PRINCIPLES OF INSURANCE ISBN : 978-81-953729-4-2

UNIT I

Origin of insurance – Definitions of Risk, Peril, Hazard – Methods of treating risk –

Types of insurance organizations. Main forms of insurance – Essentials of a sound
insurance plan – Contract of insurance – Classification of insurance - Contracts – Personal,
property, liability, and guarantee Fundamental principles – good – faith, insurable interest,
indemnity, subrogation, double insurance, reinsurance – Functions and importance of
insurance.

History of Insurance:

Insurance probably made a beginning in the ancient land of Babylonia in the 18th century
B.C., Babylonia king Hammurabi developed a code of law, known as the Code of Hammurabi,
which codified many specific rules governing the practices of early risk-sharing activities. For
instance, the code dictated that traders had to repay merchants who financed trading voyages
unless thieves stole goods in transit, in which case debts would be cancelled. This was similar to
the system of insurance known as bottomry which existed in Phoenicia in 1200 B. C. In this
system, backers loaned money to 56 merchants to finance voyage. Merchants offered their ships
(the hull was known as the ship's bottom') as collateral for such loans. When a trip succeeded, the
merchant would pay the trip's backer the original loan plus interest, the equivalent of a premium.
If a ship went down on its voyage, the trip's backer would cancel the merchant's loan. Insurance
as we know it today took its shape in 17th century England. The policy of life of William
Gybbons on June 18, 1633 was the first recorded evidence. In 1871, Lloyd's Act was passed
incorporating the members of the association into a single corporate body with perpetual
succession and corporate seal. Today, Lloyd's has become the world's best known insurance
brand. It is commonly misunderstood that Lloyd's is an insurance company.

History of India's Insurance Business:

In "Rigiveda" we find the term "Yogakshema Bahamayam" which is more or less akin to the
well being and security of people. This makes it clear that the traces of sharing the future losses
were available even in ancient India'. This suggests that a form of "community insurance" was
prevalent around 1000 BC and practiced by the Aryans. Life insurance was first set up in India

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through a British company called the Oriental Life Insurance company in 1818 followed by the
Bombay

Assurance company in 1823, the Madras Equitable Life Insurance Society in 1829, the Bombay
Mutual Life Assurance Society 1871 and the Oriental Life Assurance Company in 1874. All of
these companies operated in India but did not insure the lives of Indians. They were insuring the
lives of Europeans living in India. The first General Insurance Company viz., Triton Insurance
Co. Ltd., was established in Calcutta in 1850 whose shares were held mainly by the Britishers.
Insurance business was conducted in India without any specific regulation for the insurance
business. They were subject to Indian companies Act l866. After the start of the "Be Indian Buy
Indian Movement" (called Swadeshi Movement) in 1905, indigenous enterprises sprang up in
many 58 industries. Not surprisingly, the Movement also touched the insurance industry leading
to the formation of dozens of life insurance companies along with provident fund companies
(provident fund companies are pension funds). The first indigenous general insurance company
was the Indian Mercantile Insurance company Limited set up in Bombay in 1907.

The birth of the Insurance Act 1938:

In 1937, the Government of India set up a consultative committee. Mr. Sushil C. Sen, a well
known solicitor of Calcutta, was appointed the chair of the committee. He consulted a wide
range of interested parties including the industry. It was debated in the Legislative Assembly.
Finally, in 1938, the Insurance Act was passed.

Nationalization of Insurance in India:

The Finance Minster C. D. Deshmukh announced nationalization of the life insurance business in
1956. Life insurance business was nationalized on 19th January 1956. The Government brought
together life insurers under one nationalized monopoly corporation and Life Insurance
Corporation (LIC) of India was born. At that time there were 154 Indian life insurance
companies. In addition there were 16 non-Indian companies and 75 provident societies issuing
life insurance policies. Most of these companies were centered in the metropolitan areas like
Bombay, Calcutta, Delhi and Madras.
What Is Insurance?

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Insurance is a contract, represented by a policy, in which an individual or entity receives

financial protection or reimbursement against losses from an insurance company. The company
pools client’s risks to make payments more affordable for the insured.
Definition

A promise of compensation for specific potential future losses in exchange for a

periodic payment. Insurance is designed to protect the financial well-being of an individual,
company or other entity in the case of unexpected loss. Some forms of insurance are required by
law, while others are optional. Agreeing to the terms of an insurance policy creates a
contract between the insured and the insurer. In exchange for payments from the insured (called
premiums), the insurer agrees to pay the policy holder a sum of money upon the occurrence of a
specific event.

How Insurance Works ?

There is a multitude of different types of insurance policies available, and virtually any
individual or business can find an insurance company willing to insure them—for a price. The
most common types of personal insurance policies are auto, health, homeowners, and life. Most
individuals in the United States have at least one of these types of insurance, and car insurance is
required by law.
Businesses require special types of insurance policies that insure against specific types of risks
faced by a particular business. For example, a fast-food restaurant needs a policy that covers
damage or injury that occurs as a result of cooking with a deep fryer. An auto dealer is not
subject to this type of risk but does require coverage for damage or injury that could occur during
test drives.

Peril, risk, and hazard

Peril, risk, and hazard are three words used frequently in my business. And according to the
Oxford English Dictionary, they have very similar definitions:

Peril: Serious and immediate danger.

Risk: Situation involving exposure to danger.

Hazard: Danger or risk.

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You could get away with interchanging these words in day-to-day conversation. But in insurance
and financial circles, they each have a distinct meaning and it’s important to understand their
differences.

Consider the same words as defined by the Glossary of Insurance and Risk Management Terms:

Peril: Cause of loss.

Risk: Uncertainty arising from the possible occurrence of given events that would result in loss
with no opportunity for gain.

Hazard: Condition that increases the probability of loss.

To summarize: hazards increase the risk of a specific peril.

The distinction is important because in modeling there is a difference between modeling risk and
modeling a peril. Hazards are built into all models as a modifier to the chance of something
happening.

Risk models for natural catastrophes (flood, wind, wildfire, earthquake, etc.) generally model the
chances of something happening, but also the financial ramifications of that something. That
financial component makes them “risk” models because risk is measured in costs.

Modeling the perils themselves is a way to understand the likelihood of that peril affecting a
specific location. Peril models are the first aspect of a cat model, but certain tools focus on the
perils specifically. Some perils, especially flood, can be modeled with reliability if the right
information is used for the model. By limiting the modeling to a peril, far fewer assumptions are
needed – much of the input into a peril model is derived from direct measurements, historical
records and science. There remains some work to be done with assumptions (as in any model),
but the results of peril models are much less prone to errors caused by surprises (i.e. bad
assumptions) than risk models.

To ensure a little bit more confusion, and to close the triangle, these peril-focused models are
called “hazard models”.

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There are distinct uses and purposes for risk models and for hazard (peril) models, and it’s
important to understand which tool is the right for the job. Cat models are used widely and
wisely throughout the insurance industry, but they are not always the right solution. To know
which tool is needed, remember the difference between risk and peril, and that peril models are
called hazard models.
A risk treatment plan explains the action plan for each identified risk. Note that it is not possible
to identify all the risks associated with any project. Some risks are unexpected and need to be
managed based on the immediate assessment of the risk. For identified risks, there are four
methods of treatment:

Avoidance - Avoid the risk partially or in whole

Reduction - Employing methods to reduce the negative impacts of risks
Sharing - Sharing/outsourcing the risk component to a third party that is better equipped to
handle such risks
Retention - Acceptance of the risk, normally in cases where the gains from the risk component
are far higher than the negative impacts of the risk

Types of Risk
The various types of risks present on life can be classified under two major categories which are:

I. Insurable Risk
II. Uninsurable Risk
I. Insurable Risk: An insurable risk is one which can be insured on standard terms and
conditions or otherwise. Insurable risk can further be divided in three categories:
(a) Standard Risk: This type of risk is also known as formal or average risk. In insurance,
the dictionary meaning of the word” standard” is an insurance written on a basis of the
regular mortality and underwriting assumption used by the company. Each company lays
down its own criterion on the business of which a person proposing for life insurance is
judged as a normal or standard risk. It is to be noted, however, that normal or standard
risk does not mean that the life is an ideal one or is of an average man but it refers to a
group to which the great majority of applicants may be assigned.
(b) Sub-standard Risk: It is also known as “under average risk”, “Impaired life” or “C-
category life”. It lies in between the standards and uninsurable risk. It has been defined as

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those risks which do not meet the standards set for insurance at regular rates and are
below standard at “mortality risk”. In fact, these are neither so good as in the standard
category nor are they so bad as to be out rightly rejected. These risk carry a degree of risk
above the maximum limit of thee standard class and are usually insurable for an
additional amount of premium, because the mortality rates are higher than assumed in the
calculation of their premiums. A substandard risk is again classified into the following:
i. Constant Extra-Risk: A risk which remains constant throughout the policy term
comes under this category as for example blindness, deafness or loss of teeth.
ii. Increasing Extra-Risk: A risk which increase with the increase in age comes under
this category as for example, patients of diabetes, high blood pressure and
overweight.
iii. Decreasing Extra-Risk: A risk which tends to decrease due to increase in age as for
example, person of defective past history.
(c) Super standard Risk: A super standard risk is one which is above the standard and
presents almost no risk. This is also known as preferred risk. Generally, the insurer does
not prefer to issues preferred risk policies as it increases the premium in other standard
risk which may cause reduction in loss of business.

II Uninsurable of Risk: It refers to those lives where the mortality rate is so high as to make the
premium for the assured completely prohibitive or to make the insurer feel that the risk is almost
a certainty rather than a probability in that individual case, Proposals of such lives are altogether
rejected by the insurance companies: For example, proposal received from person who are
suffering from cancer or serious heart ailment or tuberculosis of the last stage where the death is
sure to happen in near future would be the uninsurable risk.

Methods of Risk Classification

Risk can be classified through following two methods:

(i) Judgment or Assessment method: here, the insurer studies all the features of the life to be
insured based on the material information placed before him, draws a mental picture and
brings into play all his knowledge and experience to determine terms of acceptance of the
risk. The company has to depend upon the combined judgment of those in the medical,
actuarial, and other departments who are qualified for this work.
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The judgment method functions effectively when there is only one unfavourable factor to
consider or where the decision is simply either to accept the application at standard rates or
reject it entirely. Where multiple factors are involved or a proper substandard classification
needed, this method is not found useful. It also requires the use of highly skilled personnel
for proper risk appraisal. The method also cannot ensure uniformity in the decisions by the
same persons at the same or different times. Besides it is a time consuming process. To
overcome the weaknesses of this method, life insurance companies evolved the other method
viz., Numerical Rating method.
(ii) Numerical Rating method: under this method, each factor of insurability is compared with
medico actuarially prepared standard and deviations are measured in terms of extra debit or
credit points. Adverse features attract debut points while favourable ones are given credit
points. The sum total of debit ratings of all ‘factors’ give the extra mortality of a particular
life (risk).
Thereafter total extra mortality ratings are matched with standard charts and converted
into monetary value which is called the extra premium. It is on the basis of numerical ratings
that underwriter classifies the risk and decides the terms of acceptance of risks.

Types of insurance organizations are;

1. Self-Insurance,
2. Individual Insurer,
3. Partnership,
4. Joint Stock Companies,
5. Mutual Companies,
6. Co-Operative Insurance Organization,
7. Lloyd’s Association,
8. State Insurance.
1. Self-Insurance
The plan by which an individual or concern sets up a private fund out of which to pay losses is
termed “self-insurance”. The person lays aside periodically certain sum to meet the losses of any
contemplated risk. While it may be called “self-insurance”, it is not, as a matter of fact, insurance

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at all because there is no hedge, no shifting or distributing of the burden of risk among larger
persons. It is merely a provision for meeting the contingency.
Here the insured becomes his own insurer for the particular risk. But, it can be
successfully worked only when there is a wide distribution of risks subject to the same hazard, it
may be lesser expensive, provided the amount of loss is tremendous. The fund, as it accumulates,
belongs to the insured and he can invest it as he may deem prudent. He pays no commission to
agents, no extra expenses for maintaining office.

So, on the one hand, the return on an investment will be higher and on the other, the cost of
operation will be lesser. The self-insurance will be successfully operated where;
1. There are several properties such as machine, motor vehicle, house factories, etc.,
2. The properties or units are widely distributed,
3. These are under the influence of varied risks, and;
4. The risks are greater at one place and lesser at another place.
2. Individual Insurer
An individual like other business can perform the business of insurer provided he has sufficient
resources and talent of the insurance business. The individual organization has been rare in the
field of insurance.
3. Partnership
A partnership firm can also carry on the insurance business for the sake of profit. Since it is not
an entity distinct from the persons composing it, the personal liability of partners in respect of
the partnership debts is unlimited.
In case of huge loss, the partners have to pay from their own personal funds and it will not be
profitable for them to start an insurance business. In the early period before the advent of joint
stock companies, many insurance undertakings were a partnership or unincorporated companies.
They were constituted by deed of partnerships which regulated the business.
Before the formation of joint-stock companies, the crown had empowered to grant application
letters patent to such unincorporated companies to operate the business with limited liabilities.
Sometimes, the policy-holders were permitted to share the management of the concern. These
forms of insurance had been completely disappeared with the advent of joint stock companies.
4. Joint Stock Companies

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The joint stock companies are those which are organized by the shareholders who subscribe the
necessary capital to start the business, are formed for earning profits for the stockholders who are
the real owners of the companies. The management of a company is entrusted to a board of
directors who are elected by the shareholders from among themselves.
The company can operate insurance business and the policy-holders have nothing to do with die
management of the concern. But, in life insurance, it is the practice to share a certain portion of
profit among the certain policy-holders. The participating policy-holders are getting the bonus.
Before nationalization, according to insurance act, 1938, the policy-holders had a right to elect
their representatives to the board of directors to the extent of one-fourth of the total number of
directors of the company. The provision enabled the policy-holders to have an effective voice in
the management of the company. Most of the insurance businesses were done on a joint stock
basis before nationalization. They were operating within the memorandum of association and
articles of association framed by them.
5. Mutual Companies
The mutual companies were co-operative associations formed for the purpose of effecting
insurance on the property of its members. The policy-holders were themselves the shareholders
of the companies, each member was insurer as well as insured. They had the power to participate
in, management and in profit to the full extent. Whenever the income was more than the
expenses and claims, it was accumulated in the form of saving and was entitled to reducing the
rate of premium.
Since the insured were insurers also, they always tried to reduce the management expenses and
to keep the business at a sound level. The theoretical base of the mutual companies is issuing of
participating policies, i.e., the policyholders had full power in management and profit, whereas
the joint-stock companies, strictly were to issue non-participating policies. But, in practice, the
joint-stock companies were also issuing participating policies. It made them mixed companies
i.e., where the features of joint stock companies and of mutual companies were present.
6. Co-Operative Insurance Organization
Co-operative insurance organizations are those concerns which are incorporated and registered
under co-operative societies act. The concerns are also called ‘co-operative insurance societies’.
These societies like mutual companies are a non-profit organization. The aim is to provide
insurance protection to its members at the lowest reasonable price.
7. Lloyd’s Association
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Lloyd’s association is one of the greatest insurance institutions in the world. Taking its name
from the coffee house of Edward Lloyd; where underwriters assembled to transact business and
pick-up news, the organization traces its origin to the latter part of the seventeenth century. So, it
is the oldest insurance organization in existing form in the world.
In 1871, Lloyd’s act was passed incorporating the members of the association into a single
corporate body with perpetual succession and a corporate seal. The power of Lloyd’s corporation
was extended from the business of marine insurance to other insurances and guarantee business.
The Lloyd’s association is an association of individual insurers known as ‘underwriters’. They
are also termed as ‘syndicates’ or ‘names’. Any insurer who wants to become a member of such
association has to deposit a certain fee as security for the regular payment of his liabilities. The
association before enrolling the insurer as a member of the association will inquire about the
financial position of the concern, business reputation, and experience. On satisfactory proof, the
association admits him in the association.
8. State Insurance
The government of a nation sometimes owns the insurance and runs the business for the benefit
of the public. The state insurance is defined as that insurance which is under the public sector put
more; specifically it can be stated that when governments have taken over the insurance business
particularly life insurance.
France had nationalized larger insurance companies in 1946. In Brazil, Japan and Mexico, the
insurances are largely nationalized. Previously, the state undertook only those insurances which
were regarded to be very vital for the public interest or where private companies were not able or
willing to enter the field of insurance. Social security, unemployment, crop insurance, war risk
insurance, export credit insurance, aero-plane insurance were generally understate insurance.
In India, the life insurance business was nationalized in 1956 and the general insurances were
nationalized in 1971. Thus, the insurance business in India, today, is under the control and
ownership of the central government although they are in different forms of insurances.

Main forms of Insurance:

In life, unplanned expenses are a bitter truth. Even when you think that you are financially
secure, a sudden or unforeseen expenditure can significantly hamper this security. Depending on
the extent of the emergency, such instances may also leave you debt-ridden.

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While you cannot plan ahead for contingencies arising from such incidents, insurance policies
offer a semblance of support to minimize financial liability from unforeseen occurrences.
There is a wide range of insurance policies, each aimed at safeguarding certain aspects of your
health or assets. Broadly, there are 8 types of insurance, namely:
 Life Insurance
 Motor insurance
 Health insurance
 Travel insurance
 Property insurance
 Mobile insurance
 Cycle insurance
 Bite-size insurance
Simply knowing the various insurance policies does not help. Instead, you must know how each
of these plans work.
Without adequate knowledge about each of them, you may not be able to protect your finances,
as well as the financial well-being of your family members. Read on to learn all you need to
know about the various insurance policies.
Experts view that following are the essential requirements of a sound compensation plan:
1. It is simple:
Simplicity is the fundamental principle of a sound sales compensation plan. Salesmen suspect
any plan that they do not understand, totally and this weakens their confidence and lowers their
morale. That is ‘ why, the plan of compensation must be simple to calculate and easy to
understand.

2. It is adequate:
A sound plan generates enough compensation for the salesmen to maintain a decent standard of
living in the line. Salesmen must be allowed to earn enough to meet their obligations to save for
the future.

The factors like cost of living, minimum standard of living, capacity, age, education, experience
etc., are to be taken into account. A critical analysis of compensation plans a good way-out in
fixing adequate compensation for the employees.

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3. It is flexible:
The compensation plan so designed must be capable of being adapted to varying selling
conditions that are subject to change.

The plan should be adjustable to the differing nature of salesmen, territories, products,
compensation present in any sales territory and the like. A supple plan is one that works well
both in bad and good times.

4. It is fair and equitable:

To win the hearts of salesmen their beating cooperation and lasting loyalty, the compensation
plan should be fair and equitable to one and all. Discrimination and partial treatment are the
costly mistakes for which the sales management will have to pay heavily in intangible terms.

