to
generate a monthly pension for the rest of the life, or put it into any other
suitable investment of our choice. This is one important benefit which the
endowment policy offers over a whole life insurance policy.
Overall, endowment policies are the most suitable of all insurance
plans for covering the risks to a family breadwinner’s life. Not only do these
policies provide financial risk cover for the family, were the policy holder to
die prematurely but the insurance amount is also repaid once this risk is
over. The endowment amount can then be used for meeting major
expenditures such as children’s education and marriage, etc.
Alternately, the endowment sum is available for a suitable investment
geared to providing an income for the remainder of one’s own life. These
types of plans are particularly suitable to those who other than having a risk
cover are also interested in a savings component
simultaneously.                                                              
Pension Plan or Annuities
            An annuity is an investment that we make, either in a single lump
sum or through installments paid over a certain number of years, in return
for which we receive a specific sum every year, every half – year or every
month, either for whole life or a fixed number of years. After the death of
an annuitant or after the fixed annuity period expires for annuity payments,
the invested annuity fund is refunded, perhaps along with a small addition,
calculated at that time. Annuities differ from all the other form of life
insurance in one fundamental way – an annuity does not provide any life
insurance cover but, instead offers a guaranteed income either for life or a
certain period.
            Typically annuities are bought to generate income during one’s
retired life, which is why they are also called pension plans. Annuity
premiums and payments are fixed with reference to the duration of human
life.
Joint Life Policy
Joint life insurance policies are similar to endowment policies as they
too offer maturity benefits to the policyholders, apart form covering risks
like all life insurance policies. But joint life policies are categorized
separately as they cover two lives simultaneously, thus offering a unique
advantage in some cases, notably, for a married couple or for partners in a
business firm. Under a joint life policy the sum assured is payable on the
first death and again on the death of the survivor during the term of the
policy. Vested bonuses would also be paid besides the sum assured after
the death of the survivor. If one or both the lives survive to the maturity
date, the sum assured as well as the vested bonuses are payable on the
maturity date. The premiums payable cease on the first death or on the
expiry of the selected term, whichever is earlier.
Accident benefits equivalent to the sum assured are available under
Joint life insurance policies on the first death. In case both the lives are
covered under Double Accident Benefit (DAB), the surviving life is covered
under DAB until the end of the policy year, in which the first life dies under
the cover of the policy. Both the policy holders can avail these benefits, if
·            Both the policy holders die simultaneously owing to an
accident. To avoid such an eventuality, nomination is allowed
under the policy OR
·            Both of them die within the specified period as a result
of the same accident OR
·            The second policy holder also dies in the same policy
year as result of another accident. To avoid such an
eventuality, nomination is allowed under the policy.
Joint life insurance policy is ideal for married couples as it provides
financial security and risk protection to both the individuals.
Group Insurance Policy
Group insurance offers life insurance protection under group policies
to various groups such as employers-employees, professionals, co-
operatives, weaker sections of society, etc. It also provides insurance
coverage for people in certain approved occupations at the lowest possible
premium cost. Group insurance plans have low premiums. Such plans are
particularly beneficial to those for whom other regular policies are a costlier
proposition. Group insurance plans extend cover to large segments of the
population including those who cannot afford individual insurance.   A
number of group insurance schemes have been designed for various groups.
These include employer-employee groups, associations of professionals (such
as doctors, lawyers, chartered accountants etc.), members of cooperative
banks, welfare funds, credit societies and weaker sections of society.
Many employees see group insurance coverage as a major perk for
faithful company service. The premium payments are usually deducted
automatically from the pay itself. Some companies will absorb the entire
cost of the policy as a benefit for employees. The main advantages of the
group insurance schemes are low premium and simple insurability
conditions. Premiums are based upon age combination of members,
occupation and working conditions of the group.
A major feature of group insurance is that the premium cost on an
individual basis may not be risk-based. Instead it is the same amount for all
the insured persons in the group. Another distinctive feature is that under
group insurance a person will normally remain covered as long as he or she
continues to work for a certain employer and pays their insurance
premiums. This is different from the individual insurance policy where the
insurance company often has the right to reject the renewal of a person's
policy, depending on his risk profile.
Unit Linked Insurance Plan
Unit linked insurance plan (ULIP) is life insurance solution that
provides for the benefits of risk protection and flexibility in investment. The
investment is denoted as units and is represented by the value that it has
attained called as Net Asset Value (NAV). The policy value at any time varies
according to the value of the underlying assets at the time. 
In a ULIP, the invested amount of the premiums after deducting for all the
charges and premium for risk cover under all policies in a particular fund as
chosen by the policy holders are pooled together to form a Unit fund. A Unit
is the component of the Fund in a Unit Linked Insurance Policy. 
            The returns in a ULIP depend upon the performance of the fund in
the capital market. ULIP investors have the option of investing across
various schemes, i.e, diversified equity funds, balanced funds, debt funds
etc. It is important to remember that in a ULIP, the investment risk is
generally borne by the investor. In a ULIP, investors have the choice of
investing in a lump sum (single premium) or making premium payments on
an annual, half-yearly, quarterly or monthly basis. Investors also have the
flexibility to alter the premium amount during the policy's tenure. For
 example, if an individual has surplus funds, he can enhance the contribution
in ULIP. Conversely an individual faced with a liquidity crunch has the option
of paying a lower amount (the difference being adjusted in the accumulated
value of his ULIP). ULIP investors can shift their investments across various
plans/asset classes (diversified equity funds, balanced funds, debt funds)
either at a nominal or no cost. Expenses Charged in a ULIP are as follows: 
Premium Allocation Charge: A percentage of the premium is appropriated
towards charges initial and renewal expenses apart from commission
expenses before allocating the units under the policy.
·         Mortality Charges: These are charges for the cost of insurance coverage
and depend on number of factors such as age, amount of coverage, state of
health etc.
·         Fund Management Fees: Fees levied for management of the fund and is
deducted before arriving at the NAV.
·         Administration Charges: This is the charge for administration of the
plan and is levied by cancellation of units.
·         Surrender Charges: Deducted for premature partial or full encashment
of units. 
Fund Switching Charge: Usually a limited number of fund switches are
allowed each year without charge, with subsequent switches, subject to a
charge.
·         Service Tax Deductions: Service tax is deducted from the risk portion of
the premium.
Pricing
For life insurance policy you must pay a price in terms of premium. All
insurance companies employ actuaries to fix the premiums of their policies.
The actuaries need to consider various factors (both measurable and non-
measurable) and build them into the premiums. There are some factors that
the actuaries already have information on (like mortality rate, claims paid
percentages, etc.,) and the rest of the information comes from the
applicant. We will first look at the information provided by the applicants
that play a part in Life Insurance Price, one by one.
·         Age: Young, fit people who are just about to begin the most productive
part of their lives are the ones who get the cheapest policies. The premium
component gradually increases as the age of the applicant progresses. There
is no intentional discrimination here against older people. Mortality trends
state that the chances of mortality increase is directly proportional to age
 increase and the insurance companies base their calculations on the age risk
factor. So, the older you are the higher you pay!
·         Type of policy: There are various types of policies; term, partial
payment, pension plans, cash value…..etc., As a general rule, you can be
sure that premiums increase directly proportional to the cash value benefits
and complexity. Term plans are the cheapest and any other investment
based policy will cost you higher. The coverage amount also plays a part.
Higher the coverage, higher the premium.
·         Duration of the policy: This plays a more important part in wealth
building insurance policies but even otherwise, longer duration policies are
priced cheaper.
·         Medical history and health: History of previous illness is a risk while
underwriting a policy and therefore carries such people carry higher
premium. This is a very important factor and if an applicant has illness
history or have existing ailments, they have to be disclosed to the company,
otherwise, the insurance company will outright reject the claim (when the
need arises) citing suppression of vital information. Height and weight
details are also used as factors.
·         Personal habits and occupation: Habitual smokers and drinkers will be
charged higher, as will people employed in hazardous jobs (Fire fighters,
scuba divers). Some hobbies (bungee jumping, car racing) are also deemed
high risk and will attract higher premiums.
·         Other factors: Apart from the information provided by the applicant,
the insurance actuaries need to input many other factors listed below:
o   Mortality – Life insurance is based on the sharing of the risk of
death by a large group of people. The amount at risk must be
known to predict the cost to each member of the group.
Mortality tables are used to give the company a basic estimate
of how much money it will need to pay for death claims each
year. By using a mortality table a life insurer can determine the
average life expectancy for each age group.
o   Interest – The second factor used in calculating the premium is
interest earnings. Companies invest your premiums in bonds,
stocks, mortgages, real estate, etc., and assume they will earn a
certain rate of interest on these invested funds.
o        Expense – The third consideration is the expenses of
operating the company. The company estimates such
 expenses as salaries, agents’ compensation, rent, legal
fees, postage, etc. The amount charged to cover each
policy’s share of expenses of operation is called the
expense loading. This is a cost area that can vary from
company to company based on its operations and
efficiency
Underwriting
The process of assessing the risk profile of the life insurance applicant
whether individual or group and then fixing the rate of premium is called
risk classification or underwriting. The methods by which an insurer
manages risks are:
[a] Risk avoidance
[b] Risk transfer
[c] Risk sharing, and
[d] Risk acceptance and management.
Risk acceptance would be through a process of underwriting. The typical
underwriting decisions [on a proposal] of a life insurer are as follows:
·         Accepted [on ordinary terms/rates], that is, the insurer has
decided to undertake the risk on the proposed life on standard
terms of the company.
·         Accepted [on terms other than those suggested] and offered
some other plan /term / other condition like imposing an extra
premium to meet higher health/occupation risk etc. for undertaking
risk on the proposed life.
·         Postponed, consideration of the proposal is postponed
anticipating that the effects of some of the high risk factors faced by
the proposed life may come down in future.
·         Declined, the proposed life would almost definitely result in a
claim by death within the proposed term.
Underwriters of insurance Companies arrive at the above decisions, or
rather conclusions, based on the analysis of the risks they are likely to face
on the life of the proposer or applicant for insurance. Risks on a life are
associated with his family history, personal history, individual and social
habits, occupation, hobbies and the future possibilities of joining the armed
forces or Para trooping, diving or hazardous researches etc. Broadly
 speaking these factors usually consider for appraising the risk of an
applicant:
·         Age
·         Sex (except in several states that require "uni-sex" rates,
even though actuarial data shows women live longer than
men)
·         Height and weight,
·         Health history (and often family health history -- parents
and siblings),
·         The purpose of the insurance (such as for estate planning,
or business or for family protection)
·         Marital status and number of children
·         The amount of insurance the applicant already has, and
any additional insurance s/he proposes to buy (as people
with far more life insurance than they need tend to be poor
insurance risks)
·         Occupation (some are hazardous, and increase the risk of
death)
·         Income (to help determine suitability)
·         Smoking or tobacco use (this is an important factor, as
smokers have shorter lives)
·         Alcohol (excessive drinking seriously hurts life expectancy)
·         Certain hobbies (such as race car driving, hang-gliding, piloting
non-commercial aircraft) and
·         Foreign travel (certain foreign travel is risky).
 
            The guidelines and regulations for underwriting are different
for different insurance companies. As mentioned above, the life
insurance underwriting process takes a series of factors into
consideration to decide the premium amount for an applicant for a
particular coverage policy. After an individual applies for a life insurance
quote, the insurance company will circulate a questionnaire form that the
applicant has to fill up with the answers. Underwriting is confidential, which
is maintained under strict regulations. Depending upon the underwriting
standards of the insurance company, the questions may vary. After the
applicant fills up the answers to these queries, the form is sent back to the
insurance company.
            Once the form is received, the underwriters of the life
insurance company review the risk profile of the applicant and accordingly,
the final premium amount is charged to the policyholder. In general there
are four categories of risks, which are classified according to the standard
underwriting guidelines. The four risk classifications include proffered
(charge with low premium), standard (standard premium amount), rated
(relatively high premium amount) and declined (uninsurable). This way, life
insurance underwriting process is a crucial step to calculate the premium
amount for policyholders.
For better understanding about life insurance underwriting, let's take
an example of two individuals applying for the same life insurance quote.
Let's consider that first is below 30 years without any underlying health
condition (low death risk), while the second applicant is above 45 years with
hypertension condition (high death risk). With underwriting process, the
death risks for the two applicants are examined, after which the insurance
company will charge a low premium for the first applicant (preferred), while
charging a higher premium rate for the second policyholder (rated).
Documentation
The contract for the life insurance starts with the proposal made by
the proposer in standard application form available with insurance company
and then various other documents are prepared.
Proposal Forms
The proposal form is a standardized form. The proposal form is a type of an
application form, which a proposer has to fill all the relevant details about
the life to be assured. The agent has the proposal form with him provided by
the insurer. There are different types of policies and so the different types
of proposal forms are there. It has the entire details regarding the duration
of the policy, type of plan, mode of payment, etc. A proposal form is to be
to be completed by the proposer in his own handwriting and signed in the
presence of the agent. The proposal form contains a declaration at the end,
to ensure the authenticity of the information given.
Usually the proposal form contains the following information to be
filled by the prospective insured:
1. Name of life assured
 2. Address
3. Date of Birth
4. Occupation
5. Age
6. Name of the employer (if any)
7. Sum assured of the proposed policy
8. Number and age of the family members
9. Family medical history
10. Proposer’s Medical history
Besides these there are other related forms regarding health, occupation,
the agent’s confidential report and many others. In addition there is a
consent letter which shows the consent of the life assured to the imposition
of some clause or extra premium, duly signed by the life assured.
First Premium Receipt
The agent provides the proposal form and other related documents
and the underwriter examines the form and other documents and then
determines the terms on which to accept the risk or reject the same. The
consent of the person assured is obtained in the form of payment of
premium. After receiving the payment, the insurance company issues the
First Premium Receipt, which acknowledges the proposal of the life-assured.
It contains all particulars of the policy. It has the details of the next
premium to be paid. The policy bond is sent within 45-50 days from the date
of first premium receipt to the life assured. The First Premium Receipt is an
important and powerful document on the basis of which the life-assured can
ask the insurer to issue the policy bond, which is treated as Evidence of the
Contract of Life assurance.
Policy Bond
After issuing the First Premium Receipt, the next step is that of the
insurer of sending the policy bond to the life-assured and this document is
also known as Policy Contract, which is the ultimate evidence of the life-
assured. The Policy Contract contains all the terms and conditions of the
contract between insurance company and the life assured, duly stamped as
per the Indian Stamp Act. The policy is sent to the life assured by the
insurer. The policy contract contains the details of the insurance such as
 duration of the policy, the type of policy, sum assured, premium amount
and the date of maturity, extra premium, nominee, assignee etc.
Alterations and Endorsements
Endorsement is an authenticated noting on the back of Policy Contract
and forms a part of the contract. In the case of lack of space, the
endorsements can be put on a separated sheet of papers and attached to
the policy. Endorsements are required because life assurance is a long-term
contract and the life assured may want certain changes in the terms of
contract. There are  different type of alterations or modifications that can
be made during the tenure of the policy such as changes regarding increase
or reduction in the sum assured, mode of payment of premium, modification
related on account of mistakes in the preparation of the policy by the
insurer, modifications related to reduction in term, conversion from “Non-
profit” to “With Profit” and similar other like change of name, plan-term
and so on.
Reminding Notice
It is basically information sent by the insurer to the policyholder,
reminding the latter about the due date of a particular premium and the
amount of premium. However it is not the duty of the insurance company
(insurer) to do so. The insurer also informs the policyholder about the lapse
of a policy if the premiums are not paid in time.
Other Documents
Apart from other documents there are some other specialized
documents, which are as follows:
i.        Proposal on the lives of Non Resident Indians, which consists of some
special questionnaire asking for relevant information.
ii.      Partnership Insurance which consist of papers asking for the Profit &
Loss account of the firm for the last three years, the insurance of the
partner, the partnership deed and the deed of variation allowing the
purchase of the assurance policy.
Policy Servicing And Settlement Options 
Servicing of policy holders include:
(1) Proof of age: The age of the life assured must be proved either
during the period of the policy or after the claim arises, because age is an
important factor for calculating at the rate of premium to be charged for a
particular policy.
(2) Nomination: The Policyholder should be advised for nomination, if
no nomination was effected. When nomination or assignment is effected by
a policyholder, it should be scrutinized thoroughly to see whether it was in
order or not. If there is any material omission or mistake, it may be
returned to the policyholder or the assignee with a covering letter giving
instructions as to the corrections to be made in the assignment or
nomination. When a document is sent for correction, reminders should be
sent every fortnight until the requirements are complied with. The
policyholder should follow the instructions printed on the back of
assignment or nomination.
(3) Assignment: Assignment is a means whereby the right and title
under a policy gets transferred from assignor to assignee. Assignor is the
policyholder who transfers the title and assignee is the person who gets the
title of the policy from the assignor. Assignment can be made either by
endorsement on the policy or on a separate paper duly stamped. Assignor
must be a major. Assignment must be in writing and assignor’s signature
along with a witness is required. Notice of assignment should be submitted
to the insurer by the assignor.
(4) Alteration / Changes: After issue of a Policy, the Policy holder
desires an alteration in the terms thereof to suit his convenience, e.g., an
alteration in the mode of payment of premiums, Plan of Assurance,
reduction in the premium-paying period, etc. An alteration may be allowed
provided the policy is in force and has not become fully paid up. It is stated
in the prospectus that no alteration from one class of Assurance to another
subject to a lower scale of premium is permissible. However, an alteration
from the with profits Limited Payment plan to the with profits Endowment
Assurance Plan with premiums payable for a term not exceeding the original
premium-paying term will be allowed even if the premium payable on
alteration is lower. Alterations from certain Classes of Assurance to certain
other Classes are not allowed at all.
(5) Paid up value & surrender value: When a policyholder wants to
terminate the policy, he may convert the same into paid-up policy. In this
case, the amount of paid-up value is payable to the insured only after the
full term (maturity) of the policy. The option of converting the policy into
paid up policy and stop paying the further premiums can be taken only if the
policy has been in force for at least two years.
 If the insured is unwilling or unable to pay the premium of the policy,
he may surrender the policy and ask for its surrender value. Surrender value
is the cash value payable by the insurance on voluntary termination of the
policy contract by the life assured before the expiry of the term of the
policy. Surrender value depends on the type of policy and number of premia
paid. A policy can be surrendered only when the premia is paid for the three
years.
Settlement:
The easy and timely settlement of a valid claim is an important
function of an insurance company. The yardstick to judge insurance
company’s efficiency is as to how quick the claim settlement is. The speed,
kindness and fairness with which an insurer handles claims show the
maturity of the company and may lead to great satisfaction of the client. In
every insurance company claim handling is of immense importance. It is the
liability of the insurance company to honour valid and legal claims. At the
same the company must identify the fraudulent and invalid claims. A claim
may arise:
·         On death of Policyholder before the maturity date.
·         On maturity, i.e. after expiry of the endowment period specified in the
policy contract when the policy money becomes payable.
 
