Principles & Practices of Insurance - COM 334

HARESH RAsst. Professor

Department of CommerceChrist University, Bengaluru

“Quote, Unquote”

“When we take a risk, we are betting on an outcome that will result from a decision we have made, though we do not know for certain what the outcome will be.” - Peter L. Bernstein

There is nothing certain in this world except the death and the Tax; yet the Death and Tax are uncertain as no body knows when will he die or when the tax will change.” - Benjamin Franklin

Introduction

• Every business is exposed to different types of risks such as fire, theft, burglary, accident, etc.,

• Some of the risks can be transferred to specialised institutions known as Insurance companies.

• Insurance socialisation of risks. • Insurance companies indemnify the loss of the

insured.

RISK• No single definition for the term Risk.• Historically Risk means Uncertainty. • Risk is defined as uncertainty concerning the

occurrence of a loss.• The economics and finance literature, authors often

make a distinction between risk and uncertainty. • The term “risk” is often used in situations where the

probability of possible outcomes can be estimated with some accuracy, while “uncertainty” is used in situations where such probabilities cannot be estimated.

• The potential loss that risk presents may be:financial : i.e. measurable in monetary terms;physical : death or injury (often having financial

consequences for the individual or his family);emotional : feelings of grief and sorrow.

We should also be aware that insurers may use the word "risk" with other meanings, including:– to signify the situation/premises, or policyholder,

they are insuring;– to indicate the peril or cause of loss insured (so,

some policies may insure on an "all risks" basis).

Categories of Risk

• Speculative or dynamic risk - a situation in which either profit OR loss is possible.(Business, Investments, Betting). This risk is uninsurable with few exceptions.

• Pure or static risk - a situation in which there are only the possibilities of loss or no loss, as oppose to loss or profit with speculative risk. (Premature death, occupational disability, catastrophic medical expenses, and damage to property due to fire, lightning, or flood.)

Other Risks

• Fundamental Risks - Fundamental risks affect the entire economy or large numbers of people or groups within the economy. (high inflation, unemployment, war, and natural disasters.)

• Particular Risks - Particular risks are risks that affect only individuals and not the entire community.(burglary, theft, auto accident, dwelling fires)

• Subjective Risk - Subjective risk is defined as uncertainty based on a person's mental condition or state of mind.(Drunken Driving)

• Objective Risk - Objective risk is defined as the relative variation of actual loss from expected loss. (For example, assume that a fire insurer has 5000 houses insured over a long period and, on an average, 1 percent, or 50 houses are destroyed by fire each year. Sometimes 45 houses(5 less or 10 Per cent variation). Objective risk declines as the number of exposures increases.

• Dynamic Risk - Associated with a changing economy. Important examples of dynamic risks include the changing tastes of consumers, technological change, new methods of production, and investments in capital goods that are used to produce new and untried products.

• Static Risk - Similar to pure risk.

• Financial Risk - A financial risk is one where the outcome can be measured in monetary terms.

• Non-financial Risks - the great social decisions of life are examples of non-financial risks: the selection of a career, the choice of a marriage partner, having children. There may or may not be financial implications, but in the main the outcome is not measurable financially but by other, more human, criteria. The outcome could be uncomfortable or disliked in some other way.

• A community can come to the aid of individuals who are affected by such events, by having a system of sharing and mutual support.

Meaning Insurance is based on principles of co-operation. The losses of a few are shared by many. An insurance company, otherwise called the insurer organize this

co-operative effort. Insurance is a contract between the insurer and the insured under

which the insurer undertakes to compensate the insured for the loss arising from the risk insured against.

In consideration the insured agrees to pay premium regularly. The person whose risk insured is called the insured or assured.

The person who agrees to compensate the loss arising from the risk is called the insurer or assurer or underwriter.

INSURANCE

• Insurance may thus be defined as sharing of the losses of a few who are unfortunate to suffer such losses, amongst those exposed to similar uncertain events / situations.

INSURANCE CONTRACT

• A contract of insurance is an agreement whereby one party, called the insurer, undertakes, in return for an agreed consideration, called the premium, to pay the other party, namely the insured, a sum of money or its equivalent in kind, upon the occurrence of a specified event resulting in a loss to him. The policy is a document which is an evidence of the contract of insurance.