The sales-force is quite keen and sensitive to these things of ill-treatment, discrimination,
inequality, partiality and so on. No equally qualified and experienced persons are paid
differently.

5. It is economical:
The purpose of sound compensation plan is to increase the sales and the profits at least cost.
Decreasing cost per unit, lower expense and higher profit margin on unit and total sales is the
aim, in effect.

The earnings of salesmen must be kept in kilt as such remuneration is one of the expenses. As
per the experts view, such expense should not go beyond 5 to 15 per cent of the total sales value.

6. It is easy to administer:
Administrative ease implies reduction in the complications, time consumed in accounting
department, paper work involved. To provide this much desired administrative ease, easy and
realistic compensation plans are to be devised and implemented.

Complicated plans demonstrate mathematical excellence but have problems of red-tape and
error-proneness.

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7. It is incentive oriented:
It must keep employees spurred. Monetary and non-monetary rewards for extra efforts put in are
really nice stimuli that propel the salesmen to new heights of performance.

Additional compensation, over and above normal earning, results in increased sales and profits.
This goes to distinguish between the efficient and the inefficient salesmen and improves overall
performance well above the normal efforts put in by the sales-force.

8. It is timely:
Any compensation plan, however adequate, attractive and fair and equitable, is bound to lose its
weight, if the payment is not made within the expected time.

Salesmen work for money but money is to be received at a point of time to which they are
committed. Thus, the payments can be fort-nightly, monthly and the bonuses yearly or
terminally. Money earned has value if it is received in the nick of the time.

What is Insurance Contract?

An Insurance Contract may be defined as an agreement between two parties whereby one party
is called an insurer and the other is called insured. The Insurer which is the Insurance Company
undertakes, in exchange of fixed premium to pay the Insured fixed amount of money on the
happening of a certain event.

As per the Insurance Act, 1938

Section 2(8) : ‘Insurance Company’ means any insurer being a company, association or
partnership which may be wound up under 18 [the Companies Act, 1956 (1 of 1956)], or to which
the Indian Partnership Act, 1932 (9 of 1932), applies;
Section 2(9) : ‘Insurer’ means any individual or unincorporated body of individuals or body
corporate incorporated under the law of any country carrying on Insurance business.

Any Agreement can be termed as Contract if it has the essentials of a valid contract specified
under the Contracts Act, 1872 i.e.

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Offer and acceptance

The Offer for entering into contract generally comes from Insured. In some cases offer comes
from the Insurance Company also in the form of publication of prospectus, canvassing by Agents
etc. So, it is clear that Offer can come from both the sides. The main element of acceptance
should be there. The Insured has to accept the payment of premium of the sum assured/insured
and the Insurance Company has to agree to pay the compensation in the event of loss occurred to
the Insured during the period of contract. The insurance can be for Life or for property.
Consideration

Certain sum is charged as premium from the Insured and against the consideration, a large sum is
guaranteed to be paid by the Insurer who received the premium. Insurance contracts are
Unilateral contracts, where only the insurer makes legally enforceable promises to pay for
covered losses. The Company cannot sue the Insured for breach of contract. However,
Insurance contracts are also Conditional Contracts i.e. if the Insured fails to abide the contract,
then the Insurer is not obligated to pay for any Insured’s losses.
Competenet parties:

The Section and Rules as applicable in case of General Contract Act, 1872 related to competent
parties is applicable in case of Insurance Contract also. Say for example, both the parties to the
contract must have attained the age of Majority and the Minor cannot sign the Insurance
Contract. Both the parties should be of sound mind.
Legal purpose

All contracts must have a legal purpose to be enforceable by the courts i.e. the objects are not
forbidden by law or are not immoral or opposed to public policy. If the object of Insurance, like
the consideration, is found to be unlawful, the policy is said to be Void.

Types of Insurance:

Insurance

Life General
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Fire Marine Health Motor

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There are two broad types of insurance:

 Life Insurance

 General Insurance

1. Life Insurance

Life Insurance refers to a policy or cover whereby the policyholder can ensure financial freedom
for his/her family members after death. Suppose you are the sole earning member in your family,
supporting your spouse and children.

In such an event, your death would financially devastate the whole family. Life insurance
policies ensure that such a thing does not happen by providing financial assistance to your family
in the event of your passing.

Types of Life Insurance Policies

There are primarily three types of insurance policies when it comes to life insurance. These are:
 Term Plan - The death benefit from a term plan is only available for a specified period,
for instance, 40 years from the date of policy purchase.
 Endowment Plan - Endowment plans are life insurance policies where a portion of your
premiums go toward the death benefit, while the remaining is invested by the insurance
provider. Maturity benefits, death benefit and periodic bonuses are some types of
assistance from endowment policies.
 Whole Life Insurance - As the name suggests, such policies offer life cover for the
whole life of an individual, instead of a specified term. Some insurers may restrict the
whole life insurance tenure to 100 years.

Benefits of Life Insurance

If you possess a life insurance plan, you can enjoy the following advantages from the policy.

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 Tax Benefits - If you pay life insurance premiums, you are eligible for tax benefits in
India, under Section 80(C) and 10(10D) of the Income Tax Act. Thus, you can save a
substantial sum of money as taxes by opting for a life insurance plan.
 Encourages Saving Habit - Since you need to pay policy premiums, buying such an
insurance policy promotes the habit of saving money.
 Secures Family’s Financial Future - The policy ensures your family’s financial
independence is maintained even after your demise.
 Helps Plan Your Retirement - Certain life insurance policies also act as investment
options. For instance, pension plans offer a lump-sum payout as soon as you retire,
helping you to fund your retirement.

Now that you know all about life insurance policies read on to understand the various facets of
other general insurance policies.
General Insurance:

A general insurance is a contract that offers financial compensation on any loss other than
death. It insures everything apart from life. A general insurance compensates you for financial
loss due to liabilities related to your house, car, bike, health, travel, etc. The insurance company
promises to pay you a sum assured to cover damages to your vehicle, medical treatments to cure
health problems, losses due to theft or fire, or even financial problems during travel.

Simply put, a general insurance offers financial protection for all your assets against loss,
damage, theft, and other liabilities. It is different from life insurance.
Types of General Insurance
You can get almost anything and everything insured. But there are four key types available:

1. Fire Insurance
2. Marine Insurance

3. Health Insurance

4. Motor Insurance

Fire Insurance

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Fire insurance pays or compensates for the damages caused to your property or goods due
to fire. It covers the replacement, reconstruction or repair expenses of the insured property as
well as the surrounding structures. It also covers the damages caused to a third-party property
due to fire. In addition to these, it takes care of the expenses of those whose livelihood has been
affected due to fire.

Types of fire insurance

Some of the common types are:

The insurer firsts value the property and then undertakes to pay
Valued policy
compensation up to that value in the case of loss or damage.
Floating policy It covers the damages to properties lying at different places.
This is known as an all-in-one policy. It has a wide coverage and
Comprehensive policy
includes damages due to fire, theft, burglary, etc.
This covers you for a specific amount which is less than the real value
Specific policy
of the property.

(ii) Marine Insurance

Marine insurance is an agreement (contract) by which the insurance company (also

known as underwriter) agrees to indemnify the owner of a ship or cargo against risks, which are
incidental to marine adventures. It also includes insurance of the risk of loss of freight due on the
cargo.

Marine insurance that covers the risk of loss of cargo by storm known as cargo insurance.
The owner of the ship may insure it against loss on account of perils of the sea. When the ship is
the subject matter of insurance, it is known as hull insurance. Further, where freight is payable
by the owner of cargo on safe delivery at the port of destination, the shipping company may
insure the risk of loss of freight if the cargo is damaged or lost. Such a marine insurance is
known as freight insurance. All marine insurance contracts are contracts of indemnity. The
followings are the different types of marine insurance policies

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(a) Time Policy – This policy insures the subject matter for specified period of time, usually for
one year. It is generally used for hull insurance or for cargo when small quantities are insured.
(b) Voyage Policy - This is intended for a particular voyage, without any consideration for time.
It is used mostly for cargo insurance.

(c) Mixed Policy – Under this policy the subject matter (hull, for example) is insured on a
particular voyage for a specified period of time. Thus, a ship may be insured for a voyage
between Mumbai and Colombo for a period of 6 months under a mixed policy.

(d) Floating Policy - Under this policy, a cargo policy may be taken for a round sum and
whenever some cargo is shipped the insurance company declares its value and the total value of
the policy is reduced by that amount. Such shipments may continue until the total value of the
policy is exhausted.
(iii) Health Insurance
Health insurance refers to a type of general insurance, which provides financial assistance to
policyholders when they are admitted to hospitals for treatment. Additionally, some plans also
cover the cost of treatment undertaken at home, prior to a hospitalisation or after discharge from
the same.

With the rising medical inflation in India, buying health insurance has become a necessity.
However, before proceeding with your purchase, consider the various types of health insurance
plans available in India.

Types of Health Insurance policies

There are eight main types of health insurance policies available in India. They are:
 Individual Health Insurance - These are healthcare plans that offer medical cover to
just one policyholder.
 Family Floater Insurance - These policies allow you to avail health insurance for your
entire family without needing to buy separate plans for each member. Generally,
husband, wife and two of their children are allowed health cover under one such family
floater policy.
 Critical Illness Cover - These are specialised health plans that provide extensive
financial assistance when the policyholder is diagnosed with specific, chronic illnesses.

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These plans provide a lump-sum payout after such a diagnosis, unlike typical health
insurance policies.
 Senior Citizen Health Insurance - As the name suggests, these policies specifically
cater to individuals aged 60 years and beyond.
 Group Health Insurance - Such policies are generally offered to employees of an
organisation or company. They are designed in such a way that older beneficiaries can be
removed, and fresh beneficiaries can be added, as per the company’s employee retention
capability.
 Maternity Health Insurance - These policies cover medical expenses during pre-natal,
post-natal and delivery stages. It covers both the mother as well as her newborn.
 Personal Accident Insurance - These medical insurance policies only cover financial
liability from injuries, disability or death arising due to accidents.
(iv) Motor Insurance
Motor insurance refers to policies that offer financial assistance in the event of accidents
involving your car or bike. Motor insurance can be availed for three categories of motorized
vehicles, including:
 Car Insurance - Personally owned four-wheeler vehicles are covered under such a
policy.
 Two-wheeler Insurance - Personally owned two-wheeler vehicles, including bikes and
scooters, are covered under these plans.
 Commercial Vehicle Insurance - If you own a vehicle that is used commercially, you
need to avail insurance for the same. These policies ensure that your business
automobiles stay in the best of shapes, reducing losses significantly.

Types of Motor Insurance Policies

Based on the extent of cover or protection offered, motor insurance policies are of three types,
namely:
 Third-Party Liability - This is the most basic type of motor insurance cover in India. It
is the minimum mandatory requirement for all motorised vehicle owners, as per
the Motor Vehicles Act of 1988. Due to the limited financial assistance, premiums for
such policies also tend to be low. These insurance plans only pay the financial liability to
the third-party affected in the said mishap, ensuring that you do not face legal hassle due

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to the accident. They, however, do not offer any financial assistance to repair the
policyholder’s vehicle after accidents.
 Comprehensive Cover - Compared to the third-party liability option, comprehensive
insurance plans offer better protection and security. Apart from covering third party
liabilities, these plans also cover the expenses incurred for repairing the damages to the
policyholder’s own vehicle due to an accident. Additionally, comprehensive plans also
offer a payout in case your vehicle sustains damage due to fire, man-made and natural
calamities, riots and others such instances. Lastly, you can recover your bike’s cost if it
gets stolen, when you have a comprehensive cover in place. One can also opt for several
add-ons with their comprehensive motor insurance policy that can make it better-
rounded. Some of these add-ons include zero depreciation cover, engine and gear-box
protection cover, consumable cover, breakdown assistance, etc.
 Own Damage Cover - This is a specialised form of motor insurance, which insurance
companies offer to consumers. Further, you are eligible to avail such a plan only if you
purchased the two-wheeler or car after September 2018. The vehicle must be brand new
and not a second-hand one. You should also remember that you can avail this standalone
own damage cover only if you already have a third party liability motor insurance policy
in place. With own damage cover, you basically receive the same benefits as a
comprehensive policy without the third-party liability portion of the policy.
(v) Other types of Insurance

Apart from life, fire and marine insurance, general insurance companies can insure a variety of
other risks through different policies. Some of these risks and the different policies are outlined
below.

 Burglary Insurance: Under this insurance the insurance company undertakes to indemnify
the insured against losses from burglary i.e., loss of moveable goods by robbery and theft by
breaking the house.

 Floods - In certain parts of India, floods are common. These floods can ravage your property
leading to substantial losses. Property insurance also protects against such events.
 Natural Calamities - The plan also offers financial aid against damage arising from
earthquakes, storms and more.

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Rebuilding or renovation of a property is immensely expensive. Thus, property insurance

policies are the best option to ensure long-term financial health.

 Mobile Insurance - Owing to the rising price of mobile phones and their several
applications today, it has become imperative to insure the device. Mobile insurance allows
you to reclaim money that you spend on repairing your phone in the event of accidental
damage. Further, you can also claim the same in case of phone theft, making it easier to
replace the handset with a new phone.
 Fidelity Insurance: As a protection against the risks of loss on account of embezzlement or
defalcation of cash or misappropriation of goods by employees, businessmen may get
policies issued covering the risks of loss on account of fraud and dishonesty on the part of
employees handling cash or in charge of stores. This is called fidelity insurance policy. The
employees may also be required to sign a fidelity guarantee Bond.
 Cycle Insurance

Bicycles are valuable properties in India as some people rely on these vehicles for their daily
commute. A cycle insurance policy ensures that you have access to necessary funds should your
bicycle undergo accidental damage or theft. It saves your out of pocket expenses, while also
ensuring immediate repairs to the vehicle.

 Bite-Size Insurance

Bite-sized insurance policies refer to sachet insurance plans that minimise your financial liability
for a very limited tenure, generally up to a year. These insurance plans allow you to protect your
finances against specific damage or threats. For instance, particular bite-sized insurance may
offer accidental cover of Rs. 1 Lakh for a year. You can choose this policy when you think you
might be particularly susceptible to accidental injuries.

Nature or Characteristics of Insurance

On the basis of the definitions of insurance discussed above, one can observe the following
nature or characteristics:

1. Contract

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Insurance is a contract between the insurance company and the policyholder wherein the
policyholder (insured) makes an offer and the insurance company (insurer) accepts his offer. The
contract of insurance is always made in writing.

2. Consideration
Like other contracts, there must be lawful consideration in insurance also. The consideration is in
the form of premium which the insured agrees to pay to the insurer.

3. Co-operative Device
All for one and one for all is the basis for cooperation. The insurance is a system wherein large
number of persons, exposed to a similar risk, are covered and the risk is spread over among the
larger insurable public. Therefore, insurance is a social or cooperative method wherein losses of
one is borne by the society.
4. Protection of financial risks
An insurer is protected from financial risks which can be measured in terms of money. As such
insurance compensates only financial or monetary loss or risks.

5. Risk sharing and risk transfer

Insurance is a social device for division of financial losses which may fall on an individual or his
family on the happening of some unforeseen events. When insured, the loss arising out of the
events are shared by all the insured in the form of premium. Therefore the risk is transferred
from one individual to a group.

6. Based upon certain principles

The insurance is based upon certain principles like insurable interest, utmost good faith,
indemnity, subrogation, causa-proxima, contribution, etc.

7. Regulated by Law
Insurance companies are regulated by statutory laws in almost all the countries. In India, life
insurance and general insurance are regulated by Life Insurance Corporation of India Act 1956,
and General Insurance Business (Nationalization) Act 1972, and IRDA Regulations etc.

8. Value of Risk

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Before insuring the subject matter of the insurance contract, the risk is evaluated in order to
determine the amount of premium to be charged on the insured. Several methods are being
adopted to evaluate the risks involved in the subject matter. If there is an expectation of heavy
loss, higher premiums will be charged. Hence, the probability of occurrence of loss is calculated
at the time of insurance.
9. Payment at contingency
An insurer is liable to pay compensation to the insureds only when certain contingencies arise. In
life insurance, the contingency — the death or the expiry of the term will certainly occur. In such
cases, the life insurer has to pay the assured sum.

In other insurance contracts, the contingency — a fire accident or the marine perils, may or may
not occur. So, if the contingency occurs, payment is made, otherwise no payment need to be
made to the policyholders.
10. Insurance is not gambling
An insurance contract cannot be considered as gambling as the person insured is assured of his
loss indemnified only on the happening of such uncertain event as stipulated in the contract of
insurance, whereas the game of gambling may either result into profit or loss.

11. Insurance is not a charity

Premium collected from the policyholders under an insurance is the cost of risk so covered.
Hence, it cannot be taken as charity. Charity lacks the element of contract of indemnity and
compensation of loss to the person whosoever makes it.
12. Investment portfolio
Since insurers’ liability to pay compensation to the insured arises on the happening of certain
uncertain event, the insurers do not have to keep the collected premium with them. They invest
the premium received in selected securities and earn interest and dividend on them. Thus, the
insurers have two sources of income: the insurance premium and the investment income (i.e.
interest / dividend) which occurs over time.

Principles of Insurance

As we discussed before, insurance is actually a form of contract. Hence there are certain principles
that are important to ensure the validity of the contract. Both parties must abide by these principles.
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1] Utmost Good Faith

A contract of insurance must be made based on utmost good faith. It is important that the insured
disclose all relevant facts to the insurance company. Any facts that would increase his premium
amount, or would cause any prudent insurer to reconsider the policy must be disclosed.

If it is later discovered that some such fact was hidden by the insured, the insurer will be within his
rights to void the insurance policy.

2] Insurable Interest

This means that the insurer must have some pecuniary interest in the subject matter of the insurance.
This means that the insurer need not necessarily be the owner of the insured property but he must
have some vested interest in it. If the property is damaged the insurer must suffer from some
financial losses.

3] Indemnity Protection

Insurances like fire and marine insurance are contracts of indemnity. Here the insurer undertakes the
responsibility of compensating the insured against any possible damage or loss that he may or may
not suffer. Life insurance is not a contract of indemnity.

4] Subrogation

This principle says that once the compensation has been paid, the right of ownership of the property
will shift from the insured to the insurer. So the insured will not be able to make a profit from the
damaged property or sell it.

5] Contribution

This principle applies if there are more than one insurer. In such a case, the insurer can ask the other
insurers to contribute their share of the compensation. If the insured claims full insurance from one
insurer he loses his right to claim any amount from the other insurers.

6] Proximate Cause

This principle states that the property is insured only against the incidents that are mentioned in the
policy. In case the loss is due to more than one such peril, the one that is most effective in causing
the damage is the cause to be considered.
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Components of Insurance Policy

When choosing a policy, it is important to understand how insurance works.