Certain features are common to all life insurance claims. These are:
1. Policy must be in force at the time of claims.
2. Insured must be covered by the policy.
3. Nothing was outstanding to the insurer at the time of claim.
4. Claim is covered by the policy.
Death Claims
I. Intimation of Death
The death of the life assured has to be intimated in writing to the
insurer. It can be done by the Assignee or nominee under the policy or from
a person representing such Assignee or Nominee or when there is no
nomination or assignment by a relative of the life assured, the employer,
the agent or the development officer. Where policy is assigned to a creditor
or a bank for valuable consideration, intimation of death may be received
 from such assignee. Sometimes, the office need not wait till the intimation
of claim is received. The concerned agent, newspaper reports in case of
accidents or air crashes, obituary columns may give information and claim
action can be started. However, the identity of the deceased should be
established carefully. The intimation of the death of the life assured by the
claimant should contain the following particulars: (1) his or her relationship
with the deceased, (2) the name of the policyholder, (3) the number/s of
the policy/policies, (4) the date of death (5) the cause of death and (6) sum
assured etc. If any of these particulars are missing the claimant can be
asked to furnish the same to the insurer. The intimation must satisfy two
conditions (1) It must establish properly the identity of the deceased person
as the life assured under the policy, (2) It must be from a concerned person.
II. Proof of Death and Other Documents
In case of claim by death, after the receiving the intimation of death
the insurance company ensures that the insurance policy has been in force
for the sum assured on the date of death and the intimation has been
received from assignee, nominee or other claimant.
The following documents are required:
(i) Certificate of death.
(ii) Proof of age of the life assured (if not already given).
(iii) Deeds of assignment / reassignments.
(iv) Policy document.
(v) Form of discharge.
If the claim has accrued within three years from the beginning of the policy,
the following additional requirements may be called for:
a)      Statement from the hospital if the deceased had been admitted to
hospital.
b)      Certificate of medical attendant of the deceased giving details of
his/her last illness.
c)      Certificate of cremation or burial to be given by a person of known
character and responsibility present at the cremation or burial of the body
of the deceased.
d)     Certificate by employer if the deceased was an employee.
 Proof of death and other documents to be submitted will depend upon the
cause of death and circumstances of each case.
1.      In case of an air crash the certificate from the airline authorities would
be necessary certifying that the assured was a passenger on the plane. In
case of ship accident a certified extract from the logbook of the ship is
required. In case of sudden cardiac arrest, murder the doctors’ certificate
may not be available.
2.      The insurance may waive strict evidence of title if the sum assured of
the policy is small and there is no dispute among the survivors of the policy
moneys.
3.      If the life assured had a death due to accident, suicide or unknown cause
the police inquest report, panchanama, post mortem report, etc would be
required.
If by any chance policy contract is lost, advertisement of the lost of policy is
to be given. Payment can be made on the basis of an indemnity given by the
policyholder. If the deceased has taken out policies with more than one
branch and the claimant has produced proof of death to any one of them
and desires that the other branch or branches, may act on the same proof,
his request should be complied with. The Branch requiring proof of death
should directly call for the certified copies from the branch concerned.
III. Net Payable Amount of Claim
After receiving the required documents the company calculates the
amount payable under the policy. For this purpose, a form is filled in which
the particulars of the policy, assignment, nomination, bonus etc. should be
entered by reference to the Policy Ledger Sheet. If a loan exists under the
policy, then the section dealing with loan is contacted to give the details of
outstanding
loan and interest amount, which is deducted from the gross policy amount
to calculate net payable claim amount. The net amount of claim payable is
calculated and is called payment voucher. In the case of ‘in force’ policy
unpaid premiums if any due before the Assured’s death with late fee where
necessary and the premium falling due in the policy year current at the time
of death should be deducted from the claim amount.
Maturity Claims
If the life insured survives to the full term, then basic sum assured is
payable. This payment by the insurer to the insured on the date of maturity
 is called maturity payment. The amount payable at the time of the maturity
includes a sum assured and bonus/incentives. The insurer sends in advance
the intimation to the insured with a blank discharge form for filling various
details in it. It is to be returned to the office along with
• Original Policy document
• Age proof if age is not already submitted
• Assignment /reassignment, if any. .
Legally no claim is acceptable in respect for a lapsed policy or death of the
Life assured happening within 3 years from the date of beginning of the
policy. However, some concessions are given and payment of claims is
made:
·         If the Life assured had paid at least 3 years' premiums and thereafter if
premiums have not been paid, the nominees/life assured get proportionate
paid up value.
·         In the event of the death of' the Life assured within 3 years and the
policy is under the lapsed position, nothing is payable.
Procedure of the Maturity Claims
Settlement procedure for maturity claim is simple after receipt of
completed and stamped discharge form from the person entitled to the
policy money along with policy documents, claim amount will be paid by
account payee cheque.
·         If the life assured is reported to have died after the date of maturity
but before the receipt is discharged, the claim is to be treated as the
maturity claim and paid to the legal heirs. In this case death certificate and
evidence of title is required.
·         Where the assured is known to be mentally deranged, a certificate
from the court of law under the Indian Lunacy Act appointing a person to act
as guardian to manage the properties of the lunatic should be called.
Additional Benefits apart from Regular Claims
Double Accident Benefit: For claiming the benefits under the Double
Accident Benefit the claimant has to produce the proof to the satisfaction of
the Corporation that the accident is defined as per the policy conditions.
Normally for claiming this benefit documents like FIR, Post-mortem Report
are required.
Disability Benefit Claims include waiver of all premiums to be paid in
future till the expiry of the policy of the life assured if a person is totally
and permanently disabled and cannot earn any wage/compensation/profit
as a result of the accident.
Presently, all over the country there are 12 centers where the
Insurance Ombudsman has been appointed. They are part of grievance
redressal machinery. They consider the complaints regarding disputes
related to premiums, claims etc.
Distribution Channel
The channel of distribution (place) is an important ingredient of
marketing mix as however useful the product might be and how so ever
suitable its price be, unless and until the products/services are mad
available to consumers at ‘centres of convenient buying’ the consumers will
not be buying the same. Insurance being a service business requires
marketing department to play a key role in delivery of service.
The marketing department conducts research for identification of
target customers, help in maintaining and promoting the distribution system
and also plays an active role in development of new products. It is the most
vibrant department in an insurance organization since it has to necessarily
deal with all the other department of the organization. Insurance business is
business of law of large numbers. The law requires the insurer to attract a
sufficient number of exposures to allow credible ratio prediction.
The major task of sales managers in charge of the sales section of
insurance company is the supervision of the sales functions of the branches.
This section is also responsible for spreading awareness among the general
public about the benefits of life Insurance. Sales training section is
entrusted with responsibility for training in product, in selling and sales
planning in the
personnel such as development officers and agents.
            Insurance policies are mainly sold by the agents of insurance
company. Beside insurance agents, Banks and cooperative societies have
emerged as strong business partners amongst alternate channels in terms of
first premium mobilization.
Life Insurance Sector In India
In India, insurance has a deep-rooted history. It finds mention in the
writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra  ) and
Kautilya (  Arthasastra  ). The writings talk in terms of pooling of resources
that could be re-distributed in times of calamities such as fire, floods,
epidemics and famine. This was probably a pre-cursor to modern day
insurance. Ancient Indian history has preserved the earliest traces of
insurance in the form of marine trade loans and carriers’ contracts.
Insurance in India has evolved over time heavily drawing from other
countries, England in particular.
            1818 saw the advent of life insurance business in India with the
establishment of the Oriental Life Insurance Company in Calcutta. This
Company however failed in 1834. In 1829, the Madras Equitable had begun
transacting life insurance business in the Madras Presidency. 1870 saw the
enactment of the British Insurance Act and in the last three decades of the
nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire
of India (1897) were started in the Bombay Residency. This era, however,
was dominated by foreign insurance offices which did good business in India,
namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe
Insurance and the Indian offices were up for hard competition from the
foreign companies.
            In 1914, the Government of India started publishing returns of
Insurance Companies in India. The Indian Life Assurance Companies Act,
1912 was the first statutory measure to regulate life business. In 1928, the
Indian Insurance Companies Act was enacted to enable the Government to
collect statistical information about both life and non-life business
transacted in India by Indian and foreign insurers including provident
insurance societies. In 1938, with a view to protecting the interest of the
Insurance public, the earlier legislation was consolidated and amended by
the Insurance Act, 1938 with comprehensive provisions for effective control
over the activities of insurers.
            The Insurance Amendment Act of 1950 abolished Principal Agencies.
However, there were a large number of insurance companies and the level
of competition was high. There were also allegations of unfair trade
practices. The Government of India, therefore, decided to nationalize
insurance business. An Ordinance was issued on 19  January, 1956
th

nationalising the Life Insurance sector and Life Insurance Corporation came
into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian
insurers as also 75 provident societies—245 Indian and foreign insurers in all.
The LIC had monopoly till the late 90s when the Insurance sector was
reopened to the private sector.
 Following the recommendations of the Malhotra Committee report, in
1999, the Insurance Regulatory and Development Authority (IRDA) was
constituted as an autonomous body to regulate and develop the insurance
industry. The IRDA was incorporated as a statutory body in April, 2000. The
key objectives of the IRDA include promotion of competition so as to
enhance customer satisfaction through increased consumer choice and lower
premiums, while ensuring the financial security of the insurance market.
The IRDA opened up the market in August 2000 with the invitation for
application for registrations. Foreign companies were allowed ownership of
up to 26%. The Authority has the power to frame regulations under Section
114A of the Insurance Act, 1938 and has from 2000 onwards framed various
regulations ranging from registration of companies for carrying on insurance
business to protection of policyholders’ interests. In December, 2000, the
subsidiaries of the General Insurance Corporation of India were restructured
as independent companies and at the same time GIC was converted into a
national re-insurer. Parliament passed a bill de-linking the four subsidiaries
from GIC in July, 2002. Today there are 24 general insurance companies
including the ECGC and Agriculture Insurance Corporation of India and 23
life insurance companies operating in the country. The insurance sector is a
colossal one and is growing at a speedy rate of 15-20%. Together with
banking services, insurance services add about 7% to the country’s GDP. A
well-developed and evolved insurance sector is a boon for economic
development as it provides long- term funds for infrastructure development
at the same time strengthening the risk taking ability of the country.
Check List For Buying The Right Policy
DO’S
§  Look out for no commission policies.
“ low load “ life insurance policies have fewer expenses built into
them, such as agent commissions and fees for marketing. This can
translate into lower premiums or for variable life insurance, these
lower expenses mean that a higher percentage of your premium goes
to work for you right away so that you can build your cash faster.
§  Buy as soon as the need exists
An advantage to buy life insurance earlier in life is that your premiums
will be low. As you grow old, the likelihood that you will die increases,
which is why older individuals pay more for life insurance.
DONT’S
 §  Don’t buy a guaranteed issue policy if you are healthy
“ Guaranteed issue” term life insurance policies normally require no
medical exam and are sold to anyone who comes along. While these
policies can be a great way for people who have medical problems to
obtain a life insurance policy, if you are healthy don’t buy these
policies as you will get better rates by taking the tests.
§  Don’t buy more or less than you need
Many experts say the best way to pinpoint a smart life insurance
benefit amount is through a needs analysis which can be broken into a
simple formula
Short term needs + long term needs – resources  = how much life
insurance you need

Q.5. Explain General Insurance Policy?

Introduction:
The primary legislations including the Insurance Act, 1938 and the IRDA Act,
1999 that deal with insurance business in India provide the legal framework
of insurance accounting in India, over and above the principles and
practices prescribed by Generally Accepted Accounting Principles (GAAP)
and the various Accounting Standards (AS) issued by the Institute of
Chartered Accountants of India(ICAI) and the international organization
Financial Accounting Standards Board (FASB). However, the following
statutes, rules and regulations are the major considerations for accounting
and financial management for insurance companies in India:
1.   The Insurance Act, 1938 and Insurance Rules, 1939
2.    The Insurance Regulatory and Development Authority Act, 1999
3.    The Companies Act, 1956
4.    The Life Insurance Corporation Act, 1956
5. The General Insurance Business (Nationalization) Act, 1972
Section 11 of the Insurance Act, 1938 provides that every insurer, on or
after the commencement of the IRDA Act, 1999 in respect of insurance
business transacted by him and in respect of his shareholders' fund, shall at
the expiration of each financial year, prepare a Balance Sheet, a Profit and
Loss account, a separate Account of Receipts and Payments (Cash Flow
Statement), Revenue Accounts in accordance with the regulations made by
the Authority. Every Insurer shall keep separate accounts relating to funds
of shareholders and policyholders.
Accounting Regulations and Financial Statements:
The IRDA (Preparation of Financial Statements and Auditor's Report of
Insurance Companies) Regulations, 2002 provide that-
·   An insurer carrying on life insurance business shall comply with the
requirements of Schedule' A' to prepare financial statements.
·   An insurer carrying on general insurance business shall comply with the
requirements of Schedule 'B' to prepare financial statements.
·   The Report of the Auditors on the Financial Statements of every insurer/
re-insurer shall be in conformity with the requirements of Schedule 'C'.
The said regulation further provides that financial statements
comprising (i) Balance Sheet, (ii) Receipts and Payments Account (Cash Flow
Statement) (iii) Profit & Loss Account (Shareholders' Account) and (iv)
Revenue Account (policyholders' Account) shall be in conformity with the
Accounting Standards (AS) issued by the Institute of Chartered Accountants
of India to the extent applicable to the insurer except that:
·      Accounting Standard 3-Cash-flow Statement shall be only under
Direct Method
·      Accounting Standard 13-Accounting for Investment shall not be
applicable
·      Accounting Standard 17-Segment reporting shall apply to all insurers
irrespective of the requirements for listing and turnover mentioned
therein.
Section 2C of the Regulation provides that all words and expressions
used herein and not defined in the Insurance Act, 1938 or in the IRDAAct,
1999 or in the Companies Act, 1956 shall have the meanings respectively
assigned to those Acts. However, regulatory provisions prescribed by the
IRDA and the specific and relevant Accounting Standards promulgated by
the Institute of Charted Accountants of India are being separately discussed
in detail in subsequent units.
Financial statements of insurance companies comprise the following as
stated earlier:
·            Balance sheet,
·            Revenue accounts,
·            Profit and loss account, and
·            Receipts and payments account
 Besides the financial statements, the annual reports of an insurance
company also contain the following statutory documents for the review and
analysis of the various interested groups including shareholders,
policyholders, regulators, reinsurers, employees, co-insurers, etc.
1.            Report of the board of directors
2.            Management report
3.            Auditors report
4.            Segment reporting
5.            Significant accounting policies
6.      Notes and disclosures forming part of accounts
Let us now discuss the above financial statements and reports with
reference to legal requirements, accepted principles and practices with a
few examples and exercises. Certain examples with hypothetical data are
also given in Annexure for clarity of understanding of students in respect of
financial statements
Directors’ Report: legal Requirement as Regards Directors’
Report (Companies Act 1956)
As per Section 217 of the Companies Act, 1956 there shall be attached
to every balance sheet laid before a company general meeting a report by
its Board of Directors with respect to following particulars:
·            The state of affairs of the company.
·            The amounts, if any, which it proposes to carry to any reserve
in balance sheet.
·            The amount, if any, which it recommends, should be paid by
way of dividend.
·            The material changes and commitments, if any, affecting the
financial position of the company, which have occurred between the
end of the financial year of the company to which the balance relates
and the date of the report.
·            The technology absorption, foreign exchange earnings and
outgo and the manners thereof.
·            The material changes, if occurred during the financial year in
respect of the nature and class of business of the company or its
subsidiary.
 ·            The statement showing the name of every employee of the
company who, if employed throughout the financial year, was in
receipt of remuneration for that year, which in the aggregate was not
less than Rs. 24,00,000 per annum or if employed for a part of the
financial year was not less than Rs. 2,00,000 per month. Such state
shall also indicate that whether any such employee is a relative of any
director or manager of the company.
·            The Directors' Responsibility Statement must mention that
a)      In the preparation of the annual accounts, the applicable
accounting standards have been followed along with proper
explanations relating to material departure,
b)      The directors had selected such accounting policies and
applied them consistently,
c)      The results and estimates are reasonable and prudent so as
to give.a true and fair view of the state of affairs of the
company at the end of the financial year and of the profit or
loss of the company for that period,
d)     That the directors had taken proper and sufficient care for
the maintenance of adequate accounting records in accordance
with the provisions of the Companies Act, 1956 for safeguarding
the assets of the company and for preventing and detecting
frauds and other irregularities and that the directors had
prepared the annual accounts on a going concern basis.
·            The reasons for the failure, if any, to complete the buy back
within the time specified in Section 77 A of the Act.
·            The fullest and explanations on every reservation, qualification
or adverse remarks contained in the auditors' report.
 