History/Origin of Insurance

• The idea of insurance took birth thousands of years ago. Yet, the business of insurance, as we know it today, goes back to just two or three centuries.

• Insurance has been known to exist in some form or other since 3000 BC. Various civilizations, over the years, have practiced the concept of pooling and dividing among themselves, all the losses suffered by some members of the community.

History/Origin of Insurance

• Insurance through the ages - The Babylonian traders had agreements where they would pay additional sums to lenders, as a price for writing off the loans, in case a shipment was lost or stolen. These were called “bottomry loans”.

• Similar practices were prevalent among the traders from Baruch and Surat sailing in Indian ships to Sri Lanka, Egypt and Greece.

• The Greeks had started benevolent societies in the late 7th century AD, to take care of the funeral – and families – of members who died. The Friendly societies of England were similarly constituted.

• The inhabitants of Rhodes adopted a practice whereby, if some goods were lost due to jettisoning during distress, the owners of goods (even those who lost nothing) would bear the losses in proportion.

• Chinese traders in ancient days would keep their goods in different boats or ships sailing over the treacherous rivers. They assumed that if one of the boats suffered such a fate, the loss of goods would be only partial and not total. The loss could be distributed and thereby reduced.

Modern Commercial Insurance• Marine insurance was thus the forerunner to other kinds of

insurance.• “The Great Fire of London” in 1666, in which more than

13000 houses were lost, gave a boost to insurance and the first fire insurance company, called the Fire Office, was started in 1680.

• Lloyds: The origins of insurance business as practiced today, is traced to the Lloyd‟s Coffee House in London. Traders, who used to gather there, would agree to share the losses to their goods being carried by ships, due to perils of the sea. (maritime perils, such as pirates who robbed on the high seas or bad sea weather spoiling the goods or sinking of the ship due to perils of the sea.)

History of Insurance in India

• Modern insurance in India began in early 1800.• The first life insurance company to be set up was an

English company, the Oriental Life insurance Co. Ltd. and the first non-life insurer to be established in India was the Triton Insurance Co. Ltd.

• The first Indian insurance company was the Bombay Mutual Assurance Society Ltd., formed in 1870 in Mumbai.

• Many other Indian companies were set up subsequently as a result of the Swadeshi movement at the turn of century.

History of Insurance in India – CONTD.

• In 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to regulate the insurance business.

• The oldest insurance company in India which still exists is National Insurance Company Ltd., which was founded in 1906. It is still in business.

• The Life Insurance Companies Act, 1912 made it compulsory that premium-rate tables and periodical valuation of companies be certified by an actuary. However, the disparity and discrimination between Indian and foreign companies continued.

• Nationalisation of life insurance - 1st September 1956 and the Life Insurance Corporation of India (LIC) was formed.

• Nationalisation of non-life insurance - General Insurance Business Nationalisation Act (GIBNA) in 1972, the non-life insurance business was also nationalised and the General Insurance Corporation of India (GIC) and its four subsidiaries were set up.

Malhotra Committee and IRDA

• In 1993 the Malhotra Committee was setup to explore and recommend changes for development of the industry including the reintroduction of an element of competition. The Committee submitted its report in 1994. In 1997 the Insurance Regulatory Authority (IRA) was established.

• The passing of the Insurance Regulatory & Development Act 1999 (IRDA) led to the formation of Insurance Regulatory and Development Authority (IRDA) in April 2000 as a statutory regulatory body both for Life and Non- life insurance industry.

Restructuring of GIC

• The GIC was converted into a national re-insurer [and the subsidiaries were restructured as independent companies].

• In December, 2000 the Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002. These are– National Insurance Co. Ltd.– The Oriental [Fire & General] Insurance Co. Ltd.– The New India Assurance Co. Ltd– United India [Fire & General] Insurance Co. Ltd.

Establishment of IRDA

• Insurance Regulatory and Development Authority (IRDA) was established in 2000 by an act of Parliament of 1999 “to protect the interests of holders of insurance policies and to regulate, promote and ensure orderly growth of the insurance industry”.

ASSURANCE

• The term ‘Assurance is applied to contracts, where the risk insured against is certain to happen, but the time of its happening is uncertain.