A firm understanding of these concepts goes a long way in helping you choose the policy that
best suits your needs. There are three components (premium, policy limit, and deductible) to
most insurance policies that are crucial.

Premium: A policy's premium is its price, typically expressed as a monthly cost. The premium
is determined by the insurer based on your or your business's risk profile, which may include
creditworthiness.

For example, if you own several expensive automobiles and have a history of reckless driving,
you will likely pay more for an auto policy than someone with a single mid-range sedan and a
perfect driving record. However, different insurers may charge different premiums for similar
policies. So finding the price that is right for you requires some legwork.

Policy Limit: The policy limit is the maximum amount an insurer will pay under a policy for a
covered loss. Maximums may be set per period (e.g., annual or policy term), per loss or injury, or
over the life of the policy, also known as the lifetime maximum.

Typically, higher limits carry higher premiums. For a general life insurance policy, the maximum
amount the insurer will pay is referred to as the face value, which is the amount paid to a
beneficiary upon the death of the insured.

Deductible: The deductible is a specific amount the policy-holder must pay out-of-pocket
before the insurer pays a claim. Deductibles serve as deterrents to large volumes of small and
insignificant claims.

Deductibles can apply per-policy or per-claim depending on the insurer and the type of policy.
Policies with very high deductibles are typically less expensive because the high out-of-pocket
expense generally results in fewer small claims.

Double insurance

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Double insurance arises where the same party is insured with two or more insurers in
respect of the same interest on the same subject matter against the same risk and for
the same period of time.

1. Same insured: There can be no double insurance unless at the time of the claim,
the same person is entitled to benefit from each policy.
2. Same subject matter: It is not clear whether the policies must cover exactly the
same property in its entirety or whether covering a substantial part of the
property would suffice. What is important is that the subject matter in respect of
which the claim is made is covered under both policies.
3. Same risk: Double insurance will only arise if a substantial part of the same
risk is covered by both insurances.
4. Same interest: The policies must also cover the same interest. This is due to the
fact that it is not the subject-matter of the insurance as such which is covered by
the policy but the insured’s interest in it. There would therefore be no double
insurance if two people who have different interest in the subject matter insure
their own interest.
5. Same period of time: Finally, the periods of time within each of the policies’ terms
during which the insured party is protected from the risk must be the same, or
substantially the same. It must also be during that period of time that the event giving rise
to the claim occurs.

Reinsurance
Reinsurance is also known as insurance for insurers or stop-loss insurance. Reinsurance is the
practice whereby insurers transfer portions of their risk portfolios to other parties by some form
of agreement to reduce the likelihood of paying a large obligation resulting from an insurance
claim.
The party that diversifies its insurance portfolio is known as the ceding party. The party that
accepts a portion of the potential obligation in exchange for a share of the insurance premium is
known as the reinsurer.

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Benefits of Reinsurance: By covering the insurer against accumulated individual commitments,

reinsurance gives the insurer more security for its equity and solvency by increasing its ability to
withstand the financial burden when unusual and major events occur.
Through reinsurance, insurers may underwrite policies covering a larger quantity or volume of
risk without excessively raising administrative costs to cover their solvency margins. In addition,
reinsurance makes substantial liquid assets available to insurers in case of exceptional losses.

Functions of an Insurance Company

1] Provides Reliability

The main function of insurance is that eliminates the uncertainty of an unexpected and sudden
financial loss. This is one of the biggest worries of a business. Instead of this uncertainty, it provides
the certainty of regular payment i.e. the premium to be paid.

2] Protection

Insurance does not reduce the risk of loss or damage that a company may suffer. But it provides a
protection against such loss that a company may suffer. So at least the organization does not suffer
financial losses that debilitate their daily functioning.

3] Pooling of Risk

In insurance, all the policyholders pool their risks together. They all pay their premiums and if one
of them suffers financial losses, then the payout comes from this fund. So the risk is shared between
all of them.

4] Legal Requirements

In a lot of cases getting some form of insurance is actually required by the law of the land. Like for
example when goods are in freight, or when you open a public space getting fire insurance may be a
mandatory requirement. So an insurance company will help us fulfill these requirements.

5] Capital Formation

The pooled premiums of the policyholders help create a capital for the insurance company. This
capital can then be invested in productive purposes that generate income for the company.

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Importance of Insurance

Insurance has evolved as a process of safeguarding the interest of people from loss and
uncertainty. It may be described as a social device to reduce or eliminate risk of loss to life and
property.

Insurance contributes a lot to the general economic growth of the society by provides stability to
the functioning of process. The insurance industries develop financial institutions and reduce
uncertainties by improving financial resources.

1. Provide safety and security:

Insurance provide financial support and reduce uncertainties in business and human life. It
provides safety and security against particular event. There is always a fear of sudden loss.
Insurance provides a cover against any sudden loss. For example, in case of life insurance
financial assistance is provided to the family of the insured on his death. In case of other
insurance security is provided against the loss due to fire, marine, accidents etc.
2. Generates financial resources:
Insurance generate funds by collecting premium. These funds are invested in government
securities and stock. These funds are gainfully employed in industrial development of a country
for generating more funds and utilised for the economic development of the country.
Employment opportunities are increased by big investments leading to capital formation.

3. Life insurance encourages savings:

Insurance does not only protect against risks and uncertainties, but also provides an investment
channel too. Life insurance enables systematic savings due to payment of regular premium. Life
insurance provides a mode of investment. It develops a habit of saving money by paying
premium. The insured get the lump sum amount at the maturity of the contract. Thus life
insurance encourages savings.
4. Promotes economic growth:
Insurance generates significant impact on the economy by mobilizing domestic savings.
Insurance turn accumulated capital into productive investments. Insurance enables to mitigate
loss, financial stability and promotes trade and commerce activities those results into economic

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growth and development. Thus, insurance plays a crucial role in sustainable growth of an
economy.
5. Medical support:
A medical insurance considered essential in managing risk in health. Anyone can be a victim of
critical illness unexpectedly. And rising medical expense is of great concern. Medical Insurance
is one of the insurance policies that cater for different type of health risks. The insured gets a
medical support in case of medical insurance policy.
6. Spreading of risk:
Insurance facilitates spreading of risk from the insured to the insurer. The basic principle of
insurance is to spread risk among a large number of people. A large number of persons get
insurance policies and pay premium to the insurer. Whenever a loss occurs, it is compensated out
of funds of the insurer.
7. Source of collecting funds:
Large funds are collected by the way of premium. These funds are utilised in the industrial
development of a country, which accelerates the economic growth. Employment opportunities
are increased by such big investments. Thus, insurance has become an important source of
capital formation.

UNIT II

Life insurance – fundamentals of life contract – principles – types – annuity contract

insurance & annuity compared – Various types of annuity Theory of insurance – Theory of
probability – Theorem of large numbers. Premium computation – Assessment plan – Natural
premium plan – Mortality tables – Construction of mortality tables for annuities – Life fund

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valuation – Investment of fund – Suitability of various types of investment – Surplus and its
distribution.

FUNDAMENTALS OF LIFE INSURANCE

Life insurance is a common component of most everyone’s financial plan. It can serve many
helpful purposes such as; replacing lost income in the event of your death, paying any debts you
leave behind (such as mortgages, car loans or credit card debts), paying for your final expenses
or estate taxes, and it even can create a tax-free estate for your heirs. But what types of policies
are available to you? How much insurance do you need and how much can you afford? What
Makes Up a Life Insurance Contact?

The contract is made up of 4 basic parts:

1. Legal Provisions-This part sets out the conditions of the contract, as well as the rights
and obligations of the parties involved (you and the insurance company).
2. Application-Your initial application is part of the insurance contract. It outlines your
personal information and health status.
3. Policy Specifications-This outlines the amount that your beneficiaries will receive and
the amount of premiums you must pay to keep your policy from lapsing.
4. Riders and Options-These are additional provisions that you can pay more to have
added on to your policy. These include such things as having your premium waived
during times of disability, guaranteeing you the ability to purchase more insurance
without another medical exam, and accidental death benefits.

Life Insurance - Meaning

Life Insurance can be defined as a contract between the insurer and policy owner. Insurer is
agreed to pay an amount to the person insured or his nominee either at the date of maturity or a
periodic interval or unfortunate death of the policy owner. Policy owner has to pay a fixed
amount called premium in periodic intervals. This can be monthly, quarterly, half yearly or
yearly. Policy owner is allowed to choose the type of payment and payment cycle. Premium
amount varies depending on many factors like age of the policy owner, scheme, type of the

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policy, sum- assured, etc. Premium amount once fixed cannot be changed later. It must be noted
that the life insurance is not an indemnity contract.

Definition of Life insurance

Life insurance has been defined by different authors differently as given below:

Insurance Act 1938: Under Sec. 2(ii) of Life Insurance (Amendment Act 1950: Life insurance
is the business of effecting contracts of insurance upon human life including any contract
whereby the payment of money is assured on death except death by accident on the happening of
any contingency depended on human life and any contract which is subject to the payment of
premium for a term dependent on human life.

D.S. Hansell: life insurance is a contract in which a sum of money is paid by the assured in
consideration of insurer’s incurring the risk of paying a large sum upon a given contingency.

R.S. Sharma: Life insurance is a contract whereby the insurer, in consideration of a premium
paid either in lump sum or in periodical installments, undertakes to pay an annuity or a certain
sum of money either on death of the insured or on the expiry of a certain number of years.

Characteristics of Life Insurance

The following characteristics or features of life insurance may be deduced from the aforesaid
definitions:

i) Offer and acceptance: Like other contracts of insurance, the life insurance contract
is also the outcome of an offer made by the policy owner and its acceptance by the
insurer. Generally, the life insurance contract is made in writing.
ii) Agreed sum of money: The insurer agrees to pay a certain sum of money either on
the death of the policy owner or on the maturity of the policy, whichever is earlier.
iii) Premium: The policy owner is liable to pay periodically the amount of payment in
the form of premium till the death of the policy owner or expiry or the period of
policy, whichever is earlier
iv) Not a contract of indemnity: Life insurance contract is not a contract of indemnity
as the loss caused by the death cannot be measured in terms of money nor money is a
compensation for loss of one’s life.

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v) Insurable interest: In life insurance, insurable interest must exist when the policy is
issued though it may not exist when the policy becomes the claim. The person who
has been assigned a life policy need not have insurable interest in it as the insurable
interest was already present at the time of taking policy.
vi) Lending helping hand: Life insurance provides helping hand to those who are left
supportless and helps financially in case of death of the insured. It is also considered
to be the best alternative for making savings.
vii) Cover other risks: Life insurance covers other risks which are connected with the
human life in addition to the risk of death. For example, total and permanent
disability or temporary disability and medical expenses, compulsory retirement or the
economic death risks etc. have also been covered under the purview of life insurance
these days.
viii) Relief from sword of Damocles: Life insurance relieves the insured from the sword
of Damocles i.e., various risks and uncertainties which may occur before and after the
death of the insured.

The Principle of Life Insurance

Life insurance operates on some basic principles common to many individuals. How the policy
works is actually a function of the fact that many individuals come together as a group, and each
person shares in the risk of death of the other people in the group. Life insurance companies
manage this risk quantitatively and provide an organized structure for the transfer of risk from
one individual to a large group of individuals.
Law of Large Numbers:
All life insurance policies operate on the principle of the law of large numbers. Insurance
companies must use a large sample size of the population to predict death rates. While no one
single person's death can be predicted, the law of large numbers allows insurers to predict death
rates by looking at a large group of people. A large sample size means that a probability can be
predicted as a percentage of the population. Insurers have gotten to the point where they can
predict death rates every year with very good accuracy.
Insurable Interest:

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Life insurance requires the principle of insurable interest. The person who is insured under the
contract must have some kind of personal relationship to the policyholder. In order to purchase
insurance on the life of another person, you must have a personal and economic interest in the
other person's life. A person buying life insurance on the life of a stranger is doing nothing more
than investing in the other person's death. Life insurance companies would not be able to
accurately predict mortality rates if this was allowed to occur, and if their contracts were allowed
to be used for unethical or illegal purposes, such as buying a life insurance policy on someone
and killing them or having them killed.
Transfer of Risk:
The transfer of risk is essential to life insurance. You do not retain the risk of death in your life
insurance policy. Instead, this risk is spread out among all policyholders that the insurer does
business with. All customers of the insurance company contribute money to the general account.
This money is invested, and then claims are paid out when an individual from the group dies.
Perfected Savings:
Jesus Huerta deSoto describes life insurance as a perfected savings. You purchase a death benefit
for your family's future. However, the contract actually matures at a predetermined age, or after a
preset time. With permanent insurance, this is most obvious. A whole life insurance policy, for
example, matures at age 100. If you die prior to this age, the insurer pays the money to your
family. But, the policy builds a cash reserve during your lifetime. If you live to age 100, the cash
reserve equals the death benefit and the insurer pays out the death benefit to you.
Utmost Good faith
Purchasing an insurance is entering into a contract between company and individual. This should
be done in good faith by providing all relevant details with honesty. Covering any information
from the insurance company may result in serious consequences for the individual in the future.
This being said, the insurer must explain all aspects of a policy and ensure that there are no
unexplained or hidden clauses and that the applicant is made aware of all terms and conditions.
Risk & Minimal loss
Insurance is a risky and companies have to do business and make profits keeping in mind the risk
factor. The principle of minimal risk states that the insured individual is expected to take
necessary action to limit him/her self from any hazards. This includes following a healthy
lifestyle, getting a regular health check-up and more.

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Advantages of life insurance:

The advantages of life insurance over other type of savings instruments available in the
market are as follows.

 Creates an Estate: Life insurance policy create an estate. At any point of time the value
of any other type of savings is the total accumulation in that account only. If the savings
holder unfortunately dies, the amount available to the dependents is that accumulation
only. In case of life insurance, the moments of policy is taken, an estate is created to the
extent of the sum assured under the policy i.e., if the policy owner dies, what becomes
payable to the dependents is the sum assured (the total value of the estate) and not the
total premiums paid.
 Encourages thrift: Life insurance encourages thrift i.e., forced and compulsory savings.
In case of other type of savings, the moments a person feel the need for money, there is
great attraction to withdraw money from the savings accumulation. The purpose of which
the savings account in opened is seldom fulfilled for that reason. In the insurance
policies, there is a built-in discouragement to withdraw. Only surrender value which is a
small percent of the premiums paid will be available to the policy owner if he wants to
withdraw. The policy owner thus is forced to continue payment of premiums and never
try to surrender a policy. This will ultimately fulfill the purpose for which the policy was
purchased.
 Gift to near and dear: Life insurance policies cannot be attached by any court of law or
income tax authorities. A married man can take a policy under married women’s property
Act for the benefit of his wife and/ or children separately and create separate estate for
their benefit. Once a policy is obtained under this legislation, the policyholder will not
have any hold or right over it. Life insurance thus can be used as a gift to the near and
dear.
 Protection against liquidation of property: A life insurance policy can be utilised as a
collateral security for the housing loan. In case of the unfortunate death of the policy
owner, the amount available under the life insurance policy is adjusted towards the
outstanding loan and interest and the house is released to the beneficiaries without any
ancumbrance. Without such a facility, the family will have to sell the house in the open

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market to clear the loan. It will be a distress sale and so would fetch only a fraction of the
real market value of the house. Life insurance thus affords protection against forced
liquidation of property.
 Acts as an Emergency Fund: If immediate liquid cash is needed, a policy of the life
insurance can be assigned to the life insurance company, a Bank or any other financial
institutions as security for a loan. Life insurance thus acts as an Emergency Fund. Banks
today grant educational loans to the students for higher education. They insist on a life
insurance policy as a collateral security.
 No stamp duty: Transfer of property contained in a life insurance policy does not attract
any stamp duty like other property. It can be done by an assignment under Sec. 38 of
Insurance Act 1938, either by an endorsement on the back of the policy document or on a
stamp paper.
 No tax on proceeds of policy: The proceed of a life insurance policy including any
bonuses paid are not liable for income tax.
 Tax Exemption: For gaining income tax exemptions under Sec. 80C of Income Tax Act,
a person can pay premiums under policies on his/her life or an the of spouse or children,
whether major, married or unmarried.
 Simple claim settlement: Settlement of a claim under life insurance policies is very
simple. In case of a death claim, the nominee receives the policy moneys. In case survival
of the policyholder till the date of maturity claim is plaid to the policyholder himself.
 Safe method of Investments: Life insurance is safe and profitable investment. The
IRDA constituted by the Govt. of India in1998 keeps a constant watch and vigil over the
financial position of life insurance companies. The IRDA pays special attention to the
safety of the moneys paid by the policy holders. Thus, life insurance provider a safe
method for investment especially by the middle class.
 Effective management of funds: One of the important criteria for investment of funds,
apart from safety and liquidity, is the management of funds. A life insurance company
will have the necessary experience and expertise in this field and a policyholder gets the
benefit of the same entirely free. Moreover, the policyholder will be free of all tensions.
 Convenient Denomination: Most of the investments in the market are generally
available in fixed denominations. Life insurance policies are available at denomination

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convenient to the general public and so available to practically everyone. Whether

financially very sound or average.
 Flexible policy period: Another important factor of investments available in the markets
in the duration. Life insurance policies are available from very short duration of very long
duration unlike many other savings instrument.
 Bequeath to educational and Philanthropic Institutions: Life insurance can be
bequeathed to educational and philanthropic institutions. It is difficult for many to gift a
large sum of money in lump sum for each purpose. But life insurance provides an easy
way by enabling a person make available large amount money (sum assured) to the
institution of his choice, either on hid death or on the maturity of the policy, by paying
small amount of premium under the policy.
 Beneficial to Backward section of society: Even economically and socially backward
sections of the society can benefit through group life Insurance schemes specially
designed for that purpose and sometimes subsidized by the Govt. of India.
 Prosperity of the Nation: Instead of the Government utilising its resources (generated
through taxation) to provide social security individual can take the responsibility to
provide financial security to themselves and their families. The funds so generated by
Life Insurance companies are diverted towards infrastructure Development in the
country. This will pave way for the prosperity of the nation.

Procedure for Effecting Life Insurance

The LIC of the India was set up on 1 st sep. 1956. It is carrying on its business through its
largest network of branches and agents. It is totally under the ownership and control of the Govt.
of India. It contributes a lot in the field of life insurance.