Common Disclosures in Directors’ Report Contained in the
Annual Report of a General Insurance Company:
Director report of an insurance company generally furnishes the following
information specifically as per the above requirements of the Companies
Act, 1956:
1.   Comparative Performance Analysis (Class-wise Underwriting
Performance) for the financial year under report with reference to
previous year) as appended in Annexure A.2 showing performance
 analysis of XYZ General Insurance Co. Ltd. in respect of the following
performance review for FY 2005-06.
·            Gross direct premium and percentage of growth over
previous year
·            Reinsurance premium ceded
·            Reinsurance accepted
·            Net premium and percentage of growth over previous year
·            Increase in unexpired risks reserve and percentage to net
premium
·            Net premium earned
·            Net incurred claims and percentage to net premium
·            Others
2.   Review of accounts as an annexure to accounts
3.   Profit before tax and after tax
4.   Proposed dividend
5.   General reserves and current year transfer of profit to that reserve
6.   Total assets and the contribution of increase of fair value change
account
7.   Total investments, its composition/portfolio, its increase over the
last year
8.   Solvency margin and its change over the previous year
9.   Compliance with Section 40C in regard to prescribed % of expenses
 
Financial Statements:
As mentioned earlier, as per the IRDA (Preparation of Financial
Statements and Auditors' Report of Insurance companies) Regulations,
2000, an insurer shall prepare the Financial Statements including Balance
sheet, Revenue Account (Policyholders Account), Receipts and Payments
Account (Cash Flow Statements) and Profit and Loss Account (Shareholders'
account) as Accounting Standard (AS) issued by the ICAI to the extent
applicable to the insurers except that:
1.   Accounting Standard 3 (AS 3) and Accounting Standard 17 (AS 17) in
case of insurers carrying on life insurance business
2.    Accounting Standard 3 (AS 3), Accounting Standard 13 (AS 13) and
Accounting Standard 17 (AS17) in case of insurers carrying on non-life
insurance business
  
Cash flow statements will be prepared only under direct method and
segment reporting shall apply irrespective of whether the securities of the
insurer are traded publicly or not in both the cases and in case of non-life
insurance company AS 13-Accounting for investments shall not be
applicable.
Motor Insurance
Motor insurance policy is a contract between the insured and the
insurer in which the insurer promises to indemnify the financial liability in
event of loss to the insured. 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 As per
the Motor Vehicles Act for the purpose of insurance the vehicles are
classified into three broad categories such as.
Private cars:
a) Private Cars - vehicles used only for social, domestic and pleasure
purposes
b) Private vehicles - Two wheeled
1. Motorcycle / Scooters
2. Auto cycles
3. Mechanically assisted pedal cycles
 
Commercial vehicles:
1. Goods carrying vehicles
2. Passengers carrying vehicles
3. Miscellaneous & Special types of vehicles
 
The risks under motor insurance are of two types:
1) Legal liability due to bodily injury, death or damage caused to the
property of others.
2) Loss or damage to one’s own vehicle\ injury to or death of self and other
occupants of the vehicle.
Types of motor policies
When you buy a motor vehicle, you need to buy a motor insurance. There
are, however, many types of motor insurance policies available. The
common types are:
• Third party cover - This policy insures you against claims for bodily
injuries or deaths caused to other persons (known as the third party),
as well as loss or damage to third party property caused by your
vehicle.
• Third party, fire and theft cover - This policy provides insurance
against claims for third party bodily injury and death, third party
property loss or damage, and loss or damage to your own vehicle due
to accidental fire or theft.
• Comprehensive cover - This policy provides the widest coverage,
i.e. third party bodily injury and death, third party property loss or
damage and loss or damage to your own vehicle due to accidental fire,
theft or an accident.
Exclusions/Extensions
A standard motor insurance will not cover certain losses, such as your
own death or bodily injury due to a motor accident, your liability against
claims from passengers in your vehicle (except for passengers of hired
vehicles such as taxis and buses) and loss or damage arising from an act of
nature, such as flood, storm and landslide. However, you may pay additional
premiums to extend your policy to cover flood, landslide, landslip as well as
cover your passengers. It is important to check your policy for the
exclusions.
Important points to consider when buying motor insurance
policies
Insured value/sum insured: If you are buying a policy against
loss/damage to your vehicle, you must ensure that your vehicle is
adequately insured as it will affect the amount you can claim in the event of
loss/damage. For a new vehicle, the insured value will be the purchase
price while for other vehicles, the insured value is the market value of the
vehicle at the point you apply for the insurance policy.
 • Under-insurance – If you insure your vehicle at a lower sum than its
market value, you will be deemed as self-insured for the difference,
i.e. in the event of loss/damage, you will only be partially
compensated (up to the proportion of insurance) by your insurance
company.
• Over-insurance – Should you insure your vehicle at a higher sum
than its market value, the maximum compensation you will receive is
the market value of the vehicle as the policy owner cannot ‘profit’
from a motor insurance claim.
Duty of disclosure: You should disclose fully all material facts, including
previous accidents (if any), modification to engines, etc. When in doubt as
to whether a fact is relevant or not, it is best to ask your insurance
company. If you fail to disclose any material fact, your insurance company
may refuse to pay your claim or any claim made by a third party against
you. In such cases, you are personally liable for such claims.
Price: The price you pay for your motor insurance will depend on the type
of policy selected. The insurance premium charged by your insurance
company is the standard minimum rate in accordance with the Motor Tariff.
However, in addition to the standard minimum rate, your insurance
company may impose additional premiums known as loadings to the
premium payable in view of higher risk factors involved such as age of
vehicle and claims experience.
No-claim-discount: The premium payable may be reduced if you have
no-claim-discount (NCD) entitlement. NCD is a ‘reward’ scheme for you if no
claim was made against your policy during the preceding 12 months of
policy. Different NCD rates are applicable for different classes of vehicles.
For a private car, the scale of NCD ranges from 25% to 55% as provided in
the policy.
Transfer of ownership: In case of any sale of vehicle involving transfer
of policy, the insured should apply to the insurer for consent to such
transfer. The transfer is allowed, if within 15 days of receipt of application,
the insurer does not reject the plea. The transferee shall apply within
fourteen days from the date of transfer in writing to the insurer who has
insured the vehicle, with the details of the registration of the vehicle, the
date of transfer of the vehicle, the previous owner of the vehicle and the
number and date of the insurance policy so that the insurer may make the
necessary changes in his record and issue fresh Certificate of Insurance.
Excess: Also known as a ‘deductible’. This is the amount of loss you have
to bear before your insurance company will pay for the balance of your
vehicle damage claim. The types of excess applicable are as follows:
·         Compulsory excess of RM400: If your vehicle is driven
by a person not named in your policy or a person named in your
policy who is under the age of 21, the holder of a provisional (L)
driving license or the holder of a full driving license of less than two
years.
·         Other excess: applicable at the discretion of your insurance
company and in some cases, no excess is imposed. You can
negotiate with your insurance company on this excess.
What you should do in the event of an accident/loss
• Take notes of the accident – If you are involved in a motor
accident, take notes of the accident, i.e. the names and addresses of all
drivers and passengers involved, vehicle registration numbers, make and
model of each vehicle involved, the drivers’ licence numbers and
insurance identification as well as the names and addresses of as many
witnesses as possible
• Make a police report – You are required by law to lodge a police
report within 24 hours of a road accident.
• Notify your insurance company – You must notify your insurance
company in writing with full details as soon as possible. Depending on the
type of claim you intend to make, you may have to notify other insurance
companies.  If you fail to report the accident, you will be liable for your
own loss as well as any third party claim against you.
• Select the workshop – You must send your damaged vehicle to a
workshop approved by your insurance company. If the accident occurs
during office hours, you may call the hotline/ emergency assistance
numbers provided by your insurance company. Otherwise, you may call
your insurance company for the nearest approved workshop. Should the
accident occur outside office hours and you are making a claim against
your policy, i.e. an own damage claim, you should ensure that your
vehicle is towed to a workshop approved under Repairers Scheme.
Claim Settlement
Claim arises when:
1) The insured’s vehicle is damaged or any loss incurred.
2) Any legal liability is incurred for death of or bodily injury
3) 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.
·         Replacement or reinstatement of vehicle
·         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.
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
Theft claims
• After submission of the claim form, you must cooperate fully with your
insurance company or its representative during the course of
investigation of the theft claim.
• In view that the police and your insurance company will require time to
investigate your claim, you will receive the offer of settlement from
your insurance company within six months from the theft notification or
upon completion of police investigations, whichever is earlier
Heath Insurance
Health insurance, like other forms of insurance, is a form
of collectivism by means of which people collectively pool their risk, in this
case the risk of incurring medical expenses. The collective is usually publicly
owned or else is organized on a non-profit basis for the members of the
pool, though in some countries health insurance pools may also be managed
by for-profit companies. It is sometimes used more broadly to include
insurance covering disability or long-term nursing or custodial
care needs. It may be provided universally through government as a feature
of social solidarity, as is typical in many industrial countries, or as form of
government charity such as the United States Medicaid program. It may be
purchased privately on a group basis (e.g., by a firm to cover its employees)
or purchased by an individual for himself or his family. In each case, the
covered groups or individuals pay a fee, premium, or tax, to help protect
themselves from health care expenses.
            “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.
 
Health Insurance Policies and Main Features:
Types of Health Insurance Policies:
Health Insurance policies are broadly classified into types-Individual Health
Insurance and Group Health Insurance. The following Health Insurance
policies are available in India:
1. Individual Mediclaim Insurance
2.    Group Mediclaim Insurance
3.    Overseas Mediclaim Insurance
4.    UHI
5.   Health Plus Medical Expenses Policy
6.    Group Health Plus Medical Expenses Policy
Major Characteristics of Individual Health Insurance Policy
Coverage:  Individual coverage are generally classified into the following
broad heads:
1. Hospital Surgical Insurance
 2.   Major Medical Insurance
3.   Long-term Care Insurance
4.   Disability Income Insurance
Hospital Surgical Insurance:  It covers the following expenses:
·         Hospital expenses: A typical Individual Health Insurance
policy covers impatient hospital expenses subject to a specified
limit and subject to certain amount of deductible or co-insurance
·         Surgical expenses
·         Cost of medicines and nursing
·         Domiciliary expenses up to certain limits
Major characteristics of Medical Insurance :It covers major or broader
coverage than basic coverage with the following characteristics:
1.   Broad coverage for hospital charges, drugs, nursing, medical
equipments, etc.
2.   High maximum limit, say Rs. 5,00,000 or Rs. 10,0000, etc.
3.   Benefit period: maximum amount paid under a major benefit
policy depending on the length of the policy
4.   Deductible that must be satisfied before the benefit is granted,
which may be
yearly deductible, family deductible, etc.
5.   Co-insura'lce is provided in most of the policies to avoid moral
hazards
6.   Taxation benefits subject to compliance of certain requirements
7.   Pre-exiting conditions clause to avoid adverse selection
Common exclusions
1. Expenses caused by war or military conflict
2.   Cosmetic surgery
3.   Dental care except as a result of an accident
4.   Eye and examination aids unless there is an accident
5.   Pregnancy or childbirth unless specifically provided
6.   Expenses covered under W.C. laws or similar laws
 7.   Services furnished by governmental agencies unless the patient
has the obligation to pay
8.   Experimental surgery
Standard Individual Mediclaim Insurance- Underwriting
Guidelines
Coverage: This policy covers reimbursement of hospital is at ion or
domiciliary hospitalization expenses for illness or diseases or injury
sustained. In the event of any claim becoming admissible under this scheme,
the insurer will pay to the insured person the amount of such expenses as
would fall under different heads of medical expenses mentioned below and
as are reasonable and necessarily incurred by or on behalf of such insured
persons but not exceeding the sum insured in anyone period of insurance:
1.      Room and boarding expenses provided by hospital or nursing home
2.      Nursing expenses
3.      Fees of surgeon, anesthetist, consultant etc.
4.      Anesthesia, blood oxygen, OT, X-ray, surgical appliances,
medicines etc.
The sum insured in this policy varies from ` 15,000 to 5,00,000 per
person. This policy provides for family discount on total premium for the
members of the family. In case of no claim, cumulative discount is also
available as per the company's underwriting policy. In case of cost of health
check, as per the policy conditions, generally once in four years is available.
Underwriting Guidelines: Individual Mediclaim Insurance has been
showing very high incurred claim ratio since long. In the tariff market, this
product has been sold by almost all underwriters with huge cross-subsidy
from profitable products like fire and engineering. But in the de-tariff
market, the prevalence of cross-subsidy is ruled out. Every product must
stand on its own revenue. One product cannot subsidize other product. In
view of our huge claim ratio of around 140 per cent of Individual Mediclaim
Insurance, the underwriters have adopted the following underwriting
measures to ensure prudent underwriting for this product today:
1.  Fresh proposal for a single person above 45 years of age is discouraged.
2.  Though mediclaim policy is available to persons between 5 years and 80
years of age, fresh acceptance of cover for a person beyond 60 years is
discouraged, unless he is a member of a big family or group to be covered
or otherwise potential.
3.  Policy already in force for insured exceeding 75 years of age may be
renewed on the basis of claim experience and risk evaluation with or
without restrictive condition as per the risk analysis findings.
4.  Cancellation of policy is done subject to the following underwriting
policy:
a.   Policy to be renewed by mutual consent.
b.  Company is not bound to notify that policy is due for renewal.
c.   Policy may be cancelled by company after giving 30-days notice and
pro rata premium to be refunded, provided no claim has been paid
under this policy.
d.  Company remains liable for any claim arising prior to date of
cancellation.
e.   The insured may cancel the policy any time; the company would
refund premium subject to 'No-claim' during the policy period.
5.  Renewal of policy is done on the basis of the following norms:
a.   In case renewal is agreed, the illness for which the expenses have
been paid in previous policy are not to be excluded. Renewal is done on
earlier terms.
b.  If policy is renewed for enhanced sum insured, reimbursement of
illness occurred in the previous policy shall be restricted to old sum
insured.
6.  Cost of health check up is allowed up to I per cent of average sum
insured of four claims-free underwriting years.
7.  Issuance of policies for period less than one year is prohibited.
8.  Policies for persons above 75 years to be decided on the claim
experience merit.
9.  Extension for suspended mediclaim may be allowed only when overseas
mediclaim policy has been taken by an individual or family as whole when
one of the person goes abroad by taking overseas mediclaim policy.
10. Tax-benefit under Section 80D of the IT Act available when premium is
paid by cheque.
11. General exclusions: provided under the policy:
a.    All diseases or injuries which are pre-existing when the cover
incepts for the first time.
b.   Any diseases other than those mentioned below contracted by the
insured person during the first thirty days from the commencement of
the policy.
c.    During the first year of the operation of insurance cover, the
expenses on treatment of diseases such as cataract, benign
prostatic hypertrophy, hysterectomy for menorrhagia or
fibromyoma, hernia, hydrocele, congenital internal diseases, fistula
in anus, piles, sinusitis and related disorders.
d.   Injury or disease directly or indirectly caused by or arising from
or attributable to war, invasion, act of foreign enemy, war-like
operations (whether war be declared or not).
e.    Circumcision unless necessary for treatment of a disease not
excluded hereunder or as may be necessitated due to an accident,
vaccination or inoculation or change of life or cosmetic or aesthetic
treatment of any description, plastic surgery other than as may be
necessitated due to an accident or as a part of any illness.
f.    Cost of spectacles, contact lenses, hearing aids.
g.   Any dental treatment or surgery which is a corrective, cosmetic or
aesthetic procedure, including wear and tear, unless arising from
disease injury and requires hospitalisation for treatment.
h.   Convalescene, general debility, 'run-down' condition or rest
corrective, congenital external disease defects or anomalies,
sterility, venereal disease, intentional self-injury and use of
intoxicating drugs or a1chol.
1.   All expenses arising out of any condition directly or indirectly
caused to or associated with human T cell lymph tropic virus type III
(HTD-III) or lymphadinopathy-associated virus (LAV) or the mutants
derivative or variations deficiency syndrome or any HTTB-III
syndrome or condition of a similar kind commonly referred to as
AIDs.
J.    Charges incurred at hospital or nursing home primarily for
diagnostic, X-ray or laboratory examinations not consistent with or
incidental to the diagnosis and treatment of the positive existence or
presence of any ailment, sickness or injury for which confinement is
required at a hospital or nursing home.
k.   Expenses on vitamins and tonics unless forming part of treatment
for injury or disease as certified by the attending physician.
 1.   Injury or disease directly or indirectly caused by or contributed to
by nuclear weapons or materials.        '
m. Treatment arising from or traceable to pregnancy, childbirth,
miscarriage, abortion or complications of this kind, including caesrian
section.
n.   Naturopathy treatment.
Guidelines for Group Mediclaim Policy: The underwriters generally
follow the underwriting procedures mentioned below to ensure prudent
underwriting and high incurred claim ratio:
1.         Group policy will be issued for named persons only.
2.         Group shall be of any of seven specified categories, namely, (i)
Employer-employee relationship, (ii) Pre-defined segment where
premium is paid by Government, (iii) Members of a registered club,
(iv) Members of a registered co-society, (v) Holders of credit cards of
banks, visa or master cards (vi) Holders of deposit certificates of
banks /NBFC, and (vii) Shareholders of a company.
3.         Group discount generally varies from 2.5 per cent to 30 per cent
available for various groups from 101 to 50,000 and above.
4.         Monthly endorsement for any addition or deletion of any number
of members shall be without any change in discount.
5.         Group below 100 persons may be given group policy without
discount.
6.         Maternity benefit up to Rs. 50,000 available with 10 per cent
loading on basic premium.
7.          Cost of health check-up will not be available in group
policy.
8.          5 per cent service charges on group policy.
Universal Health Insurance
This Health Insurance is a very important policy for people below the
poverty line and is thus of great importance for social security and National
Health Policy. Let us now discuss the important provisions of such Health
Insurance as a matter of case study on underwriting of a Health Insurance
product essential for National Health Policy.
Sum Insured:
 1.   Section I: Hospitalisation benefit per family-Rs. 30,000
2.   Section II: Accidental death benefit for head of family-Rs. 25,000
3.   Section III: Disability compensation on hosptalisation for head of
family for maximum period of 15 days- Rs. 50 per day
Premium:
1.   Individual person: Rs. 365 p.a.
2.   Family of five persons (insured + spouse + 3 children): Rs. 548 p.a.
3.   Family of seven persons (as above + parents): Rs. 730 p.a.
Benefits
Section I
1.   Reimbursement of total medical expenses for anyone accident: Rs.
15,000
2.   Reimbursement for a member of family-individually or collectively: Rs.
30,000, subject to following sub-limits of hospital expenses:
a.             Room or boarding expenses: up to Rs. 150 per day
b.            ICU reimbursement: up to Rs. 150 per day
c.             Fees of surgeon, anaesthesist, consultant, etc.: up to Rs.
4,500 per illness
d.            Anesthesia, blood, oxygen, QT, X-ray, surgical appliances,
medicines, etc.: up to Rs. 4,500 per illness
The insurer's liability in respect of all claims admitted during period of
insurance shall not exceed the SI ofRs. 30,000 per person or per family.
Section II
Death Compensation for earning head of the family solely and directly due
to accident caused by outward, violent and visible means will be to SI, i.e.
Rs. 25,000
 