• Thus the risk insured against death is contract of assurance. Technically speaking a life insurance may be called as “Life Assurance”.

Nature/Characteristics of Insurance

1. Sharing of risk2. co-operative device3. Large number of insured persons4. Evaluation of risk5. Payment of happening of specified event6. Transfer of risk7. Spreading of risk8. Protection against risks

9. Insurance is not charity10. Insurance is not a gambling11. A contract12. Social device13. Based upon certain principle14. Regulation under the law15. Insurance is for pure risk only16. Based on mutual goodwill

Importance of Insurance

Individual aspects:1. Security for health and property2. Encourage savings3. Encourage the habit of forced thrift4. Provide mental peace5. Increase efficiency6. Provision for the future

7. Awareness for the future8. Credit Facility9. Tax exemption10. Contribution to the conservation of health11. Cover for legal liability12. Security to the mortgaged property13. Poster economic independence

II Economic aspects

1. Safety against risk2. Protection to employees3. Basis of Credit4. Protection from the loss of key man5. Encourage loss prevention methods6. Reduction of cost7. Promote foreign trade8. Development of big industries9. Increase in efficiency

III Social aspects

1. Stability in family life2. Development of employment opportunity3. Encourage alertness4. Contributes to the development of basic facilities

IV National aspects

1. Increase the national savings2. Helps in development opportunities3. Develops the money market4. Earns foreign exchange5. Capitalizes the savings

PRINCIPLES OF INSURANCE• A contract of insurance is a mercantile contract. All the principles applicable

to mercantile contracts are applicable to contracts of insurance.• Further there are special principles applicable to contracts of insurance.

They are;– Nature of Contract– Utmost good faith (PRINCIPLE OF UBERRIMAE FIDEI)– Insurable Interest– Indemnity– Subrogation– Contribution– Proximate cause– Loss of Minimization

1. Nature of ContractThe nature of contract is a fundamental principle of a contract of insurance required for a valid contract. Essential elements of a valid contract are:a. Agreement (offer and acceptance) –insurance is an agreement between insurer and insured. Proposal is made by one party and accepted by other.b. Lawful consideration- premium is consideration for insurance contractc. Lawful objects- object of insurance is lawful and not against to public policy. d. Free consent- consent of parties to contract should be free. I.e., not by means of coercion, undue influence, fraud, misrepresentation etc.e. Competent parties (legal capacity of parties)- parties to an insurance contract should be competent to contract. Ie, they should not be idiot, lunatic, minor, insolvent etc.f. Consensus ad idem- parties to contract should understand the subject matter of insurance in same sense.g. Possibility and certainty of performance etc.

2. PRINCIPLE OF UBERRIMAE FIDEI (UTMOST GOOD FAITH)

• Both the parties i.e. the insured and the insurer should have a good faith towards each other.• The insurer must provide the insured complete, correct and clear information of subject matter.• The insurer must provide the insured complete, correct and clear information regarding terms andconditions of the contract.• This principle is applicable to all contracts of insurance i.e. life, fire and marine insurance.

3. PRINCIPLE OF INSURABLE INTEREST

• The insured must have insurable interest in the subject matter of insurance.• In life insurance it refers to the life insured.• In marine insurance it is enough if the insurable interest exists only at the time of occurrence of the loss.• In fire and general insurance it must be present at the time of taking policy and also at the time of the occurrence of loss.• The owner of the party is said to have insurable interest as long as he is the owner of it.• It is applicable to all contracts of insurance.

4. PRINCIPLE OF INDEMNITY

• Indemnity means guarantee or assurance to put the insured in the same position in which he wasimmediately prior to the happening of the uncertain event. The insurer undertakes to make good the loss.• It is applicable to fire, marine and other general insurance.• Under this the insurer agreed to compensate the insured for the actual loss suffered.

5. PRINCIPLE OF SUBROGATION• As per this principle after the insured is

compensated for the loss due to damage to property insured, then the right of ownership of such property passes to the insurer.

• This principle is corollary of the principle of indemnity and is applicable to all contracts of indemnity.

• According to the principle of subrogation, when the insured is compensated for the losses due to damage to his insured property, then the ownership right of such property shifts to the insurer.