I. Filling up a proposal from: The first stage in taking out a life insurance policy is the filling
up of a printed proposal from wherein various details of the prospective insured are sought.
This from can be obtained from life insurance companies free of cost. It contains the
following details :
a) Name, nationality, permanent address, occupation, nature of duties, permanent residential
address, name of the employer, length of service, father’s name.
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b) Table and term of Assurance, sum to be insured, whether premium is payable half-yearly or
yearly, amount of premium, place and District of birth, proof of age.
c) Object of insurance, name of nominee, age, relation with insured, full address, height and
weight, details of previous policies, if any, history of parents, sister, brother, etc.
d) Hereditary disease like diabetes, insanity, epilepsy, gout, asthma, tuber culosis, cancer,
leprosy etc.
e) When the application is a female adult, there is a further series of questions regarding
pregnancy, maternity and disturbance indicative of trouble with the female generative organs.
Thus the female proposers have to give the following information; educational qualification,
average monthly income, marital status etc.
f) In the end, the proposer has to make a declaration that the statement given in the proposal are
correct and no information is concealed. The proposal is the basis of insurance contract
which is submitted to the life insurance company.
II. Medical Examination: After having submitted the proposal form with the insurer, the
proposer is required to undergo a medical examination through one of the approved medical
doctors regarding his health, height, weight, chest, tongue, eyes, condition of heart, digesting
system, nervous system, etc. The medical report is directly submitted to the insurer for
consideration.
III. Agent’s Confidential Report: After the medical report, the agent’s confidential report is
submitted to the company. It contains details relating to the personal history of the insured.
Its purpose is to convince the life insurance company regarding the object of insurance,
financial position of the insured and his health conditions.
IV. Acceptance of the proposal: After having gone through proposal form agent’s confidential
report and medical report, the insurance company has to decide whether to accept the
proposal or not. Proposal is accepted only if it seems favorable to the insurance company.
After acceptance of proposal, the letter of intimation regarding acceptance of proposal along
with the first premium by the insured in due course.
V. Payment of first premium: On the basis of premium notice, the insured deposits the amount
of the first premium and the insurer becomes liable from the day on which it is paid. The
contract of life insurance becomes complete on the payment of the first premium. Generally,
the first premium is paid along with the proposal form. The policy may lapse on account of

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non-payment of premium within prescribed time frame. The insurance company issues
receipt acknowledging the payment of premium.
VI. Issue of policy: Having completed all the required formalities, the insurance company
prepares the life insurance policy and sends it to the insured. The back of the policy contains
all terms and conditions of the policy along with all the details of the proposal, etc. The
policy bears the seal of the company and the signature of the competent authority.

Types of Life Insurance:

1.Term Insurance

Term insurance provides life cover in the event of your demise and don’t have any maturity
benefits. This is the simplest form of insurance and cheaper than most other options present in
the market.

2. Endowment Plan

Endowment plan is similar to term insurance but the only difference is that the lump sum
amount is paid out even if you survive the maturity period. Unlike term plan which provides no
maturity benefits.

3. Unit Linked Insurance

ULIPs or Unit Linked Insurance Plans invest some part of your premium towards life
insurance and the rest into a financial instrument. The policy has a lock-in period of 5-years
and can be continued even after the lock-in ends. You can also choose where you want to
invest according to your risk appetite.

4. Whole Life Insurance Plan

Whole life insurance plan covers you throughout your life where you pay the premiums for a
stipulated period of time. The corpus is paid out to your family in case of death and does not
have a fixed validity. This plan is perfect if you have financial dependents as the death benefit
will help secure them.

5. Money Back Policy

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Money Back Policy gives you life coverage throughout the policy term and also provides
regular payments on survival. The payment made is a percentage of the sum assured which is
given during the plan tenure and the rest of the sum assured is paid out on maturity of the
policy. In case you pass away during the tenure, the sum assured is paid regardless of the
payments made to you before.

6. Annuity Pension Plan

Pension plan involves paying a lump sum amount to the insurance company where the
payments are sent out immediately on a regular basis or in a lump sum form. The wealth can
also be left to accumulate according to your risk appetite.

7. Saving & Investment Plan

Saving & Investment Plans are the types of insurance plans that provide you the assurance of
lump sum funds for you and your family’s future expenses. While providing an excellent savings
tool for your sort term and long term financial goals, these plans also assure your family a certain
sum by way of an insurance cover. This is a broad categorization that covers both the traditional
and unit linked plans.

8. Retirement Plans

These plans provide you with income during retirement is called the retirement plan. These plans
are offered by life insurance companies in India and help you to build a retirement corpus. On
maturity, this corpus is invested for generating a regulzr income stream which is referred to as
pension or annuity.

9. Child Insurance Policy

A child insurance policy is a saving cum investment plan that is designed to meet your child’s
future financial needs. It allows your kids to live their dreams and gives you the advantage to
start investing in the children’s plan right from the time the child is born and provisions to
withdraw the saving once the child reaches adulthood. Some child insurance policies do allow
intermediate withdrawals at certain intervals.

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Life insurance is not just to fulfill the daily expenses of the family in the absence of breadwinner.
It should be capable enough to bail out large financial exigencies. So, one should always choose
one or two best types of life insurance which can support his/her family in different stages of life.

Who Can You Name as a Beneficiary?

Any person, corporation, or legal entity can be your beneficiary. You have two types of
beneficiaries to name: primary and contingent. The primary beneficiary is the main person that
you wish you money to go to when you pass. A contingent beneficiary is a person you name to
inherit the money if your primary beneficiary has predeceased you.

You can name multiple beneficiaries in each category, allotting them each a specific percentage
of the benefit. You also are able to change your beneficiaries at any times.

How Much Do You Need?

The size of insurance policy you will need depends on several factors. These include if you have
a spouse, the size of your family, and the nature of your financial obligations, your career stage,
and your financial goals.

It is also important to think about such questions as:

 What immediate financial expenses would your family face after your death?
 What is the amount of your salary you devote to expenses and future needs?
 How long would your family need support if you died tomorrow?
 How much money would you want to leave as an inheritance for your children or to fund
their education?

All these factors play a part in determining how much coverage you will need.

How Much Can You Afford?

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How much coverage you need and how much you can actually afford may be two very different
things. Such factors as the type of policy you choose, your age, and your health all play a part in
determining your expense.

A financial professional can help you to determine what type of policy will fit your budget and
still work for your needs.

Where Can You Buy Life Insurance?

Some people will receive policies from their employers, other go to insurance agents or brokers.
It is important that you find someone that can help you find the best policy that will fit your
needs. Financial advisors can be helpful in aiding you to make your decision because they have
an in-depth knowledge of how life insurance works and how it will interact with other aspects of
your finances.

Difference between life insurance and general insurance:

BASIS OF
LIFE INSURANCE GENERAL INSURANCE
COMPARISON
Meaning Life insurance is an insurance General insurance is an
contract, wherein the insurance insurance contract, wherein the
company promises to compensate insurance company promises to
the insured individual for compensate the insured
uncertainties of life that are death. individual or entity for the
Life insurance provides protection financial loss or damage caused
against life risk. due to an unfortunate event.
General insurance gives
protection for all the valuable
things that are important to you.
Term of contract Long-term contract Short-term contract
Nature of contract Life insurance is not a contract of General insurance is a contract
indemnity. It is considered as an of indemnity
investment
Insurable interest Life insurance requires the In general insurance policies,

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beneficiary to have an insurance insurance interest is expected to

interest in the person who is being exist both at the time of
insured. That means, insurable underwriting and at the time of
interest needs to be present at the loss.
time of underwriting
Payment of claim Benefits under the policy are paidFinancial loss caused due to the
on the occurrence of an insured insured event is remembered on
event or on maturity the occurrence of the particular
event
Compensation value The compensation value is The compensation value is the
dependent on the premium payable actual loss incurred in the
under the policy insured event (maximum
amount payable is subjected to
the policy limit)
Premium payment Premiums need to be paid Premium is paid in a lump sum
periodically over the years for a as the policy is purchased for
specified term short-term and plans need to be
renewed on expiry
Savings Many life insurance plans come General insurance plans have no
with a savings element which savings component as it’s an
helps the insured to build corpus indemnity contract wherein you
or create wealth for future incur the premium cost to avail
the protection

ANNUITY

An annuity is a contract between the policyholder and the insurance company, wherein the
policyholder needs to make either lump-sum payment or pay in installments to receive regular
income as an annuity after retirement. The annuities can be paid either immediately after
payment of the lump-sum amount or after completion of the specific tenure.

What is an Annuity Contract?

An annuity contract is a written agreement between an insurance company and a customer
outlining each party's obligations in an annuity agreement. Such a document will include the
specific details of the contract, such as the structure of the annuity (variable or fixed); any
penalties for early withdrawal; spousal and beneficiary provisions, such as a survivor clause and
rate of spousal coverage etc,.
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How an Annuity Contract Works?

An annuity contract is a contractual obligation between as many as four parties. They are the
issuer (usually an insurance company), the owner of the annuity, the annuitant, and the
beneficiary. The owner is the person who buys an annuity. An annuitant is an individual whose
life expectancy is used as for determining the amount and timing when benefits payments will
start and cease.

In most cases, though not all, the owner and annuitant will be the same person. The beneficiary is
the individual designated by the annuity owner who will receive any death benefit when the
annuitant dies.

An annuity contract is beneficial to the individual investor in the sense that it legally binds the
insurance company to provide a guaranteed periodic payment to the annuitant once the annuitant
reaches retirement and requests commencement of payments. Essentially, it guarantees risk-free
retirement income.

Types of annuities

There are several life insurance annuities to choose from. Understanding how each type works
will help you better understand them and choose the option that helps you reach your financial
goal.
 Fixed annuities are consistent and predictable, making them extremely popular for retirees.
According to the Insurance Information Institute (III), fixed annuity sales have increased
by 36% since 2015. With a fixed annuity, the insurance company guarantees a rate of return
and payment amount either for a set number of years or for the rest of your life.
 Variable annuities give you more control over how your contribution is used within the
contract. You can choose from underlying mutual funds to take advantage of market growth
while still having a guaranteed benefit to protect you from significant market downturns.
 Fixed-indexed annuities are fixed annuities with the chance for a higher interest rate when
the index it’s tied to like the Dow Jones Industrial Average is positive. However, fixed-
indexed annuities do have growth limits and don’t earn dividends, making the rate of return
smaller than the index itself. You make up for the lower returns with a guaranteed minimum
interest rate on your contribution.

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 Immediate annuities require a lump sum payment and begin paying out immediately. This
option is great for retirees who have a substantial nest egg but are concerned they’ll blow
through it too quickly. Immediate annuities can be fixed, variable or fixed-indexed.
 Deferred annuities set a first payment date sometime in the future. You can either contribute
a lump sum or make regular premium payments to increase your annuity over time. The
insurance company will pay the contracted rate of return back into your total until you begin
receiving payments. Deferred annuities can also be fixed, variable or fixed-indexed.
Difference between Life insurance and annuity
Note Annuity Life Insurance
Purpose It is mainly for securing an income It is a plan for the future, to cater
after you have retired for what is not known.
Payment of Benefits Matured annuity is paid only when A matured Life insurance can
the policy holder is alive only be paid once the policy
holder is dead.
Mode of Payment Benefits are paid in regular Whether term or whole life
allotments for deferred annuity. insurance, the benefits are paid
out by the insurance company as
a lump sum.

Theory of Probability

The theory of probability (also known as probability theory or theoretical probability) is a

statistical method used to predict the likelihood of a future outcome. This method is used by
insurance companies as a basis for crafting a policy or arriving at a premium rate.

Insurance companies use this approach to draft and price policies. When issuing health
insurance, for instance, the policy given to a smoker is likely more expensive than the one issued
to a non-smoker. Statistical figures show a stronger association with a variety of health risks for
habitual smokers or those with a history of smoking. Insuring a smoker, then, is a greater
financial risk given their higher probability of serious illness and, hence, of filing a claim.

Law of Large Numbers

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Law of Large Numbers — a statistical axiom that states that the larger the number of exposure
units independently exposed to loss, the greater the probability that actual loss experience will
equal expected loss experience. In other words, the credibility of data increases with the size of
the data pool under consideration.

Insurance companies rely on the law of large number to help estimate the value and frequency of
future claims they will pay to policyholders. When it works perfectly, insurance companies run a
stable business, consumers pay a fair and accurate premium, and the entire financial system
avoids serious disruption. However, the theoretical benefits from the law of large numbers do not
always hold up in the real world.

Large numbers in real life

According to this law, the average of the results obtained from a large number of trials will move
closer to the expected result as more and more trials are performed. Let’s explain this through a
popular example. When you flip a coin, the chances of it landing head upwards are 50%, as the
coin has two sides and it could show either head or tail. By this logic, a person flipping a coin six
times should get tails at least three times, but when a coin is flipped just six times, the person
may get five tails in a row. But flip that coin 60 times, and the number of tails would be closer to
the 50% mark. As you increase the number of trials of an event, the number of occurrences of
that event get closer and closer to the average chance of the event taking place.
Why do insurers apply this law?
An insurer can predict the chances of a specific risk taking place more accurately through this
law. For example, as the number of people in a group (who want an insurance cover against a
common risk such as car theft) increases, the real-life instances of that disaster come close to the
expected average of that event occurring. In other words, the deviation of the actual event from
the expected average will reduce, as the number of people in the pool increases.

Life Insurance Premium Setting

The insurer collects contributions from a large number of individuals to compensate the
financial consequences of the loss of the unfortunate few. This contribution is known as
premium. In other worlds, premium is the price paid to the insurer by the insured for
underwriting risk. There is a rate for each type of insurance. The rate of premium depends upon

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the risk undertaken by the insurer. It is expressed generally per hundred or per thousand of sum
insured. It can be paid either in one lump sum or in easy periodic installments like monthly,
quarterly half-yearly or annual. The manner of payment usually annual and the payment by
monthly or other installments usually involves slight extra cost.

Types of premium

The determination of life insurance premium is one of the most technical and
difficult aspects of the branch of actuarial science which requires a broad knowledge of science
of mathematics and statistics. The premiums can be classified into the following heads:

i. Net premium
ii. Gross premium
1) Net premium: This premium is mainly based on the past experience, mortality and
assumed rate of interest. No consideration is given for expenses incurred and for future
contingencies. The net premium should be equal to the claims paid either on death or due
to the maturity of the policy.
2) Gross premium: It is also known as the “office premium”. It is the amount that the life
assured is required to pay. It includes the mortality rate, the assumed rate of interest, the
expenses and loading. So, if expenses and bonus to policyholders are added to net
premium, it becomes gross premium.
Gross premium = Net premium + Expenses + Loading

The premiums mentioned above, may be further classified into two parts:

a) Net single premium; and

b) Level premium

A. Net single premium: This premium is received by the insurer in a lump sum and is
exactly adequate, along with the return earned thereon, to pay the amount of claim. It
does not provide for expenses of the management and for contingencies.
Net single premium = Mortality coast + loading – Interest

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The computation of single premium rates on any kind of policy requires the information
as to;
 The age and sex of the assured rate must be commensurate with age and sex.
 The type of policy, for the rate depends on the type of policy,
 The size of the policy, for the rate depends on the amount of assurance or the
amount of claim guaranteed, and
 The rate of interest assured for investment made by the insurance company.
B. Level premium: Due to financial constraints, some insured’s may find it difficult to pay
for their life insurance on a single premium basic. They may like to pay their premiums
on an equal basis or at less than annual intervals. In order to enable the insured to pay
their premiums in installments, mathematically equivalent to the net single premium, the
premium is levied under the new name entitled “level premium”. The level premium
remains at a constant figure throughout the terms of the policy. This premium is payable
in periodic installments say, monthly, quarterly, half-yearly and yearly.
This premium is higher at lower age and lower at the higher age. The burden of higher
premium at higher at higher age is shifted to lower age group, Since this premium
charged at early ages in higher than the risk involved, the excess amount so received is
accumulated as reserve and a fund is created which enables the insurer to utilise it at later
when premium is less than the actual risk

Factor that affects premium

The following factors affect the computation of premium:

i. Mortality Rate (or) Death Rate: The life insurance premium to be charged must obviously
depend upon the rate of mortality i.e., the number of persons who will die at the end of a
particular period out of a given group, the insurance companies prepare the mortality tables.
For example, if there is a group of 1,000 persons aged 20 today and if of this group after one
year, i.e., at age 21 of the group. 997 are alive, the rate of mortality is 3 per thousand, Put it
in another way, it means that after the one year period is over, the policy amounts will
becomes due it respect of 3-persons. Of course, the amounts of claims will be paid from the
contributions of the survivors (997). Since the claim service of a life insurer is the very
foundation and important function, the premium must be adequate atleast to cover the cost of

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all claims. Mortality tables enable insurance companies to assess the risk and make adequate
provision in the premium for covering the risk element and cost of all claims.
ii. Interest: The second factor which affects premium is interest. The life insurers are to assess
the probable rate of interest on the investments made on the basis of advance received by
them. This is obviously because the insurers receive the premium in advance from the
various policyholders and as such, these amounts are invested by them. On such investments,
insurers receive substantial amount of interest. As the trustees of the policyholder, the
amount earned by the insurers, is utilized in reducing the amount of premium. In other words,
the rate of interest earned by the insurers is deducted from the premiums. Thus, after making
the necessary allowance for the interest, the premium is determined. In calculating the rate of
interest, the insurers make conservative calculation because the premium calculation are done
much in advance while the actual interest is earned and recovered in later years
iii. Expenses: While determining the rates of premiums, administration costs and management
expenses are to be taken into account as no business concern can function without incurring
these expenses. These include staff salaries and wages, cost of building, printing costs,
transport requirement, medical examiner’s fee, cost of keeping records, tax levied on
premiums, agents commission and other miscellaneous expenses. This expenditure cannot be
recovered separately from the policyholders but is included in the total premium by the
insured.

Plans of premium

Basically there are three plans of premiums;

i. Assessment plan
ii. Natural premium plan
iii. Level premium plan or Installment premium plan
I. Assessment plan
This is an old but simple method of calculating premiums. Under this plane, the rates of
premiums are not-fixed in the policy but are collected from the surviving members of the group
were required to contribute to a fund which could be utilised in rendering assistance at the time
of death to surviving dependants of the deceased member of the group. Initially, the
contributions were voluntary and the death benefits varied with the requirements for payments to

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individuals. Subsequently, the benefit to be paid was definitely fixed and the contributions varied
with the needs of the organization.

Demerits

a) The premium amount is not fixed, as it relates to the number of claims in a year.
b) Collection of premium at every claim is very difficult.
c) Equal contributions are collected from all members irrespective of their age.

This plan proved inequitable and unscientific and was therefore discontinued

II. Natural premium plan :

The above mentioned defects of assessment plan are removed by this plan. Here the premium to
be paid during the year is fixed in advance and is charged at the commencement of the year.
Secondly the premium is graded according to the age at entry, so that different persons of the
different ages have to pay different premiums. A man of 20 will pay less premium than the man
of 40 because his chances of death are comparatively remote. This calculation of premiums in
advance and linking it to the age is made possible by the help of mortality tables (discussed in
details later on). As premium is determined on the basis of mortality table, every year the amount
of premium changes and hence it is named as “yearly renewable term plan”.

Merits

a) A very simple method of calculating premium with the help of mortality table.
b) A lower premium at lower age, and
c) Premiums are collected in advance.