Section III
Disable compensation for earning head the family solely and directly due to
accident for which a valid claim under Section I is admitted will be up to Rs.
50 per day with excess of three days for a maximum period of 15 days.
General Exclusions:
 1.            All pre-existing diseases are not admissible.
2.            Any disease other than those stated in the policy contracted
by the insured person during the first 30 days of commencement of
the policy, provided that in the opinion of panel doctors the insured
could not have known the existence of the disease or any symptom
and had not taken any consultation treatment or medication.
3.            Some diseases like cataract, benign prostate hypertrophy,
hysterectomy, hernia, menorrhagia or fibromyoma, hydrocele,
congenital, internal disease, fistula, piles, sinusitis and related
disorders are not payable.
4.            Disease arising from or attributable to war or war-like
operations.
5.            Circumcision unless necessary for treatment or due to
accident.
6.            Cost of spectacles, contact lenses and hearing aids.
7.            Dental treatment, which is cosmetic, corrective or aesthetic.
8.            Convalescence general debility, 'run down' condition or rest
cure, congenital external disease or defects or anomalies, sterility,
venereal disease, intentional self-injury and use of drugs.
9.            Any cosmetic treatment or surgery, sterility, venereal
disease, HIV, AIDS 10.
10.         Diagnostic, X-ray or laboratory examination not consistent
with diagnosis
11.        Vitamins and tonics not forming part of treatment.
12.        Disease or injuries attributable to nuclear weapons.
13.        Treatment arising from pregnancy, childbirth, miscarriage,
etc.
14.        Naturopathy treatment.
Specific Exclusion for Section II
1.            Compensation in respect of death directly or indirectly
contributed or traceable to any disability existing on the
commencement of the policy.
2.            Death arising directly or indirectly from:
 a.             Internal self-injury or suicide.
b.            Pregnancy or any complication thereof.
c.             Whilst engaging in aviation, ballooning, mounting or
traveling in any aircraft other than as a passenger.
d.            Whilst under the influence of intoxication, liquor or
drugs.
e.             Directly or indirectly caused by venereal diseases or
insanity.
f.             Breach of law with criminal intent.
General Conditions:
1.         Only one policy will be issued to one family.
2.         The pre- and post-hospitalization expenses are excluded.
3.         Proposal form and prospectus to be signed by the proposer with
all details.
 
Health Insurance Policies in India: The health insurance policies
available in India are:
(a) Mediclaim policy (individuals and groups)
(b) Overseas mediclaim policy
(c) Raj Rajeshwari Mahila Kalyan Yojna
(d) Bhagyashree Child Welfare Policy
(e) Cancer Insurance Policy
(f) Jan Arogya Bima Policy
·         Mediclaim policy (individuals and groups): Mediclaim policy is
offered to individuals and groups exceeding 50 members. It covers the
hospitalization for diseases or sickness and for injuries. Under group
mediclaim policy, group discount is allowed to groups exceeding 101
people. The medical expenses will be reimbursed only if the insured is
admitted in the hospital for a minimum duration of 24 hours. Cost of
treatment includes consultation fee of doctors, cost of medicines and
hospitalization charges. Health insurance in India is available at very
economical rates. It is very popular among professionals like Chartered
accountants, Advocates, Engineers etc. It is very suitable for self-
 employed persons because it covers risks against several general and
serious diseases.
·         Overseas Mediclaim Policy: In 1984, the Overseas Mediclaim
Policy was developed. This policy will reimburse the medical expenses
incurred by Indians upto 70 years of age while traveling abroad. The
premium will be charged based on their age, purpose of travel,
duration and plan selected by the insured under the policy. This policy
is provided is provided to businessmen , people going on holiday tour,
traveling for educational professional and official purposes.
·         Raj Rajeshwari Mahila Kalyan Yojna: It is a personal accident
policy offered by an insurance company for the welfare of women. It
is offered to women residing in rural and urban areas. Women
between 10-75 years of age are eligible for this policy irrespective of
their occupation and income level.
·         Bhagyashree Child Welfare Policy: It is offered to girls between 0-
18 years. The age of the parents of the girls shouldn’t be more than 60
years. It provides coverage to one girl child in a family who loses her
father or mother in an accident.
·         Cancer insurance policy: It is designed for cancer patients aid
association members. The persons insured under this policy will pay
premium to their association along with the membership fee. This
policy will offer coverage to the insured in case he develops cancer.
All the expenses incurred for treatment of cancer not exceeding the
sum insured will be paid directly to the insured person.
·         Jan Arogya Bima Policy: This policy provides medical insurance to
poorer section of the people. This policy covers illness like heart
attack, jaundice, food poisoning, and accidents etc. that requires
immediate hospitalization.
Miscellaneous Insurance:
Personal Accident Insurance: Personal Accident is an insurance cover
wherein, in the event of the person sustaining bodily injuries resulting solely
and directly from an accident caused by EXTERNAL, VIOLENT & VISIBLE
means , resulting into death or disablement. An accident may include events
like: Rail / Road / Air Accident, Injury due to any collision/fall, Injury due
to Bursting of gas cylinder, Snake-bite, Frost bite/Dog bite , Burn Injury,
Drowning, Poisoning etc.
 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. On payment of
additional premium, medical expenses reimbursement can be covered.
These expenses are payable, in case, if the claim is admitted under the
basic policy cover. In addition to the Personal Accident Insurance cover the
policies available are : Nagrik Suraksha Poicy, Janta Personal Accident
Policy, Gramin Personal Accidental Policy , Student Package Policies for
students, Bhagashree for Girl-children, Raj Rajeshwari for Women etc.
Further as an ad-on cover Motor Vehicle Package Policy & Overseas
Mediclaim Policy too offer personal accidental injuries cover.
Sum insured is based on various factors namely:
 (1) Income from gainful employment,
 (2) Type of occupation,
 (3) Age as on date of proposal,
 (4) Period of insurance
 (5) Conditions prevailing at the place from where the proposal is made etc.
 (6) As regards the non-earning spouse of the insured the sum insured in
respect of  such spouse shall not exceed 50% of the eligibility of the
insured, subject to a limit of Rs. One Lakh under benefits available
under Table III of the policy.
(7) Dependent children can be offered a sum insured not exceeding
Rs.50000/- to cover death and disablement only. No temporary
disablement cover shall be offered.
Generally Personal Accident policies are maximum for one year only.
However, depending upon the requirement of the proposer it can be offered
for a period which could even be lesser than 12 months.
 
Fidelity Insurance: Fidelity insurance protects organizations from
loss of money, securities, or inventory resulting from crime.
Common Fidelity claims allege employee dishonesty, embezzlement,
forgery, robbery, safe burglary, computer fraud, wire transfer fraud,
counterfeiting, and other criminal acts. These schemes involve
every possible angle, taking advantage of any potential weakness in
your company’s financial controls. From fictitious employees,
dummy accounts payable, non-existent suppliers to outright theft of
money, securities and property. Fraud and embezzlement in the
workplace is on the rise, occurring in even the best work
environments. Liabilities covered by crime insurance usually fall into
two categories, although many polices combine both types of
coverage:
 Money and security coverage pays for money and securities taken by
burglary, robbery, theft, disappearance and destruction.
 Employee dishonesty coverage pays for losses caused by most
dishonest acts of your employees, such as embezzlement and theft.
Fidelity insurance includes comprehensive coverage of:
 Employee theft
 Money and securities while on premises or in transit
 Forgery
 Funds transfer fraud
 Computer fraud
 Money order and counterfeit currency fraud
 Credit card fraud
 Optional client coverage
 Coverage for investigative costs for covered losses
 Responds to Employee Retirement Income Security Act of 1974 (ERISA)
plan bonding requirement.
 Broad definition of employee, including directors and officers;
employees, including part-time, leased, temporary, and seasonal
employees; and volunteers.
 Worldwide coverage.
 
Burglary Insurance: Such a policy provides protection against loss or
damage caused by housebreaking, robbery or theft. It is also known as
‘robbery, theft or larceny insurance’. For this purpose a comprehensive
policy may be taken or each risk may be separately insured. Full details of
the article insured are given in the policy. Insured items include gold and
gold ornaments and other assets including household items such as TV,
fridge, air conditioner etc. A burglary policy for business premises would
provide cover against loss to damage by house breaking and burglary of
stock-in -trade, goods in- transit, cash-in-safe, fixture and fittings etc.
 
Credit Insurance: Credit insurance policy is taken to cover the loss
which may arise due to bad debts or non-payment of dues by the debtors.
This insurance is very useful to businessmen who sell goods on credit. It
protects them from loss arising out of insolvency of their debtors. In India,
Export Credit and Guarantee Corporation (ECGC) provide credit insurance to
exporters.
 
Workmen’s Compensation Insurance: In India, Workmen’s
Compensation Act was passed in 1934 and 1946. According to this act, an
employer is required to pay compensation to his workers who receive
injuries or contract occupational diseases during the course of their work.
An employer may obtain an insurance policy to cover such liability. The
premiums are payable usually on the basis of wages. It is also known as
‘Employers Liability Insurance’. This policy is essential to every employer
who employs ‘workmen’ as defined under the Workmen’s Compensation Act
in order to protect himself against the legal liabilities arising out of death or
bodily injury to this workman. It also extends coverage through
reimbursement of medical, surgical and hospitalization expenses including
transportation costs on the payment of additional premium. The National
Insurance Company Ltd, United India Insurance Company Ltd, Oriental
Insurance Company Ltd, and the New India Assurance Company Ltd offer
workmen’s compensation policies.
 
Travel Insurance: Travel insurance covers travel related accidents also.
While traveling outside India, individuals face risks such as loss of baggage,
accidents involving injuries, illnesses and medical emergencies requiring
hospitalization treatment. All this can pose serious consequences to the
overseas travellers. A rational person should therefore secure the required
coverage before leaving his home country. In India travel insurance has
become popular among International travellers. The coverage offered under
travel insurance policies in India are as follows:
·         Medical assistance in case of an emergency
·         Covers Personal Accident, Medical Expenses & Medical
Evacuation & Repatriation
 ·         Loss & delay of Checked Baggage
·         Covers pre-existing medical conditions
·         Convalescence after hospitalization
·         Takes care of sudden and unforeseen expenditure Convenient
and hassle free trip for the family
 
Wedding Insurance: These days, weddings have become quite an
expensive and elaborate affair. People do take care to make this once-in-a-
lifetime event a memorable one. In case of any postponement or
cancellation, there is a certain risk of monetary loss. The wedding insurance
package can compensate for the monetary loss. This unique product covers
the specific risks related to weddings. This Policy can protect you against
certain types of financial losses you may incur in the event of unpredictable
situations during the period leading up to and including your wedding day.
The period of insurance will be 24 hours prior to the start of the customary
functions or rituals or programmes of events mentioned in the printed
invitations till the end of the function or five days from the beginning
whichever occurs earlier. This policy provides cover for expenses actually
and already incurred or advances paid in connection with marriage hall,
catering, pandit, guests, music parties, photos and videography, loss on
cancellation of travel tickets etc. Liability is restricted only when such
cancellation arises out of cancellation or postponement of marriage. The
policy does not cover any loss arises when marriage is cancelled or
postponed because of dispute between marriage parties, willful negligence
and criminal misconduct of the bride, bridegroom or their parents.
 
Employee State Insurance Scheme: The Employee State Insurance Scheme
(ESIS) is an insurance system which provides both the cash and medical
benefits. It is managed by the Employee State nsurance Corporation (ESIC),
a wholly government-owned enterprise. It was conceived as a compulsory
social security benefit for workers in the formal sector. The original
legislation creating the scheme allowed it to cover only factories which has
been using power and employing 10 or more workers. However, since 1989
the scheme has been expanded, and it now includes all such factories which
are not using power and employing 20 or more persons. Mines and
plantations are explicitly excluded from coverage under the ESIS Act.
 