6. PRINCIPLE OF CONTRIBUTION• According to this principle, the insured can claim the

compensation only to the extent of actual loss either from all insurers or from any one insurer.

• If one insurer pays full compensation then that insurer can claim proportionate claim from the other insurers.

Example - Mr. A insures his property worth Rs. 100,000 with two insurers "AIG Ltd." for `90,000 and "MetLife Ltd." for `60,000. A's actual property destroyed is worth ` 60,000, then Mr. A can claim the full loss of `60,000 either from AIG Ltd. or MetLife Ltd., or he can claim `36,000 from AIG Ltd. And `24,000 from Metlife Ltd.

7. PRINCIPLE OF CAUSA PROXIMA (NEAREST CAUSE)

• Proximate means nearest.• The loss of insured property can be caused by

more than one cause in succession to another.• It is only the nearest reason and not the remote

reason is the factor to be taken into account. • The property may be insured against some

causes and not against all causes.• The insurer is liable only if the nearest cause

comes within the meaning of risk insured.

Proximate Cause Definition

• “the active and efficient cause that sets in motion a train of events which brings about a result, without the intervention of any force started and working actively from a new and independent source”.

8. PRINCIPLE OF LOSS MINIMIZATION

• Under this principle it is the duty of the insured to take all possible steps to minimize the loss to the insured property on the happening of uncertain event.

• The insured must not neglect and behave irresponsibly during such events just because the property is insured. Hence it is a responsibility of the insured to protect his insured property and avoid further losses.

Functions of Insurance

• Insurance is risk bearing• provides saving• provides protection• stimulates business enterprise• encourages efficiency• promotes loss prevention• provides capital• solves social problems• Use of reserve funds

Role of Insurance in Economic Development

• Pooling of resources• Policyholder benefit• Capital protection• Removal of anxiety• Increased creditworthiness• Sharing of risk expertise• Foreign exchange• Widespread industry association

Reinsurance(Insurance of Insurance)• Reinsurance is a process whereby one entity takes

on all or part of the risk covered under a policy issued by an insurance company in consideration of a premium payment.

• Reinsurance is a transaction whereby one insurance company (the “reinsurer”) agrees to indemnify another insurance company (the “reinsured, “cedent” or “primary” company) against all or part of the loss that the latter sustains under a policy or policies that it has issued. For this service, the ceding company pays the reinsurer a premium.

Double Insurance• Double insurance is a type of insurance where

the same subject matter is insured more than once. In such cases the same subject is insured, but with different insurers.

• The method of double insurance is considered a legal act. In case of loss the insured can claim from both the insurers and the insurers are liable to pay under their respective policies.

• The insured cannot claim more than the actual loss.

Types of Insurance• Insurance may be classified as follows:– Classification on the basis of nature of insurance– Classification from business point of view– Classification from risk point of view

Classification on The Basis of Nature of Insurance

• Life Insurance• Fire Insurance• Marine Insurance• Social Insurance• Miscellaneous Insurance (Motor, Accident,

Crop, Duty, Erection All Risks Insurance(EAR), Contractor’s All Risk Insurance (CAR), Machinery Breakdown Insurance, Engineering, Sports, Burglary, Baggage, Etc.)

Classification of Insurance from Business Point of View

• Life Insurance• General Insurance

Classification of Insurance from Risk Point of View

• Personal Insurance• Property Insurance• Liability Insurance• Fidelity Guarantee Insurance

Proposal to Policy

• Proposal is a comprehensive term and includes– The proposal– The agent’s report– The medical report– The moral hazard report– All special reports

• Proposal form is the most important and basic document required for insurance contract between the insured and insurance company.

• The term(proposal) also includes other documents like– Age proof– Income proof– Employment proof etc.,

Over Insurance

• When the amount for which a subject-matter is insured is more than its actual value, it is called over insurance

Underwriting of Risks• The underwriting is a process by which a

decision is taken either to accept or reject an insurance proposal.

• Only the proposals which are favourable and advantageous to the insurer are accepted and others are rejected.

• In the words of Mehr and Cammack, “Underwriting is the process of accepting or rejecting risks (prospective insureds).”