Demerits

a) Higher premium at old age, hence unattractive for old persons.

b) Premium rates are not stationary. They increase with the increase in age.
c) As the premium increases year after year, the possibility of insurance being discontinued
at later stage also increases.
III. Level premium plan
The above defect of higher premiums at old age is removed by the level premium plan.
Here the premiums to be paid are leveled up so that usually the same premium is paid
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every year. The policyholders are well aware of the rate of premium which is uniform
throughout the insurance period. This plan is considered to be the most scientific method
based on mortality, under which a uniform rate of premium is determined on the basis of
attained age and is payable throughout the term of policy.

Merits

a) The premium are constant and stationary

b) The method is simple and easy to understand
c) Premiums are received in advance, so that fund is created to earn interest.
d) The method has both the elements of saving as well as safety.

Difference Between Natural plan and the Level premium plan

i. Meaning: In natural premium plan, premium is charged as per morality tables and age,
therefore, there is increase in premium every year, whereas in level premium plan, the
same premium is charged throughout the term.
ii. Premium: Under natural premium plan, premium is not constant and increases with the
increase in age, but in the level premium plan, premium remains constant.
iii. Age: In natural premium plan, the premium amount increases every year as one
advances in age, whereas in level premium plan, increases in the age does not affect the
premium.
iv. Life fund: There is no need to create life fund under natural premium plan, whereas in
level premium plan, life fund has to be created as premium rates are higher at lower age.
v. Element of safety and investment: only element of safety is present in normal
premium plan, but in level premium plan, element of safety as well as investment is
present.
vi. Surrender value: No surrender value is available in natural premium plan, whereas in
level premium plan, the surrender value is paid whenever a policy is discontinued.
vii. Practicability: The normal premium plan is old and not practicable. The level premium
is more scientific and practicable.

MORTALITY TABLE

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Mortality table is an instrument by means of which, the probability of life and death, is
measured. It is the record of past data about death per thousand at a given age. For example, out
of one thousand persons in the age group of 50 years, if 25 persons die next year, then twenty
five is the mortality rate or death rate. It is basically a statistical data representation showing the
death rate at each age. It is generally prepared by an expert, known as the Actuary, out of many
years of experience and is not one and the same for all sections of people or for all countries. It
does not disclose as to when a particular policyholder will die but it will disclose as to how many
death will take place out of a large group of policyholders in any given year. Hence it is wrong
to presume that the insurers predict the future from the mortality table. All what the insurers
come to know from the mortality tables is a sufficient and conservative basis for calculation of
premium. Indeed, a mortality table indicates only the “ Tabular mortality” or “mortality as
disclosed by the prepared tables” . All the same, it is reasonable to assume that mortality
disclosed by the table will very approximately be the same as that what will be experienced in
future.

Definition

Maclean: A mortality table is an instrument by which the probabilities of living or dying is

measured.
O.S. Gupta: Mortality table is an instrument anticipating future mortality rates on the basis of
past mortality record.

Features of Mortality Table

 Study of Age group: by preparing a mortality table, the persons in a particular age
observed upto death.
 Requirement of the Insurer: Mortality table is designed as per the requirement of the
insurer. It continues upto the point till all of them are dead
 Period: The mortality table generally covers the records of death or survival in year
period
 Death or survival rate: The mortality table provides details about either death or
survival or both at a particular age. Any table giving mortality rate only is incomplete
unless the death rate is calculated every year.

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FUND VALUATION

The process of computing the reserve is termed as ‘valuation’. Of course the other purposes of
valuation are the comparison of actual results of mortality experienced, interest earned and
expenses incurred with those assumed in the premium table and the determination of any surplus
available for distribution as profit. The task of valuation is a complicated one and involves much
energy and time and therefore it is made once in two years. It is a sort of stock taking common to
all business enterprises. There are two important methods of making valuation. (i) Prospective
method and (ii) retrospective method.

(i) Prospective Method: The liability of an insurance company is to pay claims in future and
its income will be in form of future premiums but as seen earlier, the future premiums in
level premium plan are less than the actual cost, and to make up the deficiency, it has
received higher premiums in earlier years of the policy. Therefore, the present value of all
future claims (calculated on the basis of mortality table) and the present value of all future
premiums (based on the anticipated rate of interest) are first calculated and the difference
between the two indicates the “net liability” of the company. The actual reserve in hand (or
as it is called ‘fund’) must be equal to this net liability (also known as valuation reserve) if
the company is to maintain its financial position. This method of valuation by looking
forward is called the prospective method.
(ii) Retrospective method: The valuation may also be made by looking backward over the
results of the past. According to this method, first the premiums received in past together
with interest earned on them are calculated and then the amount of total death claims paid, is
ascertained. The excess of the former over the latter will represent the reserve. This method
is known as retrospective method. So long as the same basis of mortality and interest are
used as were assumed in fixing the net premium the result is identical whichever method is
followed. The retrospective reserves are those which are held for future liabilities while the
prospective reserves are those which should be held to meet those liabilities. However, since
actual experience rarely conforms exactly to the assumptions as to mortality and interest
made in fixing premiums, the prospective method is more logical to use in trying to
understand the nature of these reserves. In India, the Insurance Act Permits the use of only
the prospective method.

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INVESTMENT OF FUND

The ‘Fund’ or “reserve” is the liability of the company towards the policyholders and the
company invests it to earn the assumed interest. The “fund” is not an extra amount to meet
contingencies, but it represents the accumulated liabilities of the insurer towards policy holders
and it is to be kept as trust money. The supreme consideration in the investment of life “fund” is
to preserve the interests of the policyholders. It is basic that in handling trust funds, the trustee
shall in no way profit personally therefrom. Every effort should be made to protect the assets of
life assurance from any element of fluctuation, wide swings in market value, losses growing out
of the sale of securities on a unfavourable market and speculation for profits. Great care has to be
taken in selecting suitable channels of investment and supervising them. Life insurance
companies keep organized departments to handle the tremendous volume of business occasioned
by the investment of reserve funds. Experts are constantly scrutinizing the market outlet for
funds and, through an analysis of economic and financial conditions, are able to forecast
investment trends. However, the life insurance company officers must observe complete good
faith and should formulate and investment plan in conformity with the following canons of
investment:

 Safety and security: The investment should comprise the permanent integrity of the
capital so as to avoid the violent and frequent fluctuations in the value of securities. The
reserve represents the company’s liability towards its policyholders and, therefore, the
securities in which it may be invested should never at any time fall in their face value,
otherwise the liability will be more than its corresponding assets and this will bring a ruin
to thousands of policyholders. The primary purpose of investment of the fund is not to
earn profits as in other business concerns, but to maintain complete security. Due to this
reason, an amendment has been made in the statutory guidelines for investment.
Accordingly, every insurer carrying on the business of life insurance is required to invest
the life fund in the following manner:

Atleast 25% either in Govt. securities

Another 25% either in Govt. securities or other approved securities.

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Another 35% in the approved securities such as immovable property, preference,

equity shares, etc.

Another 15% investment in other than approved securities such as shares of the
new companies.

 Liquidity: The funds should be invested in such a way that they may be readily
convertible whenever claims are payable. To ensure the proper degree of liquidity,
investments are so made that the maturities will occur at intervals adjusted to meet the
needs of maturing policies. As a provision against sudden demand for surrender values or
policy loans, the insurer may keep a part of the fund in cash or in such securities which
can be realized quickly and without loss. This could be used to meet a sudden
contingency or to avail of an exceptional investment opportunity.
 Profitability: The insurer must earn atleast the assumed rate of interest otherwise there
will be a loss. The investments should be made in such securities which can yield the
highest return but not at the cost of safety. It has been realized that safety and profitability
are opposed to each other and so a fair and balanced policy or investment should be
observed.
 Diversification: The investment of the funds should be diversified. It means spreading
over investments among different classes of securities so that risks and returns are
adjusted. The diversification can be according to time factor, it provides maximum
security and yields and efficient rate of return. So, the principle of “not having all the
eggs in one basket” should be adopted.
 Aid to Life business: The funds should be invested in those projects or activities which
may provide more and more employment opportunities and may also increase the
standard of living of the people, so that the insurer can get the benefits of the lower
mortality rate and increase in new business.

SURPLUS AND ITS DISTRIBUTION

The object of the periodical valuation of a life insurance company is to find out its
financial position. As previously stated, the excess of present value of future claims over the
present value of future premiums represents the “Net Liability” of the company. For the

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company’s soundness, the reserve should atleast equal to this “Net liability”. If the reserve
exceeds the amount of net liability, the excess will represent the “gross surplus” and if it is less
than the “Net liability” the difference is known as the “Deficit”. The first charge on the “Gross
surplus” is the provision to meet unusual contingencies and for this purpose, part of the gross
surplus is transferred to “Contingency Reserve”. The contingency may be the outgrowth of an
epidemic, investment losses or other heavy and unexpected loss.

The gross surplus is usually divided in three parts viz. (i) funds set up for special purpose
such as for general contingencies or for fluctuation of investment; (ii) funds set aside for
distribution as profits and (iii) unassigned funds. The first and third parts constitute the Net
surplus and the second one is called the divisible surplus. The LIC of India has the provision to
make valuation of its liabilities once in every year and to distribute 95% of its surplus to the
participating policyholders by way of bonus.

Source of surplus

The following are the source of the surplus of a life insurance company:

i. Mortality savings: If the actual rate of mortality experienced is less than the assumed
rate of mortality for which is charged there will be a mortality savings.
ii. Interest: If the actual interest earned is higher than the anticipated or assumed rate.
There is a gain as interest surplus.
iii. Loading: The net premium is loaded at a rate to cover office and management expenses.
If these expenses are less than the loading rate of amount, there arises a loading surplus.
iv. Bonus Loading: A bonus loading is usually added with net premium to enable the
insurance company to declare bonus for with profit policies. The unutilized portion may
be added back to surplus.
v. Miscellaneous sources: Source may also arise through the following:
a) Surrender charge
b) Premium on lapsed policies
c) Fines and fees, and
d) Investment profits

Distribution of surplus

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The allocation of the divisible surplus among the eligible policyholders is a complex
matter. Certain basic principles are to be observed by an insurance company:

a) Simplicity: The method adopted must be easily understood by the policyholder and the
agency force.
b) Equity: The distribution must be fair, policies which contributed more to the generation
of surplus must get a better share.
c) Flexibility: The method be adaptable to changing circumstances.
d) Consistency: The rate of bonus declared by a company should be stable from year. Wide
fluctuations are not liked by either policyholders or the sale force.

There are various methods in which the divisible surplus can be distributed among the with
policyholders. Some of them are discussed below:

i. Contribution Method: This is otherwise called the “Fair Distribution” method. Here
the distributed method is linked to the basic source of surplus via., mortality, interest
and expenses. The rates of bonus declared will be strict proportion to the contribution
made by the policy or group of policies to the source of surplus. This method is
impractical.
ii. Simple Reversionary Method: Bonuses, in this system, are declared as a percentage
addition to the sum assured. It is payable along with the sum assured i.e, on the
happening of event insured against – death during the term or survival upto the date
of maturity (it is called reversionary bonus because of this reason)
The basic advantage in this method is its simplicity. Surplus funds will still remain
with the insurer and can earn further interest. Policyholder will have increased
interest in maintain the policies. In view of these advantages, the LIC of India has
adopted this method.
iii. Compound Reversionary Bonus System: In this method, the bonus addition of
each year is of an increasing nature. The rate declared will be a percentage of the sum
assured and bonuses already vested or added during the earlier years. Here also it I
reversionary. This system provides better incentive to the policyholders. The new
entrants to the life insurance market in our country are likely to adopt this method.
iv. Bonus in cash: Bonus declared can be paid in cash to the policyholders.

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v. Bonus in Reduction of premium: In this method, bonus is utilized in reduction of

existing premiums receivable by the company. In this method, a stage may arise
when there will be no balance premium to be reduced further. Afterwards, the
company will have to change the method of distribution of surplus, say to a
reversionary method. Another disadvantage is that surplus is distributed on cash
basis. So, the profit earning capacity of the company gets diminished by loss of
premium income and consequent depletion of funds.
vi. Toutine Bonus: In this system, bonus is distributed after the certain period to the
survivors among the policyholders. In effect, the distribution is deferred to a future
date. To be eligible, a policyholder must be alive on that date. The first few years,
say 5 years, are excluded for every policy from participating in profits. This method
is preferred by new entrants into the market with a desire to conserve their resources
by avoiding the necessity for early distribution of surplus.
vii. Interim Bonus: Bonus are declared on the basis of the result of a valuation of all
policies which are in force on the date of valuation. But before the next valuation is
made, some policies may result into claims either by maturity or by death. These
policies will not get any regular bonus declared at the time of next valuation because
by that time, they would have gone out of the books of the company. For this
purpose, interim bonus will be provided. Usually it is at the same rate as the bonus
declared at the immediate previous valuation.

UNIT III
Procedure for taking a life policy – Proposal, agents’s report, medical examination,
hazards of residence, occupation, war risks – financial position, past history etc.

PROCEDURE FOR TAKING A LIFE POLICY

Procedure for Taking a Life Policy: Life policy is based on the principle utmost good
faith. The procedure-filling in the form is quite simple. It is almost like a home industry where
the person who wishes to make an investment in the form of insurance. The first thing to do is to
fill in a proposal form.

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1. The proposal form contains the following details:

(a) Name, nationality, permanent residential address, occupation, nature of duties, present
employer’s name, length of service, previous employment record, father’s name in full.
(b) Place of birth, date of birth, proof of age and district of birth.
(c) Term of insurance, nature of insurance, type of policy, amount to be insured, mode of
premium payable — yearly, half-yearly, quarterly and monthly.
(d) Personal information regarding height, weight where the life is proposed.
(e) Details of any previous policies whether one or double insurance.
(f) Family history, history of father, mother, brothers, sisters, children.
(g) Information regarding diseases like epileptics, asthma, tuberculosis, cancer, leprosy, etc.
(h) Information regarding previous records of accident, injury, operation diseases.

2. Medical Examination:

If the applicant has a family history of disease then the investment procedure is more detailed
and description about permanent immunity and other family diseases have to be given including
habits, name, income, occupation and salary. A person of normal health almost goes through a
medical examination as a matter of formality.

3. Medical Report:

The next step after filling-in proposal form is to undergo a medical examination from one of the
doctors approved by the Life Insurance Corporation.

The examination is usually of a routine kind where the identification of the applicant, his
appearance, measurement, weight, condition of teeth, eyes, throat, tongue, ears, condition of
heart, chest, digestion, nerve system and past operation is taken into consideration to find out the
life span of the individual.

4. Agent’s Report:
The third step consists of a report which is confidential in nature. It is made by the agent who is
underwriting the life of the person. His report consist of the age of the person insuring himself,
his health, occupation, soundness of payment of premium, proper health and longevity of life.

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5. Acceptance of Proposal:
The Life Insurance Corporation accepts the proposal of the insurer on the commitment made by
the agent and after taking into consideration the doctor’s medical report. The factors which play
a dominating role is the mode of premium, type of policy, the age of the applicant, his health,
occupation and habits.

Once these factors have been considered and the Life Insurance Corporation’s officers are
satisfied, the form is accepted. An investor’s form will be rejected only if he suffers from serious
diseases or the longevity of life cannot be guaranteed.

6. Payment of first premium:

On the basis of premium notice, the insured deposits the amount of first premium and the insurer
becomes liable from the day on which it is paid. The contract of life insurance becomes complete
on the payment of first premium. Generally, the first premium is aid along with the proposal
form. The policy may lapse on account on non-payment of premium within prescribed time
frame. The insurance company issues receipt acknowledging the payment of premium.

7. Issue of policy:
Having completed all the required formalities, the insurance company prepares the life
insurance policy and sends it to the insured. The back of the policy contains all terms and
conditions of the policy along with all the details of proposal, name, address, sum assured, mode
of premium payment, etc. The policy bears the seal of the company and the signature of the
competent authority.

Residence

Mortality rates vary throughout the world. If you are contemplating foreign travel or
residence, the life insurance company will want to know when, where, and for how long. They
also want to know if you have recently traveled to or lived in a foreign country. A particular
country’s climate, living standards, sanitary conditions, medical care, political stability, and
terrorist risk can all have an effect on your mortality.

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Hazardous Occupation

There are jobs which can be considered hazardous and come with a shortened life
expectancy. They may be considered hazardous because there’s a higher chance of an accident
occurring for example, construction workers or it’s an unhealthy working environment for
example, miners.

All life insurance companies have occupational manuals which list the occupations
deemed to have an adverse effect on mortality. If you work in one of the listed occupations, you
will likely be required to pay a higher premium.
If you purchase a policy and were paying a higher rate because of your job, but then change to a
less hazardous one, you may ask the life insurance company for a reconsideration. Depending on
the circumstances, it’s likely they will agree to move you into a better risk class and decrease
your premiums.

As to occupation it is worth noting that though insurer charges extra premium, if the
proposer is engaged in hazardous occupation and removes such extra premium, if such
occupation is given up, it does not charge any extra premium to such policyholders who after
having taken the insurance takes up a hazardous job. In fact, no policyholder is required to keep
the insurer informed of the change in occupation during the continuance of any insurance policy.

War Risk Insurance mean?

War risk insurance covers damages due to acts of war, such as invasions, revolutions, and
military coups. Some insurance companies also consider terrorism as a war risk, although others
may classify it as a separate risk. War risk insurance can cover the cost of property damage,
bodily injury, death, emergency evacuations, and other problems that occur during a war.

War Risk Insurance

Most insurance policies do not cover losses due to acts of war. Therefore, if a company,
for example, does business in a politically unstable country or one in which a revolution erupts, it
would make sense to purchase war insurance coverage for its property and employees in that
country.

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Private insurance companies do not always offer war risk insurance coverage for every situation.
For example, soldiers have a lot of trouble buying life and disability insurance because they are
considered too high risk. In these situations, the government sells war risk insurance through
various programs.

Personal History
Applications often ask questions regarding:
 Past habits
 Previous environments
 Current insurance status
Life insurance companies will also want to know if you use any drugs or drink alcohol.
Companies will take a hard look at any past abuse of drugs or alcohol, as this may have caused
irreparable damage to the body. Any current use of hard drugs will cause an automatic decline.
Marijuana use varies from company to company. Moderate alcohol use is not concerning, but
heavy drinking is. There is a substantial mortality risk among heavy drinkers.
Personal history may also reveal potentially concerning living or working environments. For
example, if an applicant recently left a hazardous job, there is a possibility that his or her health
was affected.
Life insurance companies also want to know if you currently have a life insurance policy
or have been declined for one in the past. If there is a current active policy, this affects how
much coverage you can be approved for. If you have been declined in the past, the reason(s) why
may still exist.