Unemployment Insurance: Unemployment insurance is designed to
provide short term protection for regularly employed persons who lose their
jobs and who are willing and able to work. Unemployment insurance has
several basic objectives:
1) Provide cash income during involuntary unemployment.
2) Help unemployed workers find jobs.
3) Encourage employees to stabilize employment.
4) Help stabilize economy.
Unemployment insurance is a popular concept in developed countries like
U.S. where they have well defined laws and regulations. However in India it
will take a long time to come.
Personal Liability Insurance: Personal liability insurance provides
protection against the legal liability, which arises due to insured’s personal
acts. The insurance company will pay for legal defense to third party
damages or injuries up to policy limit. Except legal liability, which arises
due to automobile accidents and professional liability, most other personal
acts are covered under personal liability insurance. The personal liability
insurance covers damages caused to properties and injuries to other people
due to the negligence of the insured. Under this policy, the insurance
company is bound to defend the insured, should the matter go to court of
law. It can also settle the matter out of court by negotiating with parties for
a settlement within the policy limit. Personal liability policy offers very
wide coverage. The following instances of loss, damages or injuries caused
by an insured individual come under the purview of personal liability
insurance in which coverage will be available up to the policy limit.
·         Accidental fire to neighbor’s house as a result of insured’s
negligence
·         Accidental injury to a third party while playing
·         Damaging costly antique accidentally belonging to neighbor
·         Injuring another person while riding a bicycle
Q.6. Write a note on Marine Insurance?

The subject of Marine Insurance is very wide and encompassing, which is why there is a definite
categorization of various types of marine insurance and different types of marine insurance
policies. As per the needs, requirements and specifications of the transporter, an appropriate type
or types of marine insurance can be narrowed down and selected to be put into operation.

Why Marine Insurance?

Any insurance is designed to manage risks in the event of unfortunate incidents like accidents,
damage to the property and environment or loss of life. When it comes to Ships, the stakes are
higher as all factors are involved in the operation, i.e. risk of losing valuable cargo or expansive
ships, the risk of damage to the environment due to oil pollution and risk of losing precious lives
of seafarers due to accidents.

To ensure all the risk can be managed without the lack of monetary funds when needed the most,
different Maritime insurances are made compulsory for ships and ship owners to take.

The types of marine insurance available for the benefit of a client are many and all of them are feasible
in their own way. Depending on the nature and scope of a client’s business, he can opt for the best
marine insurance plans and enjoy the advantage of having marine insurance.

here are several marine insurance companies providing types of insurance for ship owners, cargo
owners and charterers.

The different types of marine insurance can be elaborated as follows:

Hull Insurance: Hull insurance mainly caters to the torso and hull of the vessel along with all
the articles and pieces of furniture on the ship. This type of marine insurance is mostly taken out
by the owner of the ship to avoid any loss to the vessel in case of any mishaps occurring.

Machinery Insurance: All the essential machinery are covered under this insurance and in case
of any operational damages, claims can be compensated (post survey and approval by the
surveyor).

The above two insurances also come as one under Hull & Machinery (H&M) Insurance. The
H&M insurance can also be extended to cover war risk covers and strike cover (strike in port
may lead to delay and increase in costs)

Protection & Indemnity (P&I) Insurance: This insurance is provided by the P&I club, which
is ship owners mutual insurance covering the liabilities to the third party and risks which are not
covered elsewhere in standard H & M and other policies.

Protection: Risks which are connected with ownership of the vessel. E.g. Crew related claims.

Indemnity: Risks which are related to the hiring of the ship. E.g. Cargo-related claims.
Liability Insurance: Liability insurance is that type of marine insurance where compensation is sought to
be provided to any liability occurring on account of a ship crashing or colliding and on account of any
other induced attacks.

Freight, Demurrage and Defense (FD&D) Insurance: Often referred to as “FD&D” or simply
“Defense,” this insurance provides claims for handling assistance and legal costs for a wide
range of disputes which are not covered under H&M or P&I insurance.

Freight Insurance: Freight insurance offers and provides protection to merchant vessels’
corporations which stand a chance of losing money in the form of freight in case the cargo is lost
due to the ship meeting with an accident. This type of marine insurance solves the problem of
companies losing money because of a few unprecedented events and accidents occurring.

Marine Cargo Insurance: Cargo insurance caters specifically to the marine cargo carried by
ship and also pertains to the belongings of a ship’s voyages. It protects the cargo owner against
damage or loss of cargo due to ship accident or due to delay in the voyage or unloading. Marine
cargo insurance has third-party liability covering the damage to the port, ship or other transport
forms (rail or truck) resulted from the dangerous cargo carried by them

The time limit for claims that are right to compensation may vary depending upon the content of
the policy, and an action is to be brought within that period from the date when the damage
occurred.

For Newly built ships, the shipowner is under contract with the shipyard to take out insurance
cover for a period (usually one year) from the date of yard delivery.

In addition to these types of marine insurance, there are also various types of marine insurance
policies which are offered to the clients by insurance companies so as to provide the clients with
flexibility while choosing a marine insurance policy. The availability of a wide array of marine
insurance policies gives a client a wide arena to choose from, thus enabling him to get the best
deal for his ship and cargo. The different types of marine insurance policies are detailed below:

 Voyage Policy: A voyage policy is that kind of marine insurance policy which is valid
for a particular voyage.

 Time Policy: A marine insurance policy which is valid for a specified time period –
generally valid for a year – is classified as a time policy.

 Mixed Policy: A marine insurance policy which offers a client the benefit of both time
and voyage policy is recognized as a mixed policy.

 Open (or) Unvalued Policy: In this type of marine insurance policy, the value of the
cargo and consignment is not put down in the policy beforehand. Therefore
reimbursement is done only after the loss of the cargo and consignment is inspected and
valued.
  Valued Policy: A valued marine insurance policy is the opposite of an open marine
insurance policy. In this type of policy, the value of the cargo and consignment is
ascertained and is mentioned in the policy document beforehand thus making clear about
the value of the reimbursements in case of any loss to the cargo and consignment.

 Port Risk Policy: This kind of marine insurance policy is taken out in order to ensure the
safety of the ship while it is stationed in a port.

 Wager Policy: A wager policy is one where there are no fixed terms for reimbursements
mentioned. If the insurance company finds the damages worth the claim then the
reimbursements are provided, else there is no compensation offered. Also, it has to be
noted that a wager policy is not a written insurance policy and as such is not valid in a
court of law.

 Floating Policy: A marine insurance policy where only the amount of claim is specified
and all other details are omitted till the time the ship embarks on its journey, is known as
floating policy. For clients who undertake frequent trips of cargo transportation through
waters, this is the most ideal and feasible marine insurance policy.

 Single Vessel Policy: This policy is suitable for small ship owner having only one ship or
having one ship in different fleets. It covers the risk of one vessel of the insured.

 Fleet Policy: In this policy, several ships belonging to one owner are insured under the
same policy.

 Block Policy: This policy also comes under maritime insurance to protects the cargo
owner against damage or loss of cargo in all modes of transport through which his/her
cargo is carried i.e. covering all the risks of rail, road, and sea transport.

Marine Insurance is an area which involves a lot of thought, straightforward and complex
dealings in order to achieve the common ground of payment and receiving. But as much as
complex the field is, it is nonetheless interesting and intriguing because it caters to a lot of people
and offers a wide range of services and policies to facilitate easy and uncomplicated business
transactions. Therefore, in the interest of the clients and the insurance providers, it is beneficial
and relevant to have the right kind of marine insurance. It resolves problems not just in the short
run, but also in the long run as well.

Q.7. What is Insurance ? What are the elements of contract of Insurance ?

Every risk involves the loss of one or other kind. In older time, the
contribution by the person was made at the time of loss. Today, only one
business, which offers all walks of life, is insurance business. Owing to
growing complexity of life, trade and commerce, individual and business
firms and turning to insurance to manage various risks. Every individual in
this world is subject to unforeseen uncertainties which may make him and
his family vulnerable. At this place, only insurance helps him not only to
survive but also recover his loss and continue his life in a normal manner.
 
Insurance is an important aid to commerce and industry. Every
business enterprise involves large number of risks and uncertainties. It may
involve risk to premises, plant and machinery, raw material and other
things.  Goods may be damaged or may be destroyed due to fire or flood.
Some risk can be avoided by timely precautions and some are unavoidable
and are beyond the control of a business. These unavoidable risks can be
protected by insurance. 
What is Insurance
In D.S. Hamsell words, insurance is defined “as a social device
providing financial compensation for the effects of misfortune, the payment
being made from the accumulated contributions of all parties participating
in the scheme”
In simple terms “Insurance is a co-operative device to spread the loss
caused by a particular risk over a number of persons, who are exposed to it
and who agree to insure themselves against the risk”
Thus, the insurance is
(a)  A cooperative device to spread the risk;
(b)  the system to spread the risk over a number of persons who are
insured against the risk;
(c) the principle to share the loss of the each member of the society on
the basis of probability of loss to their risk; and
(d) the method to provide security against losses to the insured
Insurance may be defined as form of contract between two parties
(namely insurer and insured or assured) whereby one party (insurer)
undertakes in exchange for a fixed amount of money (premium) to pay the
other party (Insured), a fixed amount of money on the happening of certain
event (death or attaining a certain age in case of life) or to pay the amount
of actual loss when it takes place through the risk insured (in case of
property)
Terminology used in definition of Insurance
-          Insurer or insurance company – The agency involved in
Insurance business is known as insurer
 -          Insured/ Assured – The person who gets his property/life
insured is known as insured
-          Policy    - The agreement or contract which is put in writing is
known as a Policy
-          Premium  – The consideration in return of which the insurer
undertakes to make goods the loss or give a certain amount in case
of life insurance is known as premium

Assurance and Insurance

The two words were used synonymously at one time, but there is fine
distinction between the two. ‘Assurance’ is used in those contracts which
guarantee the payment of a certain sum on the happening of a specified
event which is bound to happen sooner or later, for example attaining a
certain age or death. Thus life policies comes under ‘assurance’.
Insurance, on the other hand, contemplates the granting of agreed
compensation of the happening of certain events stipulated in the contract
which are not expected but which may happen, for example risk relating to
fire, accident or marine.
Nature of Insurance
Following are the main characteristics of insurance which are applicable
to all types of insurance (life, fire, marine and general insurance).

1. Sharing of Risks - Insurance is a device to share the financial

losses which may occur to individual or his family on the happening of
certain events
2. Co operative Device – Insurance is a co-operative device to
spread the loss caused by a particular risk over a large caused by a
particular risk over a large number of persons who are exposed to it and
who agree to insure themselves against the risk.
3. Value of Risk – Risk is evaluated at the time of insurance. There
are several methods of valuing the risk. Higher the risks, higher will be
premium
4. Payment on Contingency -If the contingency occurs, payment is
made; payment is made only for insured contingency. If there is no
contingency, no payment is made. In life insurance contract, payment is
certain because the death or the expiry of term will certainly occur. In
 other insurance contract like fire, marine, the contingency may or may
not occur
5. Amount of Payment of Claim - The amount of payment depends
upon the value of loss occurred due to the particular insured risk. The
insurance is there upto that amount. In life insurance insurer pay a fixed
sum on the happening of an event or within a specified time period.

Example – In fire insurance, if fire occurs and half the property is

destroyed, but the whole property is insured, then payment of claim
will be made only for that half building that is destroyed not the
whole amount of insured.

6. Insurance is different from Charity  - In charity, there is no

consideration but insurance is not given without premium
7. Large number of Insured Person - Insurance is spreading of
loss over a large number of persons. Larger the number of persons, lower
the cost of insurance and amount of premium and incase lower the
number of persons, higher the cost of insurance and amount of premium.
8. Insurance is different from Gambling - In gambling, there is
no guarantee of gain, by bidding the person expose himself to risk of
losing. Whereas in insurance, by getting insured his life and property, he
protect himself against the risk of loss.

Functions of Insurance
Functions of insurance can be divided into parts;
I     Primary functions.
II   Secondary functions.
 
I     Primary Functions
1.   Certainty of compensation of loss: Insurance provides
certainty of payment at the uncertainty of loss. The elements of
uncertainty are reduced by better planning and administration. The
insurer charges premium for providing certainty.
2.   Insurance provides protection : The main function of
insurance is to provide protection against risk of loss. The insurance
policy covers the risk of loss. The insured person is indemnified for the
actual loss suffered by him. Insurance thus provide financial
 protection to the insured. Life insurance policies may also be used as
collateral security for raising loans.
3.   Risk sharing : All business concerns face the problem of risk. Risk
and insurance are interlinked with each other. Insurance, as a device
is the outcome of the existence of various risks in our day to day life.
It does not eliminate risks but it reduces the financial loss caused by
risks. Insurance spreads the whole loss over the  large number of
persons who are exposed by a particular risk.
II   Secondary Functions
1.   Prevention of losses : The insurance companies help in
prevention of losses as they join hands with those institutions which
are engaged in loss prevention measures. The reduction in losses
means that the insurance companies would  be required to pay lesser
compensations to the assured and manage to accumulate more
savings, which in turn, will assist in reducing the premiums
2.   Providing funds for investment : Insurance provide capital
for society. Accumulated funds through savings in the form of
insurance premium are invested in economic development plans or
productivity projects.
3.   Insurance increases efficiency : The insurance eliminates the
worries and miseries of losses. A person can devote his time to other
important matters for better achievement of goals. Businessman feel
more motivated  and encouraged to take risks to enhance their profit
earning. This also helps in improving their efficiencies.
4.   Solution to social problems : Insurance take care of many
social problems. We have insurance against industrial injuries, road
accident, old age, disability or death etc.
5.   Encouragement of savings : Insurance not only provides
protection against risks but also a number of other incentives which
encourages people to insure. Since regularity and punctuality pf
payment of premium is a perquisite for keeping the policy in force,
the insured feels compelled to save.
Principles of Insurance
The basic principles which govern the insurance are -
(1)  Utmost good faith
 (2)  Insurable interest
(3)  Indemnity
(4)  Contribution
(5)  Subrogation
(6)  Causa proxima
(7)  Mitigation of loss
1.      Principle of utmost good faith : A contract of insurance is a
contract of ‘Uberrimae Fidei’ i.e., of utmost good faith. Both insurer
and insured should display the utmost good faith towards each other in
relation to the contract. In other words, each party must reveal all
material information to the other party whether such information is
asked or not. There should not be any fraud, non disclosure or
misrepresentation of material facts.
Example – in case of life insurance, the insured must revel the true
age and details of the existing illness/diseases. If he does not disclose
the true fact while getting his life insured, the insurance company can
avoid the contract.
Similarly, incase of the insurance of a building against fire, the insured
must disclose the details of the goods stored, if such goods are of
hazardous nature
A material fact means important facts which would influence the
judgment of the insurer in fixing the premium or deciding whether he
should accept the risk, on what terms. All material facts should be
disclosed in true and full form
2.      Principle of Insurable Interest:  This principle requires that
the insured must have a insurable interest in the subject matter of
insurance. Insurance interest means some pecuniary interest in the
subject matter of contract of insurance. Insurance interest is that
interest, when the policy holders get benefited by the existence of the
subject matter and loss if there is death or damage to the subject
matter.
For example – In life insurance, a man cannot insured the life of a
stranger as he has no insurable interest in him but he can get insured
the life of himself and of persons in whose life he has a pecuniary
interest. So in the life insurance interest exists in the following cases:-
 -     Husband in the life of his wife and wife in the life of her husband
-     Parents in the life of a child if there is pecuniary benefit derived
from the life of a   Child
 -    Creditor in the life of debtor
-     Employer in the life of an employee
-     Surety in the life of a principle debtor
            In life insurance, insurable interest must be present at the time
when the policy is taken. In fire insurance, it must be present at the time of
insurance and at the time if loss if subject matter. In marine insurance, it
must be present at the time of loss of the subject matter.
3.      Principle of Indemnity :  This principle is applicable in case of
fire and marine insurance only. It is not applicable in case of life,
personal accident and sickness insurance. A contract of indemnity
means that the insured in case of loss against which the policy has
been insured, shall be paid the actual cost of loss not exceeding the
amount of the insurance policy. The purpose of contract of insurance
is to place the insured in the same financial position, as he was before
the loss.
Example – A house is insured against fire for Rs. 50000. It is burnt down
and found that the expenditure of Rs. 30000 will restore it to its
original condition. The insurer is liable to pay only Rs. 30000.
In life insurance, principle of indemnity does not apply as there is no
question of actual loss. The insurer is required to pay a fixed amount
upon in advance in the event of accident, death or at the expiry of the
fixed term of the policy. Thus, a contract of a life insurance is a
contingent contract and not a contract of indemnity.
4.      Principle of Contribution: The principle of contribution is a
corollary to the doctrine of indemnity. It applies to any insurance which
is a contract of indemnity. So it does not apply to life insurance. A
particular property may be insured with two or more insurers against
the same risks. In such cases, the insurers must share the burden of
payment in proportion to the amount insured by each. If one of the
insurer pays the whole loss, he is entitled to contribution from other
insurers
 