Life Insurance• Life insurance contract may be defined as the

contract, whereby the insurer in consideration of a premium paid either in a lump sum or in periodical instalments undertakes to pay a certain sum of money either on the death of the insured or on the expiry of a fixed period whichever is earlier.

General Insurance

• General Insurance business means “fire, marine or miscellaneous insurance business whether carried on single or in continuation with one or more, but does not include redemption business and annuity business”

• From the above definition general Insurance include all different types of insurance except life insurance.

Marine Insurance

• A contract of insurance under which the insurer undertakes to indemnify the insured against losses incidental to marine adventure.

• Covers loss or damage to the ship, cargo, freight, vessels or any other subject of marine adventure.

Fire Insurance

• A Contract of agreement insurer Insured• Insurer undertakes to indemnify the insured

for destruction or damage to property caused by fire or other specified perils during an agreed period of time, in return for payment of a premium in lump sum or by instalments.

Motor Vehicle Insurance

• In motor insurance, the owner’s liability to compensate people who were killed or injured through the negligence of the motorists or drivers is passed on the insurance company.

Principles of Life InsuranceNature of Contract

A contract is an agreement between parties, enforceable at law. The provisions of the Indian Contract Act, 1872 govern all contracts in India, including insurance contracts.

An insurance policy is a contract entered into between two parties, viz., the company, called the insurer, and the policy holder, called the insured and fulfills the requirements enshrined in the Indian Contract Act, 1872.

The nature of contract is a fundamental principle of a contract of insurance required for a valid contract. Essential elements of a valid contract are:• Agreement• Lawful consideration• Lawful objects• Free consent• Competent parties• Consensus ad idem (parties to contract should

understand the subject matter of insurance in same sense.)

• Possibility and certainty of performance

Insurance contracts – Special features

• Utmost Good Faith• Insurable interest• Representation• Assignment• Proximate Cause• Nomination

Utmost Good Faith(Uberrimae fidei)

• “A positive duty to voluntarily disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not".

• The insured should not make any misrepresentation regarding any fact that is material for the insurance contract. The insured must disclose all relevant facts.

• The policyholder is expected to disclose the status of his health, family history, income, occupation etc. truthfully without concealing any material fact so as to enable the underwriter to assess the risk properly.

Insurable interest• A general definition used for insurable interest is “The

legal right to insure arising out of financial relationship, recognized under law, between the insured and the subject matter of insurance.”

• A person is deemed to have insurable interest on his own life to an unlimited extent, as in the event of his pre-mature death, there will be loss of his future earnings of individual. Spouses are presumed to have insurable interest in each other’s life.

• However in case of other members of the family, insurable interest is not presumed to exist. A person cannot, therefore, insure, say his brother or sister though they may dependent on him.

Representation

• All disclosures relating to an insurance policy must be made at the time of entering into the insurance contract. The insurance company hands over the application proforma to the person buying insurance seeking complete details.

• The person has to mention his profession, income, age, family, history of family, general health, ailments suffered, medical reports, matters relating to conduct and character, any criminal record, etc.

Assignment• Assignment is the transfer of the rights to receive the

benefits under a contract accruing to the party to that contract.

• In life insurance parlance, assignment is the transfer of rights to receive benefits stated in the life insurance policy from the Policyholder to the Assignee.

• In practice, a ‘space for endorsements’ is provided in the insurance policy contract where the Policyholder (Assignor) affixes the statement of assignment along with reasons therefor. This endorsement is required to be signed by the Policyholder and the signature should be witnessed by any person competent to contract. An assignment can be only for valid reasons.

Proximate Cause• Proximate cause is defined as the active and efficient cause

that sets in motion a chain of events which brings about a result, without the intervention of any force started and working actively from a new and independent source.

• Life insurance provides for payment of a death benefit, regardless of the cause of death, the principle of proximate cause would not apply.

• However many life insurance contracts also have an accident benefit rider wherein an additional sum assured is payable in the event of accidental death. In such a situation, it becomes necessary to ascertain the cause - whether the death occurred as a result of an accident. The principle of proximate cause would become applicable in such instances.

Nomination

• Nomination is a facility that enables a Policyholder to nominate an individual, who can claim the proceeds of the Policy, upon the demise of the Policyholder.