Family History
Because certain medical conditions are hereditary, family history plays a role in life
insurance as well. When you apply for life insurance, you are asked about the ages and health
status of your parents and siblings. If any are deceased, the age they died and their cause of death
will also be asked.
When determining an applicant’s risk class, a very good family history will be a credit and a very
poor family history may be a few points against your overall evaluation.

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UNIT IV
Policy conditions – Proof of age – Payment of premiums – Days of grace –
Commencement of risk – Ante dating – Critical expenses – Hazardous occupation –
Alteration – Additional assurance – Suicide – Lost policies – Assignment – Nomination –
Incontestable clause – Settlement of claim – Lapsing of policy – Revival of policies –
Redating – Surrender value – Paid up value – Role of L.I.C. of India – Case for and against
privatization of L.I.C. – Present scenario.
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LIFE POLICY CONDITIONS

1. Proof of Age:
The next step after accepting the proposal of a person is to ask him to submit the proof the age.

The person who is interested in insuring himself may give this proof by submitting any of
the following documents:

The Proofs of age, which are generally acceptable to the Corporation, are as under:

 Certified extract from Municipal or other records made at the time of birth.
 Certificate of Baptism or certified extract from family Bible if it contains age or date of
birth.
 Certified extract from School or College if age or date of birth is stated therein.
 Certified extract from Service Register in case of Govt. employees and employees of
Quasi-Govt. institutions including Public Limited Companies and Pass port issued by the
Pass port Authorities in India.
Alternative Age Proofs which are accepted:
 Marriage certificate in the case of Roman Catholics issued by Roman Catholic Church.
 Certified extracts from the Service Registers of Commercial Institutions or Industrial
Undertakings provided it is specifically mentioned in such extracts that conclusive
evidence of age was produced at the time of recruitment of the employee.
 Certificate of Birth granted by Syedna v. Molana Badruddin Sahib of Baroda
 Identity Cards issued by Defense Department.
 A true copy of the University Certificate or of Matriculation/Higher Secondary Education,
S.S.L. Certificate issued by a Board set up by a State/Central Government.
 Non- standard age proof like Horoscope, Service Record where age is not verified at the
time of entry, E.S.I.S. Card, Marriage Certificate in case of Muslim Proposer, Elder’s
Declaration, Self-declaration and Certificate by Village Panchayats are accepted subject to
certain rules.
2. Payment of Premiums :

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When an investor takes a life policy on his portfolio he must pay some installment to the
life insurance company for this investment. This installment is called premium and may be paid
periodically.

The premium rate is calculated annually, but for the convenience of the assured, it can be
paid half- yearly, quarterly or even monthly. It should be remembered that these premiums are
not just the portion of yearly premium because the insurer losses interest on the unpaid premium
of a year and expenses are involved for frequent calculation of premium.

Usually, a period of 30 days is given as grace beyond the due date of payment of
premium. The rates of premium are different for different kinds of policies offered as investment.

When premiums are not annual but fractional and if death takes place before all the
premiums have fallen due for the current policy year, the corporation deducts the unpaid
installments from policy year, the corporation deducts the unpaid instilments from the assured
sum at the time of settling the claim.

3. Days of Grace :
Premium is paid at or before the due date. But for convenience of the policyholders, certain
additional period called days of grace, is allowed to pay, the premium.

The insured can pay the premium within the days of grace and the policy would not lapse up to
the days of grace. However, the policy will lapse if the due premium is not paid even within the
days of grace.

One calendar month but not less than 30 days of grace is allowed for payment of yearly, half-
yearly and quarterly premiums, and fifteen days for payment of monthly premiums. The days of
grace are to be counted excluding the due date of the premium.

When the days of grace expire on a Sunday or a holiday observed by the office of the insurer
where premiums are payable, the premium must be paid on the following working day to keep
the policy in force. The insurer is not responsible for any delay in remittance caused through the
post office or otherwise.

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4. Commencement of Risk :
The letter of acceptance is not a cover note, it only intimates that the risk will commence when
the first premium is offered to and accepted by the insurer. If premium was paid along with the
proposal form, the date of letter of acceptance will be the date of commencement of risk.

After acceptance of risk, policy is issued. The policy contains terms and conditions of the
insurance and is a document which can be used as a proof of insurance.

5. Premium Notice:

In order that the policyholder may not forfeit the benefit of his policy, notice of premiums falling
due will be regularly sent to him except in the case of policies under which the mode of
payments of premium is monthly where no such notice is required, the insurer is not bound to
give any such notice and the want of it cannot be admitted as an excuse for not paying the due
premium in time.

6. Suicide:
It is a public policy that nobody should gain from his own wrong acts such as suicide. It is
possible that one may have suicidal thoughts that impel him take insurance policy to benefit his
family. It is against public policy. However, in India suicide is not a crime. Therefore, an insurer
may impose a restriction that if death occurs due to suicide during a year or so, nothing is
payable. It is done for the reason that suicidal thoughts are momentary and life assured is likely
to change his mind in all probabilities. In India, presently a period of 12 months is fixed from the
date of the policy or effective date of risk whicherer is later; whereafter claim is payable in the
event of suicide.

7. Double Accident benefit:

Accident benefit is provided to the assured if he really met with any accident, leading to death or
permanent disability. In the case of death due to accident, double of the sum assured will become
payable to the legal representative. This benefit is given on the condition that the physical injury
from the accident was the cause of death. The claim is payable after 90 days from the date of
death. In case of disability, the benefit can be availed on the condition that the accident had
occurred when the policy was in force and permanent disability was caused by accident.
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8. Disability benefit:

This benefit is offered to all lives assured under all policies except pure endowment, term
assurance, children’s deferred endowment Deferred and Retirement Annuities. Life assured
disabled by accident and unable to earn his livelihood would benefit under this condition of the
policy, if the maturity on the policy falls due after the date of disablement. The examples of
disablement are loss of sight of both eyes or amputation of either hands or any other specified
disablement.

9. Forfeiture in certain events:

In case, a premium is not duly paid or in case any condition contained in the policy or in any
endorsement in contravened or in case it is found that any untrue or incorrect statement is
contained in the proposal personal statement, declaration and connected documents or any
material information is withheld, the policy will be void and no benefit is payable and all moneys
received will belong to the insurance company

10. Surrender Value:

When the assured is unable to continue the premium payments on his policy, he can surrender it
to the company and acquire “the cash surrender value”. With this payment, the contract of life
insurance comes to an end and the assured will get the cash value without any liability of further
premium payments. The amount of surrender value will depend upon the class of the policy and
its duration.

Computation of Surrender Value

There are two methods of computation of surrender value as (a) Accumulation method; and (b)
Saving Method.

(a) Accumulation method:

This method considers reserve for policy as the basis for distribution of surrender values. The
reserve is calculated as gross premium. The expenses are also deducted from the premium
received. Thus the reserve would be equal to all the premiums paid and interest earned thereon
minus shares of death claims and of overall expenses of the insurer. Thus:
Surrender value: Full Reserve – Surrender charges
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Surrender charges are those expenses and losses which are incurred on account of a surrender or
lapsation of policy. The surrender charges include (i) initial expenses such as payment of
commission to agents and medical officer, correspondence and stationery; (ii) Adverse final
selection charge; (iii) Adverse mortality selection charge; (iv) Contribution to contingency
reserve and (v) Cost of surrender.
(b) Saving method:
The insurer is responsible for payment of claims whenever they arise. But if a policy is
surrendered the insurer is relieved of is obligation for the payment of the assured sum. He is in a
position to save some amount due to non-payment of claims. Under Saving method, the
surrender value is paid in lieu of the claim amount, This method is scientific and more logical.
The surrender value can be ascertained under this method as given below:
Surrender value: Sum assured + Accumulated value of future expenses + Future Reversionary
bonus (if participating policy) – (Accumulated value of all future premium + Expenses incurred
in processing the surrender value).
With the help of the above formula, the surrender value is calculated at the time of
maturity or death. But it does not mean that the surrender value is paid only at that time. A
provisional amount called minimum surrender allowance is paid at the time of surrender and the
rest of the amount may be paid at the time of maturity or death.
11. Paid up value:

If, instead or surrendering the policy for its cash value and cancelling the contract completely,
the policyholder merely wishes to discontinue the payment of further premiums, the policy is
converted into a paid-up policy for a reduced sum assured. The paid-up value is determined as
given below:

Paid up value = No. of Premiums paid X Sum assured

No. of Premiums payable

The paid up value is payable only on the date of maturity of the original policy i.e., at the expiry
of the full term of the policy or at the death of the assured whichever is earlier. On the death of
the assured, the amount becomes payable to his nominee or to the dependents. All bonuses
accrued upto the date of conversion of the policy into paid-up value will be credited to the
assured if the policy is a with profit policy but future profits are not added to the paid-up value.

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Such facility is particularly useful when the normal maturity date is near and or when the policy
will continue to participate in bonus distribution.

12. Lost Policies

Kindly make a thorough search before concluding that you have lost the policy bond. Look
for the same within your residence, among your investment papers, at your office and even
with your agent to whom you might have entrusted the document for some reason.
It could have been even pledged with LIC/any other financial institution for availing a loan by
you. LIC retains the policy bond when you go in for a loan against the policy. Make sure that
the document you are searching is not one that has already been assigned to LIC, or to another
financial institution. If the policy bond is partially destroyed due to natural causes like, fire,
flood, etc, the remaining portion may be returned as evidence of loss of policy to LIC, while
applying for a duplicate policy.

Whenever a policy is lost or destroyed, the assured should at once intimate the life insurer
with full particulars of the circumstances of loss or destruction and the steps taken to trace the
policy if not destroyed. On a satisfactory evidence of the loss or destruction, the life insurer
will issue a duplicate copy after advertising the fact and will charge the assured the fee for
issuing the duplicate copy, stamp duty and other incidental charges.

13. Alterations:

After the policy is issued, the policyholder in a number of cases finds the terms not suitable to
him and desires to change them. LIC allows certain types of alterations during the lifetime of
the policy. However, no alteration is permitted within one year of the commencement of the
policy with some exceptions. The following alterations are allowed.

 Alteration in class or term.

 Reduction in the Sum Assured
 Alteration in the mode of payment of premiums
 Removal of an extra premium
 Alteration from without profit plan to with profit plan
 Alternation in name
 Correction in policies
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 Settlement option of payment of sum assured by installments

 Grant of accident benefit
 Grant of premium waiver benefit under CDA policies
 Alteration in currency and place of payment of policy monies
 Alteration due to change in age on submission of age proof.

Requirement for Alterations

 An application in writing from the policyholder stating the nature of alteratio0n desired.
Quotation fees or Alteration fee if necessary
 Consideration amount
 Policy for endorsement or cancellation
 Policy preparation and stamp charges if a new policy is to be issued after alteration or
cancellation of the original one.
 Consent of the policyholder agreeing to the terms of alteration.
 Consent of the assignee, if any, if the alteration can be effected by an endorsement. If
the alteration can be effected by issuing new policy in cancellation of the orifinal one
and if the policy is assigned, the policy should be reassigned by the assignee in favour of
the assured before the alteration can be effected.
 Evidence of health, if necessary.

14. Assignment:
An assignment has an effect of directly transferring the rights of the transferor in respect of
the property transferred. Immediately on execution of an assignment of the Policy of life
assurance the assignor forgoes all his rights, title and interest in the Policy to the assignee.
The premium/loan interest notices etc. in such cases will be sent to the assignee. In case the
assignment is made in favor of public bodies, institutions, trust etc., premium notices/receipts
will be addressed to the official who has been designated by the institutions as a person to
receive such notice.

Who can make an assignment?

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A policyholder who has policy on his own life can assign the policy to another person.
However, a person to whom a policy has been assigned can reassign the policy to the
policyholder or assign it to any other person. A nominee cannot make an assignment of the
policy. Similarly, and assignee cannot make a nomination on the policy which is assigned to
him.

What happens to the ownership of the policy upon Assignment?

When a policyholder assigns a policy, he loses all control on the policy. It is no longer
his property, It is now the assignee’s property whether the policyholder is alive or dead, the
assignee alone will get the policy money from the insurance company. If the assignee dies,
then his (assignee’s) legal heirs will be entitled to the policy money.

Can Assignment be changed or cancelled?

An assignment of a life insurance policy once validly executed, cannot be cancelled or

rendered in effectual by the assignor. Scoring of such assignments or super scribing words
like 'cancelled' on such assignment does not annul the assignment. And the only way to cancel
such assignment would be to get it re-assigned by the assignee in favor of the assignor.

What happens if the assignee dies?

If the assignee dies, the assignment does not get cancelled. The legal heirs of the
assignee become entitled to the policy money. Assignment is a legal transfer of all the
interests the policyholder has in the policy to the assignee.

What are the procedures to make an assignment?

Assignment can be made only after issue of the policy bond. The policyholder can
either write out the wording on the policy bond (endorsement) or write it on a separate paper
and get it stamped. (Stamp value is the same, as the stamp required for the policy- Twenty
paise per one thousand sum assured). When assignment is made by an endorsement on the
policy bone, there is no need for stamp because the policy is already stamped.

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Is it necessary to inform the insurer about assignment?

Yes, it is necessary to give information about assignment to the insurance company.

The insurer will register the assignment in its records and from then on recognize the assignee
as the owner of the policy. If someone has made more than one assignment, then the date of
the notice will decide which assignment has priority. In the case of reassignment also, notice
is necessary.

Can a policy be assigned to a minor person?

Assignment can be made in favor of a minor person. But it would be advisable to

appoint a guardian to receive the policy money of it becomes due during the minority of the
assignee.

Who pays premium when a policy is assigned?

When a policy is assigned normally, the assignee should pay the premium because the
policy is now his property. In practice, however, premium is paid by the assignor
(policyholder) himself. When a bank gives a loan and takes the assignment of a policy a
security, it will ask the assignor himself to pay the premium and keep it in force. In the case
of an assignment as a gift, the assignor would like to pay the premium because he has gifted
the policy.

There are two types of assignments:

1. Conditional Assignment whereby the assignor and the assignee may agree that on the
happening of a specified event which does not depend on the will of the assignor, the
assignment will be suspended or revoked wholly or in part.
2. Absolute Assignment whereby all the rights, title and interest which the assignor has in the
policy passes on to the assignee without reversion to the assignor or his estate in any event.

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Re-assignment:

Status of your policy indicates if your policy is in force or has lapsed due to non-payment of
premium. It also provides other important information with respect to your policy, for your
reference.

15. Nomination:

The nominee is statutorily recognized as a payee who can give a valid discharge to the
Corporation for the payment of policy monies.

Nomination will be incorporated in the text of the policy at the time of its issue. After the policy
is prepared and issued and if no Nomination has been incorporated the assured can ordinarily
affect the nomination only by an endorsement on the policy itself. A nomination made in this
manner is required to be notified to the Corporation and registered by it in its records. A
nomination is not required to be stamped.

Who can make a nomination?

A policyholder who has a policy in his own life can make a nomination. A father who has taken
a policy on his child’s life cannot make nomination on that policy.

What happens to the ownership of the policy upon nomination?

When a policyholder makes a nomination, he continues to e the owner of the policy. The
nominee can only collect the policy money from the insurer and that too only if the policy holder
dies before the policy matures. Therefore, if the policyholder lives upto the date of maturity, then
nomination gets automatically cancelled.

It should be made clear that a nominee can only collect the policy money when the policyholder
dies. But all legal heirs have a right to the policy money. So strictly speaking, a nominee who
collects the policy money from the insurer has to share it with all the legal heirs. Take an
example, if a Christian male person dies (this point namely, “Christian male” is mentioned only
because legal heirs are different for different religious communities) and if one of his sons is the
nominee, that son can no doubt collect the policy money from the insurer. But he will have to
share it with his brothers and sisters and his mother who also are the legal heirs

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Can nomination be changed or cancelled?

The policyholder can always cancel a nomination. He can also change the nomination.
He can change it any number of times.

What happens if the nominee dies?

If a nominee dies, the nomination gets automatically cancelled. The policyholder can
make a fresh nomination. That is why it should be noted that a nomination does not confer a
legal right except to collect the policy money in the event of the death of the policyholder before
the date of maturity.

What is the procedure to make nomination?

Nomination can be made either at the time of taking the policy or later. If the
policyholder wishes to make a nomination at the time of taking the policy, he can indicate his
desire in the proposal form. When the policy is issued, it will contain the fact of the nomination.

Nomination can also be done at any time after taking the policy. In that case the policyholder has
to write out the wording of nomination on the policy bond, sign it and get it witnessed.

Is it necessary to inform the insurer about nomination?

In the case of nomination also, it is necessary to inform the insurer when a policyholder
makes a nomination after a policy is issued or if he changes the nomination or cancels it. Such
information is called notice. On receiving the notice, the insurer registers the nomination in is
records so that if and when the policyholder dies, it will pay the policy money to the nominee.

Can a policy be nominated to a minor person?

Nomination can be made in favour of a minor person. But it is advisable in such a case to
appoint a major person as the appoint a major person as the appointee. If the policyholder dies
when the nominee is still a minor then the appointee will receive the policy amount on behalf of
the minor nominee.

What are the circumstances in which a nomination gets cancelled?

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A nomination gets cancelled under the following circumstances:

 If the policyholder cancels it

 If the policyholder changes it
 If the nominee dies
 If the policy is assigned
 If the policyholder makes a will and mentions in the will that his policy should go to
someone else.

Who pays premium when a policy is nominated?

When a policy is nominated, the policyholder himself continues to pay the premium.

BASIS FOR
COMPARISO NOMINATION ASSIGNMENT
N

Meaning Nomination implies appointment Assignment, alludes to, ceding of

of a person, by the policy holder to right, title and interest of the
receive the policy benefits, on the policy to another person.
event of death.
Attestation Attestation is not required in Attestation is required in
nomination. assignment.
Consideration It does not involve consideration. It may involve consideration.
Right to sue Nominee has no right to sue under Assignee has the right to sue
the policy. under policy.
Purpose To help beneficiary recover the To transfer all rights and interest
policy amount when it becomes in favor of the assignee.
due for payment.
Revocation Can be changed or revoked several Can be revoked one or two times
times. during the term of policy.
Favor Generally, made in favor of Can be made in favor of
immediate relatives. immediate relatives or to external
party.