 Example – B gets his house insured against fire for Rs. 10000 with insurer
P and for Rs. 20000 with insurer Q. a loss of Rs. 15000 occurs, P is
liable to pay for Rs. 5000 and Q is labile to pay Rs 10000. If the whole
amount pf loss is paid by Q, then Q can recover Rs. 5000 from P. The
liability of P &Q will be determined as under:
 
Sum insured with Individual insurer (i.e. P or Q )   x  Actual Loss  =
Total sum insured         
                                     
                              Liability of P =  10000   x 15000              =
Rs.5000
                                                                                 30000
 
                              Liability of Q = 20000   x 15000              =
Rs.10000
                                                                                30000
The right of contribution arises when:
(a)     There are different policies which related to the same subject
matters;
(b)     The policies cover the same period which caused the loss;
(c)     All the policies are in force at the time of loss; and
(d)    One of the insurer has paid to the insured more than his share
of loss.
5.      Principle of Subrogation :   The doctrine of subrogation is a
collorary  to the principle of indemnity and applies only to fire and
marine insurance. According to doctrine of subrogation, after the
insured is compensated for the loss caused by the damage to the
property insured by him, the right of ownership to such property
passes to the insurer after settling the claims of the insured in respect
of the covered loss.
Example – Furniture is insured for Rs. 1 lacs against fire, it is burnt
down and the insurer pays the full value of Rs. 1 Lacs to the insured,
 later on the damage Furniture is sold for Rs. 10000. The insurer is
entitled to receive the sum of Rs. 10000.        
A loss may occur accidentally or by the action or negligence of third
party. If the insured suffer a loss because of action of third party and
he is in a position to recover the loss from the insurer then insured can
not take action against third party, his right is subrogated
(substituted) to the insurer on settlement of the claim. The insurer,
therefore, can recover the claim from the third party.
If the insured recovers any compensation for the loss (due to third
party), from the third party, after he has already been indemnified by
the insurer, he holds the amount of such compensation as the trustee
if the insurer.
The insurer is entitled to the benefits out of such rights only to the
extent of the amount he has paid to the insured as compensation  
6.      Principle of Causa Proxima : Causa proxima, means
proximate cause or cause which, in a natural and unbroken series of
events, is responsible for a loss or damage. The insurer is liable for
loss only when such a loss is proximately caused by the peril insured
against. The cause should be the proximate cause and can not the
remote cause. If the risk insured is the remote cause of the loss, then
the insurer is not bound to pay compensation. The nearest cause
should be considered while determining the liability of the insured.
The insurer is liable to pay if the proximate cause is insured.
 
Example – In a marine insurance policy, the goods were insured
against damage by sea water, some rats on the board made a hole in a
bottom of the ship causing sea water to pour into the ship and damage
the goods. Here, the proximate cause of loss is sea water which is
covered by the policy and the hole made by the rats is a remote
cause. Therefore, the insured can recover damage from the insurer
Example – A ship was insured against loss arising from collision.  A
collision took palce resulting in a few days delay. Because of the
delay, a cargo of oranges becomes unsuitable for human consumption.
It was held that the insurer was not liable for the the loss because the
proximate cause of loss was delay and not the collision of the ship.
 7.      Principle of Mitigation of Loss: An insured must take all
reasonable care to reduce the loss. We must act as if the property was
not insured.
Example – If a house is insured against fire, and there is accidental
fire, the owner must take all reasonable steps to keep the loss
minimum. He is supposed to take all steps which a man of ordinary
prudence will take under the circumstances to save the insured
property.
Benefits of Insurance or Role and Importance of Insurance
Benefit of insurance can be divided into these categories -
1.   Benefits to Individual
2    Benefits to Business or Industry
3.   Benefits to the Society   
It can be explained as under -
1.   Benefits to Individual
(a)  Insurance provides security & safety : Insurance gives a
sense of security to the policy holder. Insurance provide security and
safety against the loss of earning at death or in old age, against the
loss at fire, against the loss at damage, destruction of property,
goods, furniture etc.
Life insurance provides protection to the dependents in case of death
of policyholders and to the policyholder in old age. Fire insurance
insured the property against loss on a fire. Similarly other insurance
provide security against the loss by indemnifying to the extent of
actual loss.
(b) Encourage Savings : Life insurance is best form of saving. The
insured person must regularly save out of his current income an
amount equal to the premium to be paid otherwise his policy get
lapsed if premium is not paid on time.
(c)  Providing Investment Opportunity : Life insurance provide
different policies in which individual can invest smoothly and with
security; like endowment policies, deferred annuities etc. There is
special exemption in the Income Tax, Wealth Tax etc. regarding this
type of investment
2    Benefits to Business or Industry
(a)  Shifting of Risk : Insurance is a social device whereby
businessmen shift specific risks to the insurance company. This helps
the businessmen to concentrate more on important business issues.
(b) Assuring Expected Profits : An insured businessman or
policyholder can enjoy normal expected profits as he would not be
required to make provisions or allocate funds for meeting future
contingencies.
(c)  Improve Credit Standing : Insured assets are easily accepted
as security for loans by the banks and financial institutions so
insurance improve credit standing of the business firm
(d) Business Continuation – With the help of property insurance,
the property of business is protected against disasters and chance of
closure of business is reduced
3.   Benefits to the Society  
(a)  Capital Formation : As institutional investors, insurance
companies provide funds for financing economic development. They
mobilize the saving of the people and invest these saving into more
productive channels
(b) Generating Employment Opportunities : With the growth of
the insurance business, the insurance companies are creating more
and more employment opportunities.
(c)  Promoting Social Welfare : Policies like old age pension
scheme, policies for education, marriage provide sense of security to
the policyholders and thus ensure social welfare.
(d) Helps Controlling Inflation : The insurance reduces the
inflationary pressure in two ways, first, by extracting money in supply
to the amount of premium collected and secondly, by providing funds
for production narrow down the inflationary gap.
Type of Insurance
Insurance cover various types of risks and include various insurance
policies which provide protection against various losses.
There are two different views regarding classification if insurance:-
I.   From the business point of view; and
 II   From the risk points of view
I.    Business point of view
The insurance can be classified into three categories from business point of
view
1.    Life insurance;
2.   General Insurance; and
3.   Social Insurance.
1.    Life Insurance: The life insurance contract provide elements of
protection and investment after getting insurance, the policyholder
feels a sense of protection because he shall be paid a definite sum at
the death or maturity. Since a definite sum must be paid, the element
of investment is also present.   In other words, life insurance provides
against pre-mature death and a fixed sum at the maturity of policy. At
present, life insurance enjoys maximum scope because each and every
person requires the insurance.
Life insurance is a contract under which one person, in consideration
of a premium paid either in lump sum or by monthly, quarterly, half
yearly or yearly installments, undertakes to pay to the person (for
whose benefits the insurance is made), a certain sum of money either
on the death of the insured person or on the expiry of a specified
period of time.
Life insurance offers various polices according to the
requirement of the persons -
-     Term Assurance
-     Whole Life
-     Endowment Assurance  
-     Family Income Policy
-     Life Annuity Joint Life Assurance
-     Pension Plans
-     Unit Linked Plans
-     Policy for maintenance of handicapped dependent
-     Endowment Policies with Health Insurance benefits
 2.   General Insurance: The general insurance includes property
insurance, liability insurance and other form of insurance. Property
insurance includes fire and marine insurance. Property of the
individual and business involves various risks like fire, theft etc. This
need insurance Liability insurance includes motor, theft, fidelity and
machine insurance
 
Type of General Insurance policies available are -
-          Health Insurance
-          Medi- Claim Policy
-          Personal Accident Policy
-          Group Insurance Policy
-          Automobile Insurance
-          Worker’s Compensation Insurance
-          Liability Insurance
-          Aviation Insurance
-          Business Insurance
-          Fire Insurance Policy
-          Travel Insurance Policy
3.    Social Insurance: Social insurance provide protection to the
weaker sections of the society who are unable to pay the premium. It
includes pension plans, disability benefits, unemployment benefits,
sickness insurance and industrial insurance.
II   Risk Points of View
The insurance can be classified into three categories from Risk point
of view
1.   Property Insurance
2.   Liability Insurance
3.   Other forms of Insurance
1.   Property Insurance: Property of the individual and business is
exposed to risk of fire, theft marine peril etc. This needs insurance.
This is insured with the help of:-
(i)         Fire Insurance
(ii)        Marine Insurance
(iii)       Miscellaneous Insurance
(i)   Fire Insurance: Fire insurance covers risks of fire. It is
contract of indemnity.  Fire insurance is a contract under which the
insurer agrees to indemnify the insured, in return for payment of
the premium in lump sum or by instalments, losses suffered by the
him due to destruction of or damage to the insured property,
caused by fire during an agreed period of time. It includes losses
directly caused through fire or ignition. There are various types of
fire insurance policies.
-     Consequential loss policy
-     Comprehensive policy
-     Valued policy
-     Valuable policy
-     Floating policy
-     Average policy
(ii) Marine Insurance: Marine insurance is an arrangement by
which the insurer undertakes to compensate the owner of the ship
or cargo for complete or partial loss at sea. So it provides
protection against loss because of marine perils. The marine perils
are collisions with rock, ship attack by enemies, fire etc. Marine
insurance insures ship, cargo and freight.
The following   kinds of marine policies are -
-     Voyage policy
-     Time policy
-     Valued policy
-     Hull Policy
-     Cargo Policy
 -     Freight Policy
(iii)    Miscellaneous Insurance: It includes various forms of
insurance including property insurance, liability insurance, personal
injuries are also insured. The property, goods, machine, furniture,
automobile, valuable goods etc. can be insured against the damage
or destruction due to accident or disappearance due to theft.
Miscellaneous insurance covers
-     Motor
-     Disability
-     Engineering and aviation risks
-     Credit insurance
-     Construction risks
-     Money Insurance
-     Burglary and theft insurance
-     All risks insurance
2.   Liability Insurance: The insurer is liable top pay the damage of
the property or to compensate the loss of personal injury or death. It
includes fidelity insurance, automobile insurance and machine
insurance.    
The following   are types of liability Insurance:-
-     Third party insurance
-     Employees insurance
-     Reinsurance
3.   Other forms of Insurance: It include export credit insurance,
state employee insurance etc. whereby the insurer guarantees to pay
certain amount at the happening of certain events.
The following are other form of Insurance-
-     Fidelity Insurance
-     Credit Insurance
-     Privilege Insurance
Q.8. What are the characteristics of Fire Insurance?

Protecting your business against fire-related outbreak is essential.  Fire Insurance is the ideal
protection plan to ensure optimum financial protection in case of a fire outbreak. The policy
protects the insured building, assets, furniture and fixtures against a series of perils. The insured
is reimbursed based on the market value of the property.

Every entrepreneur or new business set-up should own fire insurance as it comes in handy in
mitigating the aftermath of fire damage. As no property is resilient to fire or other natural
disasters. The repercussion can lead to huge fragility if you’re not backed by financially. At
times, a small business may face huge financial hardship if not covered by insurance. Hence, Fire
insurance can be a saviour in the event of privation.  

Let’s gather some information about the concept!

Key Features of Fire Insurance

A fire insurance policy is a contract between the insurance company and the insured when the
insurer compensates for the loss or damage occurred due to the fire outbreak. The premium of
such policy is pre-decided, where the insurance company pays up to the insured amount only.
The basic features of fire insurance include:

 The policy works under the principle of indemnity. This means under a fire insurance
policy, the insured will be compensated for the loss up to a certain limit subject to the
maximum sum insured.
 The policyholder should have insurable interest with the subject-matter of the insurance
contract at the time of buying as well as in case of loss.
 Under a fire insurance policy, the insurance provider covers the risk of damage/loss
caused by fire or any cause, which is close by reason of such loss.
 Fire insurance comes with one-year tenure. The policy lapses automatically after one year
unless it is renewed.

Fire Insurance: The Characteristics

If you are planning to insure your office space with fire insurance, here are some of the basic
characteristics of fire insurance that plays an important role in ensuring the right policy:

1. Insurable Interest
Fire insurance demands the insured to have an insurable interest in the property to be insured.
The insurable interest is the basic of having fire insurance, which makes the insurer eligible for
ensuring insurance benefits in case of loss. It should exist both at the time of buying insurance
and while claiming your insurance.

2. Utmost Faith

Fire insurance deal is based on the principle of greatest good faith, which demands no secrets to
keep. This compels the insured to disclose all important points with regard to the subject-matter
of the fire insurance policy so that the insurer can have a proper analysis of risks associated. The
insured should give all the related information pertaining to location, construction of the
property, the probability of fire incident etc. however, the insurance company has all rights to
terminate the contract if any important point is not disclosed.

Likewise, the insurer should give the complete details of the policy without hiding about the
clause or hidden charges.

3. Contract of Indemnity

The policyholder can claim up to the sum insured offered under fire insurance. In case there is no
loss, no claim will be entertained.

4. Personal Insurance Contract

As fire insurance provides financial protection to the property, the involvement of the insured is
inevitable. Thus, it is necessary for the insurance provider to keep an eye on every behaviour of
the insured. Moreover, the insured can’t make any change in the policy without the consent of
the insurer. Even if the possession is transferred to a third-party and the insurer is not informed,
it has complete authority to terminate the policy right away.

5. Personal Right

The person whose name is mentioned in the fire insurance contract as the policyholder is eligible
to receive the insured amount in case of any loss or damage.

6. Direct Cause of Loss

The only condition to avail the benefits of fire insurance is that fire should be the immediate and
direct cause of the loss or damage for which the claim arises.

7. Description of Property

 The true description of the property at the time of buying insurance should be mentioned in the
fine print. It is important as the insurer compensates the claimed amount only if the accident
happens at the mentioned location. Any change in the location will lead to claim rejection. If
there is any change, the same needs to be intimated to the insurer.
Wait Here is the Catch!
While claiming for the losses under fire insurance, an average clause has to be fulfilled. This
says a portion of the total loss has to be borne by the insured. The insurer will bear the proportion
of the loss up to sum insured. Simply put, the insured has to bear the difference amount.

Let’s Illustrate-

 Suppose you have a property worth Rs. 10,00,000, where it is insured with fire insurance
for Rs. 5,00,000. Now, in case of a fire outburst, if half of the property is damaged, the
insurer will pay only 2,50,000, using the following formula:
 Insured amount (Rs.5,00,000) x Actual loss(Rs. 2.5,00,000) / Actual value of the
property(Rs.10,00,000)
 The complete policy amount is payable only in case of complete destruction of the
property if a fire outbreak occurs.

Wrapping it Up!

Remember, fire accidents are unanticipated and destructive. A fire insurance policy gives the
financial security for home, furniture, shares, and other business assets. The policy acts as a
saviour by providing the actual value of the property in case of fire damage. Therefore, by owing
a fire insurance policy in India, you can provide the utmost financial shield to your business.

Q.9. What is Insurable interest ? State the insurable interest in life insurance.

Insurable interest is a part an entity’s value for which an insurance policy is purchased to cover
the risk of loss.

Insurable interest is a requirement for the issuance of an insurance policy, making it legal, valid
and protecting against intentionally harmful acts.

Entities not subject to financial loss from an event do not have an insurable interest and cannot
purchase an insurance policy to cover that event.

‘Insurable Interest’ Insurance is a collection of risk exposure, to protect policyholders from

financial losses.

Types of Insurable Interest are;

 Fidelity Guarantee Insurance,

 Credit Insurance,
 Performance Bond.

Fidelity Guarantee Insurance

This type of policy covers the insured in respect of the loss sustained by him arising out of fraud,
defalcation or dishonesty caused by the employee of the insured.

Usually, this type of insurance who either handle cash or hold positions of trust covers those
employees.

Four types of guarantees are in use depending on the class of employees, viz., Commercial
Guarantees, for persons other than below;

 Court Bonds, for administrators, receivers, and other appointments.

 Government Bonds, for trustees, customs, and excite people. Guarantees For Local Govt.
Officers.

Credit Insurance
The present-day international trade is mainly transacted on credit basis and exporters can sustain
heavy losses because of the possible insolvency of the buyers of such goods or because of
protracted default in payment on the part of buyers.

The main purpose of credit insurance is to provide financial protection to such exporters arising
out of nonpayment.

Payment of the value of the goods may not be possible for the buyers because of the outbreak of
war and because of the restrictions imposed on remittances abroad.

In addition, there is always the question of the possible insolvency of the buyer.

Export Credit Guarantee Scheme aims at providing cover to the exporter (insured) arising out of
(a) such political risks and (b) insolvency of the buyer.

Performance Bond
These types of policies basically aim at providing protection to those who are responsible under
a contract to perform some obligations within a specified time or as per certain pre-determined
standard.