• Under Section 39 of the Insurance Act, 1938. It lays down that the Policyholder who holds a policy of life insurance on his own life, may nominate the person or persons to whom the money secured by the policy shall be paid in the event of his death.

Overview of Life Insurance Products

• Product is a bundle of attributes• Products may be:– Tangible– Intangible

• Life insurance is a product that is intangible. • A life insurance agent has the responsibility to

enable the customer to understand the features of a particular life insurance product, what it can do and how it can serve the customer’s unique needs.

LIFE INSURANCE PRODUCTS(a) Pure protection plans;(b) Protection cum savings plans;(c) Pure savings and pension plans;

These can be further classified into:I. Term insurance & Health Insurance plansII. Endowment & Money-back plansIII. Whole life plansIV. Pension and savings plansV. Unit linked insurance plans (ULIPs)VI. Variable Insurance plans (VIPs)

Pure Protection Plans

• A simple risk cover insurance product where the sum assured becomes payable upon the happening of the risk event during the term of the policy.

• The two variants of a pure protection plan are:1. Term Insurance plan2. Health Insurance plan

Term Insurance plan• A pure risk cover where the sum assured becomes

payable upon death of the life assured during the term of the policy.

• The premiums are usually low and affordable and the policy assures a financial security to the family members upon death of the life assured.

• The term of the policy is fixed and where the life assured survives the full term, no amount is payable.

• The benefit arising to the insurance company in such case is the income out of the premiums invested during the term.

Health Insurance plan• A pure risk cover where the sum assured becomes payable

upon the life assured being diagnosed of certain identified illness during the term of the policy.

• Popularly known as Medical Insurance or Mediclaim that covers medical expenses including hospitalization expenses.

• Some of the critical illnesses that are usually covered under a health insurance plan are:Blindness − Stroke − Major organ transplant − Multiple Sclerosis − Paraplegia − Arota Surgery − Kidney failure − Heart attack − Cancer − Coma

• The list of illnesses differs between various health plans of different insurance companies and the premium would also differ according to the illnesses covered.

PROTECTION + SAVINGS INSURANCE• In addition to getting a pure term insurance cover, the

policyholder is also able to leverage long term savings. • Life insurance plans are an excellent choice for

providing for Protection needs, Long term goals such like children’s education and marriage, retirement and others.

• In such plans, the premium payable is divided into two parts:Premium for life coverage – provides financial protection in case of deathPremium for savings element – Is invested by the insurance company on behalf of the policyholders.

Endowment Insurance

• An endowment insurance offers death cover if the life insured dies during the term of the policy and also offers a Survival benefit if the life insured survives until the maturity of the policy.

Key Features of An Endowment Insurance Plan

• If the life insured survives the entire term of the plan, then a specified amount is paid to him/her on maturity of the plan• If the life insured dies before the maturity of the plan, then the death cover benefit is paid to the nominee/beneficiary• Savings element• Goal-based investment• Some insurance companies also allow partial withdrawal or loans against these policies

Whole of Life Insurance• A term insurance plan with an unspecified

period is called a whole life plan. Some plans also have a savings element to them.

• As the name of the plan specifies, this plan covers the individual throughout their entire life. On the death of the life insured, the nominee/beneficiary is paid the sum insured along with the bonuses accumulated up until that point in time.

• During the individual’s lifetime they can make partial withdrawals to meet emergency requirements.

• An individual can also take out loans against the policy.

• Although, in case of Whole Life Plans, sum assured is payable only on death, some insurers pay the sum assured when life insured completes a certain age. For example, 80 years, 90 years, 100 years, etc.

Unit Linked Insurance Plan• A Unit Linked Insurance Plan or ‘ULIP’ as it is popularly known

is basically a combination of insurance as well as investments.• A fund is created from a pool of premiums collected from

policyholders and the fund is used to invest in various market instruments (debt and equity) in varying proportions similar to mutual funds.

• The Policy holders can select the type of funds (debt or equity) or a mix of both based on their investment need and risk appetite.

• ULIP policy holders are allotted units and each unit has a net asset value (NAV) that is declared on a daily basis. The NAV varies from one ULIP to another based on market conditions and the fund’s performance.

Variable Insurance Plan

• Variable life insurance is a permanent life insurance policy with an investment component. Variable universal life insurance can help meet the needs of those who want life insurance protection with the potential to build cash value.