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16. Revival of lapsed policies:

When the premium is not paid within the days of grace, the policy lapses it may, however, be
revived during the life time of the assured under the following revival schemes:
(I) Ordinary Revival Scheme: Under this scheme, the life assured is required to pay all the
arrears of unpaid premiums with interest. The evidence of good health wherever necessary is
also required to be submitted.
(II)Special Revival Scheme: In case the policyholder is not in a position to pay all the arrears of
premium with interest, he can opt this scheme for reviving his policy. According to this
scheme, the date of commencement will be shifted to a date prior to the date of revival.
Revival under this scheme is allowed if the following conditions are fulfilled:
 The policy should not have acquired any surrender value.
 Revival is sought after six months but within three years from the date of lapse.
 Such revival was not allowed under the same policy preciously.
 Evidence of good health to the satisfaction of the insurer is required to be submitted
 The revival will be effected through an endorsement on the policy document stating the
new commencement and date of maturity. The plan and period of insurance will remain
the same as it was in the original policy.
 Revised policy conditions are to be applied to the new policy
(III) Installment Revival Scheme: the revival by installment scheme is available to those
who are unable to pay the arrears of premium in one lump sum on revival or who are unable
to avail of special revival scheme. In this scheme, arrears of premium with interest are
allowed to be paid by installments spread over for two years or more along with normal
premium installment. Revival under this scheme is permitted if the following conditions are
fulfilled:
 The arrears of premium should be for more than one year.
 Six monthly premiums must be paid immediately on the date of revival.
 The balance of arrears should be paid in two years thereafter along with the current
premiums due in future.
 Normal paid up and surrender value will be allowed if policyholder pays in one lump
sum.

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(IV)Loan-cum-Revival Scheme: Under this scheme, a policyholder can obtain a loan to cover
the outstanding premium in arrears. The arrears of premium in calculated along with interest.
The loan is calculated treating all the premiums in arrears as paid and the amount of loan so
required is called for. If the loan available under the policy is more than the arrears of premium,
the same is paid to the assured. The assured has to submit the evidence of good health to the
satisfaction of the insurer. He is also required to get the loan papers duly completed.

17. Loan on policies:

The insurer grants loans on the security of life insurance policies to the persons entitled for the
same, under the contract. Loans are granted upto 90% of the surrender value (inclusive of cash
value of bonus) in case of policies which are in force for full sum assured and 85% of the
surrender value (inclusive of cash value of bonus) in case of policies which are paid-up-being in
force for reduced sum assured. In case, policies are due to mature within 3 years, a large
percentage may be granted. The interest is charged on this loan and rate of interest varies time to
time.
The policyholder shall have to follow the procedure given below to obtain loan against a policy:
 An application in the prescribed form to the divisional office
 Make an absolute assignment of the policy in favour of insurer
 Sign a letter regarding the assignment, and
 If necessary, pay stamp fee for endorsement of loan.
Claim concession: If, atleast three years premiums have been paid, the insured at any time has
not paid further premium on a policy and happens to die within six months from the due date of
the first unpaid premium, the beneficiary will get the policy money after deduction of unpaid
premium to the date of death with interest by the insurer. If after atleast five years premiums
have been paid, he dies within twelve months from the due date of the first unpaid premium the
policy money less the unpaid premium to the date of his death with interest will be payable by
the insurer.
Bonus Notice: The insurer has to issue notice to the insured about bonus earned by the policy.
This notice is a source of information to the insured by which he comes to know how much he

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has deposited and what is the amount of bonus his policy has accumulated. This helps him to
have an idea about the status of his policy and he can keep in mind the health status of his policy.

LIC: ROLES & FUNCTIONS

The LIC of India is the largest life insurance company in India. It is fully owned by the Govt. of
India. It was established under Life Insurance Corporation Act 1956, on 1 st Sep. 1956. Thus the
business with all the assets and liabilities of 245 private life insures was taken over by the
Corporation on 1st Sep. 1956.

Headquartered in Mumbai, which is considered the financial capital of India, the LIC of
India currently has 7 zonal offices and 100 divisional offices located in different parts of India,
atleast 2,048 branches located in different cities and towns of India and has a network of around
one million agents for soliciting life insurance business from the public.

At the industry level, along with the Government and GIC of India, it has helped to establish the
national Insurance Academy. It presently transacts individual life insurance businesses, group
insurance businesses, social security schemes and pensions, grants housing loans through its
subsidiary and markets saving and investment products through its mutual fund. It pays-off-
about Rs. 6,000 crores annually 5 to 5.6 million policyholders.

Objectives of the Life Insurance Corporation of India:

 The primary objective of LIC of India is to spread the importance of life insurance widely
in the rural areas and people belonging to socially and economically backward classes.
The company functions with a view of providing such individuals with financial cover
against death at a reasonable cost.
 The company strives hard to meet various life insurance needs of the community
depending on the changing social and economic environment.
 The main focus of the Life Insurance Corporation of India is to safeguard the interests of
the life insured’s and act as a trustee in their individual and collective capacities.
 Maximize the ability of savings by providing a diverse range of life insurance products to
choose from.

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 LIC of India fully encourages the participation and involvement of its employees and LIC
agents so they work towards attaining the objectives of the company.
Functions of LIC:

 To carry on capital redemption business, annuity certain business or reinsurance business in

so far as such reinsurance business relating to life insurance business;
 To invest the funds of the Corporation in such manner as the Corporation may think fit and to
take all such steps as may be necessary or expedient for the protection or realisation of any
investment; including the taking over of and administering any property offered as security
for the investment until a suitable opportunity arises for its disposal;
 To acquire, hold and dispose of any property for the purpose of its business;
 To transfer the whole or any part of the life insurance business carried on outside India to any
other person or persons, if in the interest of the Corporation it is expedient so to do;
 To advance or lend money upon the security of any movable or immovable property or
otherwise;
 To borrow or raise any money in such manner and upon such security as the Corporation
may think fit;
 To carry on either by itself or through any subsidiary any other business in any case where
such other business was being carried on by a subsidiary of an insurer whose controlled
business has been transferred to and vested in the Corporation by this act;
 To carry on any other business which may seem to the Corporation to be capable of being
conveniently carried on in connection with its business and calculated directly or indirectly to
render profitable the business of the Corporation; and
 To do all such things as may be incidental or conducive to the proper exercise of any of the
powers of the Corporation.
 In the discharge of any of its functions the Corporation shall act so far as may be on business
principles.

Role of LIC in National Economy

The role of Life Insurance Corporation involves all the activities relate to national economy,
individual and society. He following are the important areas identified:

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1. Investment
2. Under writing
3. Disbursing loans
4. Subscribing to Debentures and Bonds
5. Socially oriented
6. Shareholding
7. Control
8. Mutual Fund
9. Boosting Industrial Growth
10. Claims and Settlement
(1) Investment: life Insurance Corporation is acting as capital market intermediaries. It
provide long-term investments in Government Securities, Public Sector, Co-operative
Sector, Private Sector and Joint-Sector. On the Stock Exchange it is considered a very
powerful security holder
(2) Underwriting: LIC has been the largest underwriter of capital issues in the Indian
Capital Market till the year 1978 after which it has reduced its activities infavour of
socially oriented projects. During the year 1983 onwards. LIC underwrites firm and
prefers large and established companies. It also prefers ‘further’ issues. As an underwriter
it influences the capital market considerably and is also able to stabilize the market
during the downswings or depression periods.
(3) Disbursing Loans: Since 1970 LIC has disbursing ‘loan’ for industrial development.
One of the major avenues of investment in every year constituted financing through
loans. It has given loans for generation and transmission of electricity for agriculture and
industrial use, housing schemes, piped water supply schemes and development of road
and transport. Out of the total disbursement of all financial institutions to the industry
LIC’s contribution comes to around 8%.
(4) Subscribing to Debentures and Bonds: Financial Institutions and corporate enterprises
requiring burgeoning funds to meet their expanding needs find it easier and cheaper to
raise funds from the market by issuing commercial papers. LIC also subscribes to
debentures and bonds of various financial institutions and development banks like IDBI
and IFCI. In 1983, LIC Subscribed to the Debenture of ICICI of the value of Rs. 8 crores.

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(5) Socially Oriented: A basic feature of financial liberalization and many innovations are
the trend towards social orientation. LIC has resorted to socially oriented schemes has big
way since 1978. This has brought down its activities in the capital market. The rationale
behind this change has been to go in for developmental work. Own Your house (OYH)
Schemes have been given priority. Apart from these schemes, loans for sewerage, road
and transport and electricity generation have also been given priority in the recent years.
(6) Shareholding: By virtue of its shareholding LIC has been recognized amongst the top
ten shareholders in one of every three companies listed in the stock exchange on which it
has a sharehold in companies. While LIC has invested in large blocks of equities and in
later years in debenture holdings, it had kept away and did not interfere in the decisions
of the management in the past.
(7) Control: In the recent years, LIC has influenced the management to take proper
decisions and to tone up the quality of working in the companies financed by it. This is
intended to promote confidence in the minds of the public and to exercise control in the
corporate sector which often has a very small shareholding. In 1984 LIC dominated
Indian industries scene. These changes in the direction of the LIC are bound to exert
some pressure on the industry and change the complexion of the Indian industrial
scenario.
(8) Mutual Fund: It has set up in 1989, a mutual Fund for operating various schemes for
mobilization of savings from the public particularly from the rural and urban areas and
channel these funds to the capital market. The LIC has considerable expertise in
investment management by virtue of its earlier operations of funds.
(9) Boosting Industrial Growth: The corporation helps boost the industrial growth in the
country. It helps small scale and medium scale industries by granting loans for setting up
co-operative industrial estates and amount of Rs. 45 crores has so far been advanced to
industrial estates and industrial development corporations. The corporation also makes
investment in the corporate sector in the form of long, medium and short-term loans to
companies/corporations. The total investment made by way of loans up to year 2001 was
Rs. 2812 crores and by way of subscription to shares/debentures was Rs. 35048 crores.
All this makes a distinct contribution towards growth in industralisation and generation of
skilled and unskilled employment opportunities in the country.

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(10) Claims and Settlement: The settlement of claims constitutes one of the
important functions of the corporation. Indeed, the payment of claims may be regarded as
the primary services of insurance to the public. Proper settlement of claims will be
provided on the basis of sound knowledge of law, principles and practices governing,
insurance contracts, terms and conditions of standard policies etc.

CURRENT STATUS

Over its existence of around 50 years, LIC of India, which commanded a monopoly soliciting
and selling life insurance in India, created huge surpluses and contributed around 7% of India’s
GDP in 2006.

The Corporation which started its business with around 300 offices, 56.86 lakh policies and a
corpus of INR 45.9 crores, has grown to 2,048 offices serving around 8 crores policies and a
corpus of over INR. 3,40,000 crores.

All divisional offices of LIC of India are interconnected with Metro Area Network and LIC has
tied up with some banks to offer online premium collection in selected cities. Also LIC has Info
Kiosks, Interactive Voice Response System (IVRS) and Info centres in major cities like Mumbai,
Delhi, Chennai, Bangalore, Hyderabad, Ahmedabad and Pune. The LIC also operates in 12 other
countries primarily to cater to the needs of Non-Resident Indians.

LIC life fund, a yardstick to measure an insurance company’s strength, has grown from Rs.
410.40 crores in 1956 to Rs. 4,63,147 crores in 2006 with its assets of Rs. 5,52,447 crores, LIC
has won the distinction of being the largest financial institution in India a Asset base.

The LIC is the largest single investor in India and Second largest investor amongst the insurers in
Asia. With total investment of Rs. 4,65,100 crores, LIC has been rendering resources for
economic development of the country. The Corporation is the largest single financial
institutional investor in the equity market with investment of over Rs. 46,000 crores in equity
(book value). The LIC’s investments of around Rs. 59,000 crores in infrastructural projects speak
volumes about its contribution towards nation building activities.

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LIC has defined the world standard in the field of claim settlement. During the year 2005-06,
LIC settled 1.18 crores claims for Rs. 28.512 crores, which incidentally is more than the number
of policies in force taken together of all its peer companies in India. On an average LIC settles
44,500 claims per working day or to say, 2 claims per second. Inspite of handling such a large
volume, 97% of the maturity claims are settled on or before due date and in case of death claims,
93% of the death claims are paid within 20 days of intimation. Total outstanding ratio of claims
as on 31.3.2006 was 0.16%.

Registering a growth rate of 182.26% in premium income, LIC has earned a market share of
77.51%, a gain of over 3.5% by the end of July 2006. As on 15 th Aug. 2006 corporation is new
premium stands at Rs. 10,381.57 crores showing a growth of 191%. With a marketing strength of
10.44 lakh individual agents. 27 banks, 103 brokers and 660 corporate agents, corporate agents,
corporation is poised to continue its onward march in new business.

LIC’s performance in Group Insurance Business amply reaffirms the trust reposed even by the
corporate Houses in LIC’s effective and efficient management of large superannuation funds.
The Group Insurance portfolio has collected a new premium of Rs. 1819.44 crores with a growth
rate of 85% and under social security schemes, the new premium is Rs. 28.00 crore with growth
rate of 74% as on 15th Aug. 2006. Under society security schemes, LIC has so far covered 172
lakh lives while the growth rate on number of new lives is 682%. With effect from 15 th Aug.
2006, the insurance cover under LIC’s Janashree Bima Yojana has been increased to Rs. 30,000
in case of natural death, Rs. 37,500 for permanent disability and Rs. 75,000 in case of accidental
death.

In keeping with the times, LIC has diversified into other areas like mutual fund and housing
finance to function as a financial super market for its customers.

With the change in the India’s economic philosophy from the early 1990’s and subsequent
relaxation of state control over several sectors of the economy, the monopolistic position of the
LIC of India was diluted and it has had to compete with a number of other corporate entities,
Indian as well as transnational life insurance brands.

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UNIT V
Nature of marine insurance contract – Marine policies – Conditions of marine losses –
Payment of claims. Nature and use of fire insurance – contract – Kinds of polices – Rate
fixing in fire insurance – Payment of claim – Reinsurance. Emerging trends in insurance.

Introduction
A marine insurance is a type of insurance policy that provides coverage against any
damage/loss caused to cargo vessels, ships, terminals, etc in which the goods are transported
from one point of origin from another. Marine insurance coverage includes loss or damage
caused to the shipment/cargo/ship while is grounded and also from untoward perils like, sinking,
collision, burning, weather conditions, navigation errors, thefts, jettison, improper stowage by
the carrier, hook damages, strikes, wars, and natural perils.
Definition
Section 2(13)A of the Insurance Act 1938 defines marine insurance as follows:

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"Marine Insurance Business" means the business of effecting contracts of insurance of

insurance upon vessels of any description, including cargoes, freights and other interests which
may be legally insured in or in relation to such vessels, cargoes and freights, goods, wares,
merchandise and property of whatever description insured for any transit by land or water or
both, and whether or not including warehouse risks or similar risks in addition or as incidental to
such transit and includes any other risks customarily included among the risks insured against in
marine insurance policies.
Classification of the Marine Insurance
(1) Hull Insurance: Insurance of vessel and its equipments are included under hull insurance.
There are a number of classification of vessels such as ocean steamers, sailing vessels, builders,
risks, fleet policies and so on.
(2) Cargo Insurance: It may be written under a single risk policy or floating policies. The cargo
may be of any description, for example, wares, merchandise, property, goods and so on.
(3) Freight Insurance: Freight is to be payable for the carriage or if the vessel is chartered, the
money to be paid for the use of the vessel. The carrier is unable to earn freight if the goods or
property (called cargoes) are not safely transported.
(4) Liability Insurance: The marine insurance policy may include liability hazards such as
collision or running down. Insurance can also be taken for the expenses involved in non-
compliance of rules and regulations without any intention to deceive. It should be clear here that
marine perils insurance covers not only the "ocean but also the inland perils". The perils to be
included in the policy are clearly defined and the insurer will be liable only for the insured perils.
Elements of Marine Insurance Contract / Fundamental Principles of Marine Insurance
1.Features of General Contract
2.Insurable Interest
3.utmost Good Faith
4.Doctrine of Indemnity
5.Subrogation
6.Warranties
7.Proximate cause
8.Assignment and nomination of the policy

1. Features of General Contract

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(A) Proposal
The broker will prepare a slip upon receipt of instructions to insure from ship owner, merchant or
other proposers. proposal forms, so common in other branches of insurances, are unknown in the
marine insurance and only the 'slip' so called 'the original slip' is used for the proposal.
(B) Acceptance
The original slip is presented to the LIoyd's Underwriters or other insurers or to the Lead of the
insures, who initial the slip and the proposal is formally accepted.
(C) Consideration
The premium is determined on assessment of the proposal and is paid at that time of the contract.
the premium is called consideration to the contract.
(D) issue of Policy
Having effected the insurance, the broker will now send his client a cover note advising the
terms and conditions, on which the insurance has been placed. The policy is prepared, stamped
and signed without delay and it will be the legal evidence of the contract.

2.Insurable Interest

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.

3.Utmost Good Faith

The doctrine of caveat emptor applies to commercial contracts, but insurance contracts are based
upon the legal principle of uberrimae fides (utmost goof faith). If this is not observed by either of
the parties, the contract can be avoided by the other party. The duty of the utmost good faith
applies also to the insurer. He may not urge the proposer to effect an insurance which he knows
is not legal or has run off safely. But the duty of disclosure of material facts rests highly on the
insured because he is aware of the material common in other branches of insurance are not used
in the marine insurance.
In the following circumstances, the doctrine of good faith may not be adhered to:
1. Facts of common knowledge

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2.Facts which are known or should be known to the insurer.

3.Facts which are not required by the insurers.
4.facts which the insurer ought reasonably to have inferred from the details given to him.
5.Facts of public knowledge.

4.Doctrine Of Indemnity

The contract of marine insurance is of indemnity. Under no circumstances an insured is allowed

to make a profit out of a claim. in the absence of the principle of indemnity, it was possible to
make a profit out of a claim. In the absence of the principle of indemnity, it was possible to make
a profit. the insurer agrees to indemnify the assured only in the manner and only to the extent
agreed upon. marine insurance fails to provide complete indemnity due to large and varied nature
of the marine voyage.
There are two exceptions of the doctrine of indemnity in marine insurance:
(1) Profits Allowed: Actually the doctrine says that the market price of the loss should be
indemnified and no profit should be permitted, but in marine insurance a certain profit margin is
also permitted.
(2)Insured Value: The doctrine of indemnity is based on the insurable value where as the marine
insurance is mostly based on insured value. The purpose of the valuation is to predetermine the
worth of the property insured.

5.Doctrine of Subrogation

The aim of doctrine of subrogation is that the insured should not get more than the actual loss or
damage. After payment of the loss, the insurer gets the right to receive compensation or any sum
from the third party from whom the assured is legally liable to get the amount of compensation.
The main characteristics of subrogation are as follows:
1. The insurer subrogates all the remedies, rights and liabilities of the insured after payment of
the compensation.
2. The insurer has right to pay the amount of loss after reducing the sum received by the insured
from the third party.
3.After indemnification, the insurer gets all the rights of the insured on the third parties, but
insurer cannot file suit in his own name.