If the performance cannot be made as per contract leading to a loss for the principal, then the
principal would have a right under the contract for claiming damages or compensation for the
default of the contractor or the person who is to perform, a certain obligation under the contract.

The situation may relate to, for example, construction of buildings, roads, bridges, mills,
factories etc., or may relate to a loan agreement repayable as per certain terms and conditions.
Such persons, sometimes of their own or sometimes at the direction of the principal, are required
to take such Performance Bonds or Surety Bonds when insurance companies stand as sureties or
guarantors.

In the business of insurance, the pertinent question that usually crops up into our mind is “Can
anybody insure anything that he sees around?”

To put it the other way round, who can insure and what?

The answer relating to this pertinent question revolves around the Principle of insurable interest.

This principle asserts that only the person who has an insurable interest -on a subject matter of
insurance can insure that particular subject matter.

It is not possible to effect a policy of insurance on a subject matter by somebody who has got no
insurable interest in that subject matter. This insurable interest is virtually a legal right to insure.

It is the legal financial interest of a man on a property, the interest being such that by the safety
of the subject matter he is benefited, by the loss, damage or destruction thereof he is prejudiced.

Actually, before the promulgation of certain Acts by English Parliament, it was not necessary to
have an insurable interest for the purpose of affecting a policy of insurance.

The notable Acts are The Marine Insurance Act, 1745, The Life Assurance Act, 1774 & the
Gaming Act, 1845 that necessitated the presence of insurable interest.

Before that, anybody could insure anybody’s life or property and the business of insurance
became more of gaming and wagering.

The Marine Insurance Act, 1745 prohibited effecting policies of insurance on British ships or
cargo without having an insurable interest.

The Life Assurance Act, 1774 clearly provides that no insurance shall be allowed to be made by
a person for his own benefit on the life of another unless the person affecting the policy of
insurance shall have an insurable interest on the life of that another.

The Gaming Act, 1845 has made all contracts of gaming or wagering null and void.

Present day position, therefore, is this that insurable interest is necessary for every insurance
contract. Insurable interest has best been defined by Macgillivray in the following way.

“Where the assured is so situated that the happening of the event on which the insurance money
is to become payable would, as a proximate cause, involve the assured in the loss or diminution
of any right recognized by law or in any legal liability, there is an insurable interest in the
happening of that event to the extent of the possible loss or liability”. (Macgillivray on Insurance
law).
Some provisions of the law are considered below;

1. In the leading English case of LUCENA V. CRAUFURD (1806) it was said by the
learned judge:
“A man is interested in a thing to whom advantage may arise or prejudice happen from
the circumstances which may attend it; interest does not necessarily imply a right to the
whole or a part of a thing, not necessarily and exclusively that which may be the subject
of privation, but the having some relation to, or concern in the subject of the insurance,
which relation or concern by the happening of the perils insured against may be so
affected as to produce a damage, detriment, or prejudice to the person insuring ; and
where a man is so circumstanced with respect to matters exposed to certain risks or
dangers as to have a moral certainty of advantage or benefit, but for those risks or
dangers, he may be said to be interested in the safety of the thing. To be interested in the
preservation of a thing is to be so circumstanced with respect to it as to have benefit from
its existence, prejudice from its destruction. The property of a thing and the interest
devisable from it may be very different; of the first, the price is generally the measure,
but my interest in a thing every benefit or advantage arising out of or depending on such
thing may be considered as being comprehended”. The students should try to realize how
the concept of insurable interest was well grasped.
2. Section 5(2) of the Marine Insurance Act, 1906 (of the United Kingdom) lays down a
clear concept of the principle of insurable interest when it says: “In particular a person is
interested in a marine adventure where he stands in any legal or equitable relation to the
adventure or to any insurable property at risk therein, in consequence of which he may
benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss,
or by damage thereto, or by the detention thereof, or may incur liability in respect
thereof’.
3. The relevant provision of the Life Assurance Act, 1774 is as follows: “No insurance shall
be made on the life or lives of any person or persons, or on any other event or events
whatsoever, wherein the person or persons for whose use, benefit or on whose account
such policy or Policies shall be made, shall have no interest, or by way of gaming or
wagering”.

The situation that provoked the promulgation of the Life Assurance Act, 1774 by the British
Parliament might be of interest to the students. Before the promulgation of this Act, it was not
necessary for an insured to have an insurable interest in the subject matter of insurance.

Anybody could affect life insurance on any life, the result being that it became a common
practice amongst the judges and jurors of the English judicial system to affect life policies on the
lives of the suspected criminals brought for trial, where the maximum penalty could be a death
sentence.

Being motivated by policy money consideration, the judgment quite often used to be death
sentence irrespective of the merit of the case, because only by giving death sentence they could
realize policy money.
The scandal went to such an extent that the Parliament had to enact the Life Assurance Act,
1774, prohibiting life insurance in the absence of insurable interest.

Insurable interest is a fundamental principle of insurance.

It means that the person wishing to take out insurance must be legally entitled to insure the
article, or the event, or the life. The happening of the event insured against or death of the life
insured must cause the policyholder financial loss.

Essentials of Insurable Interest

The following are the essentials of insurable interest;

1. There must be property, rights, interest, life, limb or potential liability devolving upon the
insured capable of being covered by a policy of insurance.
2. Such property, right, life, limb, interest or liability must be the subject matter of
insurance.
3. The insured must bear such relationship, recognized by law, to that subject-matter of
insurance whereby the benefits by the safety of that subject-matter and is prejudiced by
the loss, damage or destruction thereof.

When a person fulfills the above criteria or when a person has such a relationship with the
subject matter, it is said that he has an insurable interest and it is only then that he can insure.

One point is very clear from the above requirement and that is this that if the presence of such an
insurable interest would not have been required and if anybody would have been allowed to
effect a policy of insurance on anybody’s life or property in the absence thereof, then there
would have been created intentional or deliberate losses solely for making gains without losing
anything at all.

It is actually this principle, which is keeping the business of insurance absolutely free from
gaming or wagering, or from the creation of such a situation.

The subject of insurable interest will be further understood if we can create a distinction in
between -“subject matter of insurance” and a subject-matter of the insurance contract”. Subject-
matter of insurance is nothing but the property that is being insured.

For example, it is life in life insurance, factory, machinery, stock, house, building etc. in fire
insurance, ship, cargo etc, in marine insurance and so and so forth.

But the subject-matter of an insurance contract is indeed not the property as such but the
insurable interest of a man in that property.

It was, therefore, rightfully commented by the judge in the leading case of Castellain V. Preston (
1883 ) that in a fire policy it is not the bricks or materials or the house itself that a man insures,
in fact, it is the interest of the man in that house that he insures.
Examples of Insurable Interest
Insurable interest exists in the following cases;

1. Owners: Owners have got insurable interest to the extent of full value.
2. Part owners or joint owners: They have an insurable interest to the extent of their part
or financial interest.
3. Mortgagor/ Mortgagee: Mortgagor, being the owner of the property, has got insurable
interest. Mortgagee, though not the owner, has got insurable interest to the extent of the
money advanced, plus interest and, an amount to cover up insurance premium.
4. Bailees: They have got insurable interest because of a potential liability being created if
goods belonging to others get lost or damaged whilst in their custody.
5. Carriers: Like bailees, carriers have also got insurable interest in view of potential
liability that might devolve on them for any mishap to the goods belonging to others, but
whilst in their custody.
6. Administrators, Executors & Trustees: They have an insurable interest in view of
responsibility put on them by law.
7. Life: A person has got insurable interest in his own life. A husband has also got insurable
interest in the life of his wife and vice-versa. No other relationship as such merits
existence of insurable interest. However, insurable interest has been created up to £30 on
the lives of parents, stepparents, and grandparents, under the Industrial Assurance &
Friendly Societies Act, 1948 & 1958 of U. K., for meeting funeral expenses.
8. Debtor and Creditor: A Debtor has an insurable interest in his own life, but he has no
insurable interest in the life of his Creditor. A Creditor, on the other hand, has an
insurable interest in his own life and he has also insurable interest in the life of his debtor
to the extent of the loan, interest, and something to cover up the premium. This is because
of the financial interest being created by advancing money.
9. Insurers: They have got insurable interest because of a potential liability is undertaken
from the insured under a policy, and this justifies taking out a reinsurance policy.
10. Liability: The creation of a potential liability justifies the existence of insurable interest.
The best examples are third-party motor insurance, public liability insurance, employer’s
liability insurance etc.

It should be remembered that a person in the lawful possession of goods of another has got
insurable interest so long he is responsible for the goods.

Mere possession without responsibility does not carry any insurable interest.

Similarly, a person having illegal possession of goods has got no insurable interest, e.g., thieves.

One important point with regard to insurable interest is that it must be capable of being valued in
terms of money. Sentimental value is no criteria.

When Insurable Interest Must Exist

The question as to when insurable interest must exist varies depending on the type of insurance.
The position is as follows;

 Marine: Insurable interest must exist at the time of claim although it need not exist at the
time of effecting the policy. However, at the time of effecting the policy, the insured must
prove that he is going to acquire insurable interest soon. (Marine Insurance Act, 1906).
 Fire: Insurable interest must exist both at the time of effecting the policy and at the time
of claim.
 Life: Insurable interest must exist at the time of effecting the policy and it may not exist
at the time of claim. For example, if a creditor takes out a policy on the life of a debtor
and subsequently the debtor pays back the loan, nevertheless, the creditor can continue
the policy as per original terms and shall be entitled to sum assured either on death of the
debtor or on maturity, even though at the time of claim there existed no insurable interest.
(The rule was laid down in the English Case Dalby V. The India and London Life
Assurance Co., 1854).
 Accident: Like fire, insurable interest must exist both at the time of effecting the policy
and at the time of claim.

It should be remembered that in the absence of insurable interest the contract should be
void ab-initio.

Therefore, it is the duty of the underwriters to see the position of insurable interest at the time of
issuance of the policy and similarly, it is the duty of the Claims Manager to see the position of
insurable interest at the time of settling a claim.

Insurable Interest in Life Insurance

Insurable interest is the pecuniary interest; the insured must have an insurable interest in the life
to be insured for a valid contract insurable interest arises out of the pecuniary relationship that
exists between the policy-holder and the life assured so that the former stands to lose by the
death of the latter and/or continues to gain by his survival.

If such a relationship exists, then the former has the insurable interest in the life of the latter.

The loss should be monetary.

Mere emotion and expectation do not institute insurable interest in the life of his friend or father
merely because he gets valuable advice from them.

The general rule of insurable interest in life insurance

 Time of insurable interest: The insurable interest must exist at the time of proposal.
Policy, without the insurable interest, will be the wager. It is not essential that the
insurable interest must be present at the time of claim.
  Services: Except the services of wife, services of other relatives will not essentially form
insurable interest. There must be the financial relationship between the proposer and the
life assured. In other words, the services performed by the son without dependence of his
father, will not constitute insurable interest of the father in the life of his soil. Vice-versa
is not essential for forming insurable interest.
 Insurable interest must be valuable: In the business relationship, the value or extent of
the insurable must be determined to avoid wager contract of the additional insurance.
Insurance is limited only up to the amount of insurable interest.
 Insurable interest should be valid: Insurable interest should not be against public policy
and law should recognize it. Therefore, the consent of life assured is essential before the
policy can be issued.
 The legal responsibility may be the basis of insurable interest: Since the person will
suffer financially up to the extent of responsibility, the proposal has insurable interest to
that extent, for instance, a person will be under legal responsibility to expense at the
funeral of his wife and children, and he can purchase insurance in their lives up to that
extent.
 Insurable interest must be definite: The insurable interest must be present definitely at
the time of proposal. Mere expectation of gain or support will not constitute the insurable
interest.
 Legal consequence: The insurable interest must be there to form legal and valid
insurance contract without insurable interest would be invalid.

After taking these rules into account, the insurable interest principle in life insurance can be
divided into two categories: insurable interest in own life, and an insurable interest in other’s life.

The latter is sub-divided into two classes: where the proof is not required, and where the proof is
required.

Again, this insurable interest is divided into two classes: insurable interest arising due to the
business relationship, and the insurable interest in family relationships.

Insurable interest in one’s own life

An individual always has an insurable interest in his own life it does not need any verification of
proof. Every man is presumed to possess an insurable interest in his estate for the loss of his
future gains or savings, which might be the result of his premature death.

According to the definition of insurable interest, it is also evident that the person will continue to
gain financially while lie is surviving and will suffer loss if he is dead because he will be unable
to earn or protect the property.

The insurable interest in own life is boundless because the loss to the insured or his dependents
cannot be measured regarding money and, therefore, no limit can be placed to the amount of
insurance that one may take on one’s own life.
Thus, ideally, a person can take a policy to an unlimited amount of his own life; but in practice
no insurer will issue a policy for an amount larger than amount seems suitable to the
circumstances and means of the applicant generally, it is mentioned that one cannot purchase
policy usually more than ten times of his one year’s income.

The third party could pay the premium if there were no intention of speculation. If there is a
possibility of a wager, the contract will become void.

Insurable interest in other’s life

Life insurance can be affected by the lives of third parties provided the proposer has the
insurable interest in the third party. There are two types of insurable interest in other’s life. First
where the proof is not required and second, where the proof is required,

Proof not required

There are only two such cases where the presence of insurable interest is legally presumed and
therefore need not be proved.

Wife has an insurable interest in the life of her husband

It is presumed and decided by reed vs. Royal exchanged 795) that wife is presumed to have the
insurable interest in the life of her husband because the husband is legally bound to support his
wife.

The wife will suffer financially if she husband is dead and will continue to gain if the husband
was surviving.

Since the extent of loss or gain cannot be measured in this case; the wife has the insurable
interest in the husband’s life up to an unlimited extent.

Husband has an insurable interest in the life of his wife

The insurable interest is presumed to exist here, and no proof is required. It was decided in
Griffith vs. Fleming (1909) that the husband has the insurable interest in his wife’s life because
of domestic services performed by the wife.

If the wife is dead, a husband has to employ another person to render the domestic services, and
certain other financial expenditures will involve at her death which is not calculable.

The husband is benefited by the survival of his wife, so it is self-proved that husband has the
insurable interest in his wife’s life.

Since the monetary loss at her death or monetary gain at his survival cannot be measured; there
is unlimited insurable interest in the life of the wife.

Proof is required

Insurable interest has to be proved in the following cases;

Business relationship. The policy-holder may have the insurable interest in the life of assured
due to business or contractual relationship. In this case, the amount of insurable corresponds to
the amount of risk involved. Some of such examples are narrated below:

A creditor has in the life or his debtor. The creditor may lose money if (the debtor dies before the
loan is repaid.

The continuance of debtor’s life is financially meaningful to the creditor because (the latter will
get all his money repaid at the former’s survival.

The maximum amount of loss to a creditor may be the amount of outstanding loan plus interest
thereon and the amount of premium paid; so, the maximum amount of insurable interest is
limited to the outstanding loan, plus interest and amount of premium expected to be paid.

The interest is calculated on the estimation of duration of debt to be paid.

The maximum amount of interest does not say about the payment of policy amount, it, merely,
determines the chances of speculation. The full amount of policy is payable irrespective of the
payment of loan and interest. Since it is life insurance, the full policy amount is paid.

A trustee has the insurable interest in respect of the interest of which he is the trustee because of
the survival of the other person the trustee is benefited, and at his death, he will suffer.

A surety has the insurable interest in the life of his principal. If the principal (the debtor) is dead,
the surety is responsible for payment of the outstanding loan, or obligated amount.

At the survival of principal, he will not suffer this loss. The insurable interest is limited up to the
amount of outstanding loan, interest, and premium paid.

A partner has the insurable interest in the life of each partner. At the death of a partner, the
partnership will be dissolved, and the surviving partner will lose financially.

Even if the firm continues at the death of the partner, the firm has to pay the deceased partner’s
share to his dependents; this will involve a huge financial loss to the partnership.

Therefore, the firm collectively can purchase insurance policies in the life of each partner of the
firm: since the firm part of money up to the extent of deceased partner goodwill, capital, the
share of profit and reserve the firm has insurable interest up to the extent in each partner.

Similarly, all the partners have the insurable interest in the life of each partner because they will
financially suffer death.

An employer has in the life of a key-man. A key-man is the person whose presence, capital,
capacity cause profit to the business. If the key-man is dead, the business will reduce profit up to
a certain extent.

The business suffers reduced profit, expenses involved in appointing and training new persons
and the amount to be given to the dependents of key-man at his death. So the business has
insurance interest up to such an extent in the key-man’s life.

An insurer has in the life assured. The insurer suffers from the death of the life assured and,
therefore, he can get reinsurance of the assured persons by him. The insurable interest is limited
up to the policy amount.

Family relationship

The insurable interest may arise due to family relationship if pecuniary interest exists between
the policy-holders and life assured because mere relationship or tics of blood and affection does
not constitute insurable interest, proposer must have a reasonable expectation of financial benefit
from the continuance of the life of the person to be insured or of financial loss from his death.