• The policy has a cash value account, which is invested in a number of sub-accounts available in the policy.

• A sub-account act similar to a mutual fund, except it's only available within a variable life insurance policy.

• A typical variable life policy will have several sub-accounts to choose from, with some offering upwards of 50 different options.

Money Back Policy

• Provides for periodic payments of partial survival benefits during the term of the policy, so long as the policy holder is alive.

• A distinguishing feature of money back policy is that in the event of death at any time within the policy term, the death claim amount comprises full sum assured without deducting any of the survival benefit amounts already paid as money back components.

Actuary• A business professional who analyzes the financial

consequences of risk.• Mathematics, Statistics, and Financial Theory to

study uncertain future events, especially those of concern to insurance and pension programs.

• An actuary is an expert who applies mathematical and statistical methods for assessment of financial and other risks relating to various contingent events and for scientific valuation of financial products in the fields of insurance, retirement and other benefits, investments etc.

• Actuaries may work for – insurance companies– consulting firms– government, employee benefits departments of

large corporations, hospitals, banks and investment firms

Nature of Job• The Actuary designs insurance & pension plans. • Determines insurance premium rates and contract

provisions for each type of policy offered• Compiles data relating to rates of mortality,

sickness, injury, retirement and property loss from accident, theft, fire or any other hazard.

• On the basis of data thus collected, he/she analyzes insurances’ claims from Corporation or Company.

• Also evolves new types of attractive policies ensuring greater business.

Services of Actuary

(1) Design an insurance product and set its price(2) Select the right people for insurance products.(3) Minimise the amount of losses for the company by reinsuring the company’s insurance policies with another insurer (called reinsurers)(4) Maximize the profits for the company (5) protect the customers’ amounts kept with the insurance company for a number of years etc.(6) Prepare on a given date a summary of the company’s liabilities (commitments)(6) To determine the adequacy of the reserves.(7) To certify the solvency of the Insurance Company.

Required Traits of an Actuary

• Natural problem solving ability• See situation from different vantage points.• Develop lateral thinking.• Practical Outlook.• Probing curiosity & business sense with highly

developed inter personal Communication skills• An Aptitude for Mathematics• Deep knowledge of Statistics & Commerce

Actuary Appointment– Eligibility Criteria

• IRDA(Appointed Actuary) Regulations, 2000 prescribe that an insurer registered to carry on insurance business in India shall, appoint an actuary, who shall be known as the 'Appointed Actuary' for the purposes of the Act.

• A person shall be eligible to be appointed as an appointed actuary for an insurer, if he or she shall be(a) Ordinarily resident in India;(b) A Fellow Member of the Actuarial Society of India;(c) An employee of the life insurer, in case of life insurance business;

(d) An employee of the insurer or a consulting actuary, in case of general insurance business;(e) A person who has not committed any breach of professional conduct;(f) A person against whom no disciplinary action by the Actuarial Society of India or any other actuarial professional body is pending;(g) Not an appointed actuary of another insurer;(h) A person who possesses a Certificate of Practice issued by the Actuarial Society of India; and(i) Not over the age of seventy years.

Risk Management

• Risk management refers to the practice of identifying potential risks in advance, analyzing them and taking precautionary steps to reduce/curb the risk.

• Risk management may be defined as “the identification, analysis and economic control of those risks which can threaten the assets or earning capacity of an enterprise.”

• A risk management plan includes strategies and techniques for recognizing and confronting these threats.

• Good risk management doesn’t have to be expensive or time consuming; it may be as uncomplicated as answering these three questions:– What can go wrong?– What will we do, both to prevent the harm from

occurring and in response to the harm or loss?– If something happens, how will we pay for it?

Features of Risk Management

• Scientific Approach and deals with Pure Risk of individuals and business

• Importance is given to Insurable and uninsurable interests

• Emphasizes reducing the cost of handling risk

Methods of Handling Risks

• Prevention of Risks• Reduction of Risks• Shifting of Risks• Acceptance of Risks• Spreading of Risks

Risk Management Process

• Risk Identification• Risk Evaluation• Risk Removal• Risk Reduction• Risk Re-valuation• Risk Retention• Risk Transfer