The interest must be based on value and not on mere sentiments.

Similarly,

the mere moral obligation is not sufficient to warrant the existence of insurable interest although
the legal obligation to get support will form insurable interest of the person who is supported in
the life of the person who is supporting.

Thus,

a son can insure his father’s life only when he is dependent on him, and the father can take the
insurance policy on his son’s life only when he is dependent on his son.

Insurable interest in life insurance indicates that the insured must have a pecuniary interest in the
life to be insured for a valid life insurance contract.

Insurable Interest in Marine Insurance

An insured person will have insurable interest in the subject-matter where he stands in any legal
or equitable relation to the subject-matter in such a way that he may benefit by the safety or due
arrival of insurable property or may be prejudiced by its loss, or by damage thereto or by the
detention thereof or may incur liability in respect thereof.

Since marine insurance is frequently affected before the commercial transactions to which they
apply are formally completed it is not essential for the assured to have an insurable interest at the
time of effecting insurance, though he should have an expectation of acquiring such an interest.

If he fails to acquire an insurable interest in due course, he does not become entitled to
indemnification.

Since the ownership and other interest of the subject matter often change from hands to hands,
the requirement of the insurable interest to be present only at the time of loss this makes a marine
insurance policy freely assignable.

Exceptions
There are two exceptions to the rule in marine insurance; Lost or Not Lost and P.P.I. Policies.

Lost or Not Lost

A person can also purchase a policy in the subject-matter in which it was known whether the
matters were lost not lost, in such cues the assured and the underwriter are ignorant about the
safety or otherwise of the goods and complete reliance was placed on the principle of Good
Faith.
The policy terminated if any one of the two parties was aware of the fact of loss, in this case,
therefore, the insurable interest may not be present at the time of contract because the subject-
matter would have been lost.

Related: Utmost Good Faith in Life Insurance

P.P.I. Policies

The subject-matter can be insured in the usual manner by P.P.I. (Policy Proof of Interest), i.e.,
interest proof policies. It means that in the event of claim underwriters may dispense with all
proof of insurable interest.

In this case, if the underwriter does not pay the claims, it cannot be enforced in any court of law
because of P.P.I. policies are equally void and unenforceable.

But the underwriters are generally adhering on the terms and pay the amount of claim.

The insurable interest in marine insurance can be of the following forms:

According to Ownership

The owner has insurable interest up to the Rill value of the subject-matter. The owners are of
different types according to the subject-matter.

 In Case of Ships: The ship-owner or any person who has purchased it on charter-basis
can insure the ship up to its full price.
 In Case of Cargo: The cargo-owner can purchase a policy up to the full price of the
cargo. If he has paid the freight in advance, he can lake the policy for the full price of the
goods plus the amount of freight plus the expense of insurance.
 In Case of Freight: The receiver of the freight can insure up to the amount of freight to
be received by him.

Insurable Interest in Re-insurance

The underwriter under a contract of marine insurance has an insurable interest in his risk and
may re-insure in respect of it.

Insurable Interest in other Cases

In this case, all those underwriters are included who have an insurable interest in the salary arid
own liabilities.

For example, the master or any member of the crew of a ship has an insurable interest in respect
of his wages.
The lender of money on bottomry or respondentia has an insurable interest in respect of the loan.

Q.10. Importance of Social Insurance in India?

Meaning of Social Insurance:

Social insurance is one of the devices to prevent an individual from falling to the depths of
poverty and misery and to help him in times of emergencies. Insurance involves the setting aside
of sums of money in order to provide compensation against loss, resulting from particular
emergencies.

The elimination of the risk of the individual is the basic idea of insurance. It is primarily the
effort of the social group, in place of the individual effort, to lessen the incidence of loss on the
individual.

We may define social insurance as “a co-operative device, which aims at granting adequate
benefits to the insured on the compulsory basis, in times of unemployment, sickness and
other emergencies, with a view to ensure a minimum standard of living, out of a fund
created out of the tripartite contributions of the workers, employers and the State, and
without any means test, and as a matter of right of the insured”.

In the words of Sir William Beveridge, social insurance can be described as the giving in return
for contribution, benefits upto subsistence level, as right and without means tests, so that
individual may build freely upon it.

Main Features of Social Insurance:

We can, point out certain well-marked features of social insurance:

(1) It involves the establishment of a common monetary fund out of which all the benefits in
cash or kind are paid, and which is generally built up of the contribution of the workers,
employers and the State.

(2) The contribution of the workers is merely nominal and is kept at a low level so as not to
exceed their paying capacity, whereas the employers and the State provide the major portion of
the finances. This means that there is no close correspondence between workers’ own
contribution, and the benefits granted to them.

(3) Benefits are granted as a matter of right and without any means test, so as not to touch the
beneficiaries’ sense of self-respect.

(4) Social insurance is now provided on a compulsory basis so that its benefits might reach all
the needy persons of the society who are sought to be covered.

(5) The benefits are kept within fixed limits, so as to ensure the maintenance of a minimum
standard of living of the beneficiaries during the period of partial or total loss of income.
 (6) It has to be borne in mind that social insurance alleviates the sufferings of the individual
from the particular event, but, it does not prevent it. As a matter of fact, when prevention is
impossible, or nearly so, that insurance has its greatest appeal.

Characteristics of Social Insurance:

1. A common fund is established by employer, State and the workers out of which all the
benefits in cash or kind are paid.

2. The contribution of the workers is nominal which generally does not exceed their paying
capacity, whereas the employers and the State provide the major portion of the finances.

3. The object of the benefits is to ensure the maintenance of a minimum standard of living to the
beneficiaries during the period of partial or total loss of income.

4. Benefits are granted as a matter of right and without any means test, thus, they do not touch
the self-respect of the beneficiaries.

5. It is provided on compulsory basis so that its benefit might reach to all the needy persons of
the society who are sought to be covered by the scheme.

6. Lastly, social insurance reduces the sufferings arising out of the contingencies faced by
individual contingencies which he cannot prevent.

Social Insurance and Commercial Insurance:

Commercial insurance is necessarily voluntary, whereas social insurance is generally

compulsory. In commercial insurance, the policy benefits are according to the premiums paid,
while in social insurance the benefits received by the workers are much larger than their
contributions.

Moreover, commercial insurances do not have for its object the maintenance of a minimum
standard of living, which is the only inspiring motive of social insurance. Besides, social
insurance is undertaken to meet a chain of contingencies of diverse nature and intensity, while
commercial insurance provides against an individual risk only.

Social insurance is different from commercial insurance, for the latter is voluntary and is meant
for the better-paid sections of the society, and its benefits are in proportion to the premium paid;
it offers protection only against individual risks and does not aim at providing a minimum
standard of living.

Thus, commercial insurance is voluntary whereas social insurance is compulsory. In commercial

insurance the benefits are given according to the premium paid just as the risks are covered under
LIC policies, while in social insurance the benefits received by the workers are much larger than
their contribution. Moreover, social insurance has the object of maintaining a minimum standard
of living while in commercial insurance the object is to cover the risk of those individuals who
pay the premium.

It is, thus, obvious that, the ideals of social insurance are based on human dignity and social
justice while that of commercial insurance are on means tests. Besides, social insurance is
undertaken to meet a chain of contingencies of diverse nature and intensity, while commercial
insurance provides security against an individual’s risk.

Social Insurance and Social Assistances:

Social insurance is also somewhat different from social assistance. A social assistance scheme is
a device according to which benefits are given as a legal right to workers, fulfilling prescribed
conditions, by the State out of its own resources. Thus, social assistance is supplemental rather
than substitutive to social insurance.

Both go side by side. But the difference is that social assistance is purely a Government affair,
while social insurance is only partly financed by the State. Social insurance is granted to those
who pay a contribution, whereas social assistance is given gratis.

Besides, social insurance does not insist upon a means test and benefits are granted without it,
whereas social assistance is given only if certain prescribed conditions are satisfied. Then, the
word insurance, in the term ‘Social insurance’, implies the preservation of the contributory
principle which is absent in the assistance. Similarly, we can say that the word social makes a
difference from commercial insurance.

It may also be seen that social insurance ranges between social assistance and commercial
insurance. In social assistance the help is gratis to the needy and is given by the State or the
community, while commercial insurance is purely a private contract. Social insurance requires
contributions both from the State as well as the insured and thus, is mid-way between the two.

Social Insurance:

Shri K.N. Vaid defined social insurance as the, “giving, in return for contribution, benefits upto
subsistence level, as of right and without means test so that an individual may build freely upon
it. Thus, social insurance implies that it is compulsory and that men stand together with their
fellows.”

Social Insurance has also been defined as “a cooperative device which aims at granting
adequate benefits to the insured on compulsory basis, in times of unemployment, sickness,
and other contingencies with a view to ensure a minimum standard of living, out of a fund
created out of the tripartite contributions of the workers, employers and State.”

While social assistance is purely a Government affair and financed wholly from the general
revenues of the State. Social security includes both social assistance and social insurance.
India’s social security system is composed of a number of schemes and programs spread
throughout a variety of laws and regulations. Keep in mind, however, that the government-
controlled social security system in India applies to only a small portion of the population.

Furthermore, the social security system in India includes not just an insurance payment of
premiums into government funds (like in China), but also lump sum employer obligations.

Generally, India’s social security schemes cover the following types of social insurances:

 Pension
 Health Insurance and Medical Benefit
 Disability Benefit
 Maternity Benefit
 Gratuity

While a great deal of the Indian population is in the unorganized sector and may not have an
opportunity to participate in each of these schemes, Indian citizens in the organized sector
(which include those employed by foreign investors) and their employers are entitled to coverage
under the above schemes.

the applicability of mandatory contributions to social insurances is varied. Some of the social insurances
require employer contributions from all companies, some from companies with a minimum of ten or
more employees, and some from companies with twenty or more employees.

Pension or Employees’ Provident Fund

The Employees’ Provident Fund Organization, under the Ministry of Labor and Employment,
ensures superannuation pension and family pension in case of death during service. Presently,
only about 35 million out of a labor force of 400 million have access to formal social security in
the form of old-age income protection in India. Out of these 35 million, 26 million workers are
members of the Employees’ Provident Fund Organization, which comprises private sector
workers, civil servants, military personnel, and employees of State Public Sector Undertakings
(PSUs).

The schemes under the Employees’ Provident Fund Organization apply to businesses with at
least 20 employees. Contributions to the Employees’ Provident Fund Scheme are obligatory for
both the employer and the employee when the employee is earning up to Rs 15,000 (US$220)
per month, and voluntary, when the employee earns more than this amount. If the pay of any
employee exceeds this amount, the contribution payable by the employer will be limited to the
amount payable on the first Rs 15,000 (US$220) only. 

The Employees’ Provident Fund Organization includes three schemes:

 The Employees’ Provident Fund Scheme, 1952;

 The Employees’ Pension Scheme, 1995; and,
 The Employees’ Deposit Linked Insurance Scheme, 1976.

The Employees’ Provident Fund (EPF) Scheme is contributed to by the employer (1.67-3.67
percent) and the employee (10-12 percent).

The Employee Pension Scheme (EPS) is contributed to by the employer (8.33 percent) and the
government (1.16 percent), but not the employee.

Finally, the Employees’ Deposit Linked Insurance (EDLI) Scheme is contributed to by the
employer (0.5 percent) only.

Four main types of pension (all monthly) are offered:

 Pension upon superannuation or disability;

 Widows’ pension for death while in service;
 Children’s pension; and,
 Orphan’s pension.

In addition, there are separate pension funds for civil servants, workers employed in coal mines
and tea plantations in the state of Assam, and for seamen.

Health Insurance and Medical Benefit

India has a national health service, but this does not include free medical care for the whole
population. The Employees’ State Insurance (ESI) Act creates a fund to provide medical care
to employees and their families, as well as cash benefits during sickness and maternity, and
monthly payments in case of death or disablement for those working in factories and
establishments with 10 or more employees.

The ESI (Central) Amendment Rules, 2016 – notified on December 22, 2016 – expanded
coverage to include employees earning Rs 21,000 (US$313.53) or less in a month from January
1, 2017; previously, the wage limit for ESI subscribers was Rs 15,000 (US$223.95) per month.
Subsequently, the Employees’ State Insurance (Central) Amendment Rules, 2017 was notified
on January 20, detailing new maternity benefits for women who have insurance.

Sickness benefit under ESI coverage is 70 percent of the average daily wage and is payable for
91 days during two consecutive benefit periods. 
Disability Benefit
The Employee’s Compensation Act, 1923, formerly known as the ‘Workmen’s Compensation
Act, 1923’, requires the employer to pay compensation to employees or their families in cases of
employment related injuries that result in death or disability.

In addition, workers employed in certain types of occupations are exposed to the risk of
contracting certain diseases, which are peculiar and inherent to those occupations. A worker
contracting an occupational disease is deemed to have suffered an accident out of and in the
course of employment, and the employer is liable to pay compensation for the same. Injuries
resulting in permanent total and partial disablement are listed in parts I and II of Schedule I of
the Employee’s Compensation Act, while occupational diseases have been defined in parts A, B,
and C of Schedule III of the Employee’s Compensation Act. 

Compensation calculation depends on the situation of occupational disability:

(a) Death
50 percent of the monthly wage multiplied by the relevant factor (age) or an amount of Rs
80,000 (US$1,246.20), whichever is more.

(b) Total permanent disablement

60 percent of the monthly wage multiplied by the relevant factor (age) or an amount of Rs
90,000 (US$1,401.98), whichever is more.

Maternity Benefit
The Maternity Benefit (Amendment) Act, 2017 came into force on April 1, 2017, and increases
some of the key benefits mandated under the previous Maternity Benefit Act of 1961. The
amended law provides women in the organized sector with paid maternity leave of 26 weeks, up
from 12 weeks, for the first two children. For the third child, the maternity leave entitled will be
12 weeks. India now has the third most maternity leave in the world, following Canada (50
weeks) and Norway (44 weeks). 

The Act also secures 12 weeks of maternity leave for mothers adopting a child below the age of
three months as well as to commissioning mothers (biological mothers) who opt for surrogacy.
The 12-week period in these cases will be calculated from the date the child is handed over to the
adoptive or commissioning mother.

In other provisions, the law mandates that every establishment with over 50 employees must
provide crèche facilities within easy distance, which the mother can visit up to four times a day.
For compliance purposes, companies should note that this particular provision will come into
effect from July 1, 2017.

The Maternity Benefit (Amendment) Act introduces the option for women to negotiate work-
from-home, if they reach an understanding with their employers, after the maternity leave ends.
Under the pre-existing Maternity Benefit Act of 1961, every woman is entitled to, and her
employer is liable for, the payment of maternity benefit at the rate of the average daily wage for
the period of the employee’s actual absence from work. Apart from 12 weeks of salary, a female
worker is entitled to a medical bonus of US$54.45 (Rs 3,500).

The 1961 Act states that in the event of miscarriage or medical termination of pregnancy, the
employee is entitled to six weeks of paid maternity leave. Employees are also entitled to an
additional month of paid leave in case of complications arising due to pregnancy, delivery,
premature birth, miscarriage, medical termination, or a tubectomy operation (two weeks in this
case). 

In addition to the above, the 1961 Act states that no company shall compel its female employees
to do tasks of a laborious nature or tasks that involve long hours of standing or which in any way
are likely to interfere with her pregnancy or the normal development of the fetus, or are likely to
cause her miscarriage or otherwise adversely affect her health.

Gratuity
The Payment of Gratuity Act, 1972 directs establishments with ten or more employees to provide
the payment of 15 days of additional wages for each year of service to employees who have
worked at a company for five years or more.

Gratuity is provided as a lump sum payout by a company. In the event of the death or
disablement of the employee, the gratuity must still be paid to the nominee or the heir of the
employee. 

The employer can, however, reject the payment of gratuity to an employee if the individual has
been terminated from the job due to any misconduct. In such a case of forfeiture, there must be a
termination order containing the charges and the misconduct of the employee.

Gratuity is calculated through the formula mentioned below:

Gratuity = Last Drawn Salary × 15/26 ×  Years of Service, where

 The ratio 15/26 represents 15 days out of 26 working days in a month.

 Last Drawn Salary = Basic Salary + Dearness Allowance.
 Years of Service are rounded up or down to the nearest full year. For example, if the
employee has a total service of 10 years, 10 months and 25 days, 11 years will be
factored into the calculation.

Gratuity is exempt from taxation provided that the amount does not exceed 15 days’ salary for
every completed year of service calculated on the last drawn salary (subject to a maximum of
US$15,467.62 or Rs 10 lakh). It is important to note that an employer can choose to pay more
gratuity to an employee, which is known as ex-gratia and is a voluntary contribution. Ex-gratia is
subject to tax.