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6.Warranties

A warranty is that by which the assured undertakes that some particular thing shall or shall not
be done, or that some conditions shall be fulfilled or whereby he affirms or negatives the
existence of a particular state of facts. Warranties are the statement according to which insured
person promises to do or not to do a particular thing or to fulfill or not to fulfill a certain
condition. It is not merely a condition but a statement of fact. Warranties are more vigorously
insisted upon than the conditions because the contract comes to an end if a warranty is broken
whether the warranty was material or not. In case of conditions or representation the contract
comes to end only when these were material or important. Warranties are of two types:
(1) Express Warranties, and (2) Implied Warranties
(1) Express Warranties: Express warranties are those warranties which are expressly included or
incorporated in the policy by reference.
(2) Implied Warranties: These are not mentioned in the policy at all but are tacitly understood by
the parties to the contract and are as fully binding as express warranties.
Warranties can also classified as (1) Affirmative, and (2) Promissory. Affirmative warranty is the
promise which insured gives to exist or not to exist certain facts. Promissory warranty is the
promise in which insured promises that he will do or not do a certain thing up to the period of
policy.

7.Proximate Cause

The cause proxima of a loss is the cause of the loss, proximate to the loss, not necessarily in
time, but in efficiency. While remote causes may be disregarded in determining the cause of a
loss, the doctrine must be interpreted with good sense. So as to uphold and not defeat the
intention of the parties to the contract. Thus the proximate cause is the actual cause of the loss.
There must be direct and non-intervening cause. The insurer will be liable for any loss
proximately caused by peril insured against.

8.Assignment

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A marine policy is assignable unless it contains terms expressly prohibiting assignment. It may
be assigned either before or after loss. A marine policy may be assigned by endorsement thereon
or on other customary manner.

Marine Insurance Policies

The marine insurance policy is issued only when the contract has been finalized and it
would be legal documents of evidence of the contract. The standard policy generally contains the
following information:
1. Name of insured or his agent
2.Subject matter insured
3.Risks insured against
4.Name of vessel and officers
5.Descriptiom of voyage or period of insurance
6.Amount and term of insurance
7.Premium
These are various clauses which are suitably inserted according to the nature and type of policies.
Clauses attached to the policy would override the printed wording in the policy.

Classes of Policies/Types of Marine Insurance Policies

Different classes of policies are used in marine insurance.

 Floating Policy
 Voyage Policy
 Time Policy
 Mixed Policy
 Named Policy
 Port Risk Policy
 Single Vessel Policy & Fleet Policy
 Valued Policy
 Unvalued Policy
 Block Policy
 Wager/PPI Policies
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 Composite Policy
 Blanket Policy
1. Floating Policy:
When a person ships goods regularly in a particular geographical area, he will have to purchase a
marine policy every time. It involves a lot of time and formalities. He purchases a policy for a
lump sum amount without mentioning the value of goods and name of the ship etc. When he
sends the goods, a declaration is made about the particulars of goods and the name of the ship.
The insurer will make an entry in the policy and the amount of policy will be reduced to that
extent. The policy is called an open or a floating policy. The declaration by the insured is a
must. When the total amount of policy is reduced, it is called ‘fully declared’ or ‘run off. The
underwriter will inform the insured who will take another policy. The premium is called on the
basis of declarations made.

2. Voyage Policy:

It covers the risk from the port of departure up to the port of destination. The policy ends when
the ship reaches the port of arrival. This type of policy is purchased generally for cargo. The risk
coverage starts when the ship leaves the port of departure

3.Time policy

Time policy in marine insurance is generally issued for a year’s period. One can issue for more than a year
or they may extend to complete a specific voyage. But it is normally for a fixed period. Also under marine
insurance in India, time policy can be issued only once a year.

4. Mixed Policy:

This policy is a mixture of time and voyage policies. A ship may be insured during a particular
voyage for a period, e.g., a ship may be insured between Bombay and London for one year.
These policies are issued to ships operating on a particular route.

5.Named policy

Named policy is one of the most popular policies in marine insurance policy. The name of the ship is
mentioned in the insurance document, stating the policy issued is in the name of the ship.
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6.Port Risk policy

It is a policy taken to ensure the safety of the ship when it is stationed in a port.

7. Single Vessel Policy & Fleet Policy:

A policy may be taken up for one ship or for the whole fleet. If it is taken for each ship, it is
called a single vessel policy. When a company purchases one policy for all its ships, it is called a
fleet policy. The insured has an advantage of covering even old ships at an average rate of
premium. This policy is generally a time policy.

8. Valued Policy:

Under this policy the value of the policy is decided at the time of contract. The value is written
on the face of the policy. In case of loss, the agreed amount will be paid. There is no dispute later
on for determining the value of compensation. The value of goods includes cost, freight,
insurance charges, some margin of profit and other incidental expenses. The ships are insured in
this manner.

9. Unvalued Policy:

When the value of insurance policy is not decided at the time of taking up a policy, it is called
unvalued policy. The amount of loss is ascertained when a loss occurs. At the time of loss or
damage the value of the subject-matter is determined. In finding out the value of goods, freight,
insurance charges and some margin of profit is allowed to the policy in common use.

10. Block Policy:

Sometimes a policy is issued to cover both land and sea risks. If the goods are sent by rail or by
truck to the departure, then it will involve risk on land also. One single policy can be issued to
cover risks from the point of dispatch to the point of ultimate arrival. This policy is called a
Block Policy.

11. Wager Policy/PPI Policies:

This is a policy held by a person who does not have any insurable interest in the subject insured.
He simply bets or gambles with the underwriter. The policy is not enforced by law. But still
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underwriters claim under this policy. The wager policy is also called ‘Honour Policy’ or
‘Policies Proof of Interest’ (P.P.I.).

12. Composite Policy:

A policy may be undertaken by more than one underwriter. The obligation of each underwriter is
distinctly fixed. This is called a composite policy.

13. Blanket Policy

The policy is taken to cover losses within the particular time and place. The policy is taken for a
certain amount and premium is paid on the whole of it in the beginning of the policy and is
readjusted at the end of the policy according to the actual amount at risk. On the other hand, if
the amount of shipments are greater than the insured sum, additional premium is charged over
the excess protection.

Coverage under various policies:

The Maritime insurance coverage provided by marine insurance can be understood by going through the
risks handled by the insurance policies loaded with various marine insurance clauses:

 Institute Cargo Clause C provides basic coverage and includes a restricted list of risk covers. It
covers the shipment against events such as fire, discharge of cargo in case of distress, explosion,
accidents like sinking, capsizing, derailment, collision, etc.
 Institute Cargo clause B offers an additional layer of protection. Not only does it include all the
risk covers provided under Clause C, but it also covers the shipment against events such as
earthquake, volcanic eruption, and damage due to rainwater, seawater, river water, etc., and loss to
package overboard or during loading and unloading.
 Institute Cargo Clause A provides maximum coverage as it covers all risk of loss or damage to the
goods. Apart from the risks covered under Clauses B and C, it also covers losses due to breakage,
chipping, denting, bruising, theft, non-delivery, all water damage, etc.
 Risks such as wars, strikes, riots, and civil commotions are not covered under the institute cargo
clauses. However, the insurer may provide this cover on payment of additional marine insurance
premium.

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 So in terms & conditions of marine insurance coverage, these three types of marine insurance
clauses: Institute Cargo Clauses A, B, and C. Clause A provides maximum coverage, Clause C
provides basic risk coverage.

Payment of Claim

When the policy has been issued the risk for the peril insured against is covered. The contingency against
which protection is given or not materialized when the loss insured against actually occurs, the insured has
got to make a claim on the insurer for indemnification of loss. If loss does not occur, no payment would be
made to the insured.

Evidence
Before admitting a claim, relevant evidence in connection with the policy is required. In marine insurance
the policy is generally issued on mutual understanding and good faith of both the parties. But, at the time of
claim, the insurer should satisfy himself on the information furnished by the insured. Value of subject
matter, nature of the subject matter, warranties, insurable interest, etc are some of the matters to be
considered at the time when the claim arises. For these purposes, the production of certain documents
becomes necessary.

Types of Marine Losses

If the loss takes place on account of any of the perils insured against with the insurer, the insurer
will be liable for it and shall have to make good the losses to the assured. If the peril is insured,
the insurer will indemnify the assured, otherwise not. The doctrine of causa-proxima is to be
applied while calculating the amount of loss. It means for payment of losses, the real or
proximate cause is to be taken into account. If the proximate cause is insured, the insurer will
pay, otherwise not. Marine losses can be divided into two main parts containing several subparts;

A. Total loss;

1. Actual total loss

2. Contractive total loss

B. Partial loss;

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1. Particular average losses

2. General average losses
3. Particular charges
4. Salvage charges

These classifications are described in details below;

Total loss

There is an actual total loss where the subject matter insured is destroyed or so damaged as to
cease to be a thing of the kind insured or where the assured is irretrievably deprived thereof.
Losses are deemed to be total or complete when the subject- matter is fully destroyed or lost or
ceases to be a thing of its kind. It should be distinguished from a partial loss where only part of
the property insured is lost or destroyed. In case of total loss, the insured stands to lose to the
extent of the value of the property provided the policy amount was to that limit.

Actual total loss

The actual total loss is a material and physical loss of the subject-matter insured. Where the
subject- matter insured is destroyed or so damaged as to cease to be a thing of the kind insured,
or where the insured is irretrievably deprived thereof, there is an actual total loss. When a vessel
is foundered or when merchandise is so damaged as to be valueless or when the ship is missing it
will be an actual total loss.

The actual total loss occurs in the following cases:

1. The subject-matter is destroyed, e.g., a ship is entirely destroyed by fire.

2. The subject-matter is so damaged as to cease to be a thing of the kind insured. Here, the
subject- matter is not totally destroyed but damaged to such an extent as the result of the
mishap; it is no longer of the same species as originally insured. The examples of such losses
are foodstuff badly damaged by sea water became unfit for human consumption, hides
became valueless as hides due to the admission of water. These damaged foodstuffs or hides
may be used as manure. Since the characters of the subject-matters are changed and have lost
their shapes, they are all actual total loss.

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3. The insured is irretrievably deprived of the ownership of goods even they are in physical
existence as in the case of capture by the enemy, stealth by a thief or fraudulent disposal by
the captain or crew.
4. The subject-matter is lost. For example, where a ship is missing for a very long time and no
news of her is received after the lapse of a reasonable time. An actual total loss is presumed
unless there is some other proof to show against it.

In case of actual total loss, notice of abandonment of property need not be given. In such
total losses, the insurer is entitled to all rights and remedies in respect of damaged properties.
In no case, amount over the insured value or insurable value is recoverable in a total loss
form the insurers.

If the property is under-insured, the insured can recover only up to the amount of insurance.
If it is over insured he is not over-benefited but only the actual loss will be indemnified.
Where the subject-matter had ceased to be of the kind insured, the assured will be given the
full amount of total loss provided there was insurance up to that amount, and the insurer will
subrogate all rights and remedies in respect of the property. Any amount realized by the sale
of the material will go to the insurer.

Constructive total loss

Where the subject-matter is not actually lost in the above manner but is reasonably abandoned
when its actual total joss is unavoidable or when it cannot be preserved from total loss without
involving expenditure which would exceed the value of the subject-matter.

For example, The cost of repair and replacement was estimated to be $50,000, whereas the ship
was estimated to be $40,000, the ship may be abandoned and will be taken as a constructive total
loss. But if the value of the ship was more than $50,000 it would not be a constructive total loss.
Here it is assumed that retention of the subject-matter would involve financial loss to the insured.

The constructive total loss will be where;

1. The subject-matter insured is reasonably abandoned on account of its actual total loss
appearing to be unavoidable;

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2. The subject-matter could not be preserved from actual total loss without an expenditure
which would exceed its repaired and recovered value.

The insured is not compelled to abandon his interest, where the goods are abandoned, the
insurer will have to pay the full insured value.

Where awe is a constructive total loss, the assured may either treat the loss as a partial loss or
abandon the subject-matter insured to the insurer and treat the loss as if it was an actual total
loss.

Difference between actual and constructive total loss

The actual total loss is related with the physical impossibility and the constructive total loss is
related with the commercial impossibility.

For example, If the hides are so damaged that it is impossible to prevent the hides from the
destruction and it may become a mass of putrefied matter, die case is of an actual total loss. But
if it was possible to restore the hides to their original condition, though die cost of so doing
would exceed their value at the destination, the damaged hides can be claimed as constructive
total loss because the completion of the adventure has become commercially impossible.

Salvage loss

Where actual total loss occurred, and die subject-matter is so damaged as to cease to be a thing
of the kind insured or when they have been sold before reaching the destination, there is a
constructive total loss. The usual form of settlement is that the net sale proceeds will be paid to
the assured. The net sale proceeds are calculated by deducting expenses of the sale from the
amount realized by die sale. The insured will recover from the insurer the total loss less the net
amount of sale. This amount received from the insurer is called a ‘salvage loss’.

Partial loss

Any loss other than a total loss is a partial loss. The partial loss is there where only part of the
property insured is lost or destroyed or damaged partial losses, in contradiction from total losses,
include;

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1. Particular average losses, i.e., damage, or total loss of a part,

2. General average losses (general average) le., the sacrifice expenditure, etc., done for the
common safety of subject-matter insured,
3. Particular or special charges, i.e., expenses incurred in special circumstances, and
4. Salvage charges.

Particular average loss

The particular average loss is ‘a partial loss’ of the subject-matter insured caused by a peril
insured and is not a general average loss. The general average loss or expense is voluntarily done
for the common safety of all the parties insured.

But, the particular average loss is fortuitous or accidental. It cannot be partially shifted to others
but will be borne by die persons directly affected. The particular average loss must fulfill the
following conditions:

1. The particular average loss is a partial loss or damage to any particular interest caused to (hat
interest only by a peril insured against.
2. The loss should be accidental and not intentional.
3. The loss should be of the particular subject-matter only.
4. It should be the loss of a part of die subject-matter or damage thereto or both. The
distinguishing feature in this matter is that where the properties insured are all of the same
description, kind and quality and they are valued as a whole in the policy, the total loss of a
part of this whole is a particular loss, but where the properties insured are not all of the same
description, kind and quality and they are separately valued in the policy, the loss of an
apportionable part of the interest is a total loss.

In case of total loss of a part of recoverable either as a total loss or as a particular average
loss, the basis of the settlement will be on the total loss of the whole lot or the insurer will be
liable to pay in proportion according to the insured or insurable value of the whole interest.

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The particular average on cargo

The particular average loss may be either the damage or depreciation of a particular interest or a
total loss of its part. If the property is insured under one value for the whole and is all the same
kind, quality or description, a total loss of part will be recovered as a particular average loss.

In the case where goods are delivered in a damaged condition or where the value is depreciated,
the resulting particular average loss will be adjusted upon the basis of comparison between the
gross sound value and damaged value.

The process of valuation is as follows:

1. The gross sound value of the goods damaged is found out. This is the value for which the
goods would have been sold if the goods had reached the port of destination in sound
condition.
2. After calculating the above value, the gross damaged value of the goods damaged or
depreciated is found out on the basis of market price at that time.
3. Deduct the gross damaged value from the gross sound value. The difference is the measure of
the actual damage or depreciation.
4. The ratio of the damage or depreciation is calculated by dividing the amount of damage or
depreciation by the gross sound value.
5. Apply the above ratio to the value (insured or insurable value as the case may be) of the
damaged or depreciated goods which will give the amount of particular average loss.
6. Of the amount thus arrived at, the insurer is liable for that proportion which his sum insured
bears to the value (insured or insurable).

General average Loss

General average is a loss caused by or directly consequential on a general average act which
includes a general average expenditure as well as general average sacrifices. The general average
loss will be there where the loss is caused by an extraordinary sacrifice or expenditure
voluntarily and reasonably made or incurred in time of peril for the purpose of preserving the
property imperiled in common adventure.

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The following elements are involved in general average.

The loss must be extraordinary in nature. The sacrifice or expenditure must not be related to the
performance of routine work. A state of affairs may compel the master to do something beyond
his ordinary duty for the preservation of the subject-matter.

1. The whole adventure must be imperiled. The peril should be something more than the
ordinary perils of the sea. It should be imminent and real.
2. The general; average act must be voluntary and intentional accidental loss or damage is
excluded.
3. The toss, expenses or sacrifice must be incurred or made reasonably and prudently. The
master of the ship is the proper person to decide the reasonableness of a particular
circumstance.
4. The sacrifice, loss or expenditure should be made for the preservation of the whole
adventure. It should be made for the common safety.
5. If the sacrifice proved abortive, it will be allowed as the total loss. Therefore, to call it the
general average, it must be successful at least in part.
6. In absence of contrary provision, the insurer is not liable for any general average loss or
contribution where the loss was not incurred for the purpose of avoiding, or in connection
with the avoidance of a peril insured against.
7. The loss must be a direct result of a general average act. Indirect losses such as demurrage
and market losses are not allowed as general average.
8. The general average must not be due to some default on the part of the person whose interest
has been sacrificed.

The adjustment of general average losses is entrusted to an average adjuster.

Particular charges

Where the policy contains a “sue and labor” clause, the engagement thereby entered into is
deemed to be supplementary to the contract of insurance and the assured may recover from the
insurer any expenses properly incurred pursuant to the clause. The clause requires the insurers to
pay any expenses properly incurred by the assured or his agents in preventing or minimizing loss

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or damage to the subject-matter by an insured peril. The essential features of the clause are as
below:

The expenses must be incurred for the benefit of the subject matter insured. The expenses
incurred for the common benefit will be a part of the general average. The expenses must be
reasonable and be incurred by “the assured, his factors, his servants or assigns” and this
provision effectively excludes salvage charges. They are recoverable only when incurred to avert
or minimize a loss from a peril covered by the policy.

Procedure for Settlement / Payment of Claim

Notice of Claim:
1.A prompt notice of claim by the insured is required. The compliance with the rules of notice is necessary
to enforce the right of recovery of the loss by the insured.
2.After the notice, the insured must take delivery of the damaged goods at once or otherwise deal with the
damage because the insurer is not responsible for further and continued depreciation of the interest
damaged.
3. In case of any theft or pilferage, the insured must give notice to the insurer within 10 days from the date
on which the risk expired.
4.If ship owner is also liable for any loss or damage, he or his agent is also entitled to a written notice.
5.The notice is generally given at the time of taking delivery of goods. But if loss could not be determined
or detected before such delivery, the notice is to reach the ship-owner or his representative within 3 days of
the delivery.
The notice is an important factor in the matter of claim.

Documents required for claim:

The following documents are required at the time of claim.

(i) Policy or Certificate of Insurance
(ii) Bill of Lading. It determines the scope of the contract of carriage
(iii) Invoice or Bill stating terms and conditions of sale.
(iv) Copy of Protest: The protest states that everything was done to bring to safety the ship and cargo and
loss or damage was not due to lack of diligence on the part of the master or crew.

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(v) Certificate of Survey: This is necessary to find out whether the necessary franchise is reached or not in
case of particular average.
(vi) Account Sales or Bill of Sale: Similar documents where goods have been sold. The difference between
gross sound value and proceeds as per account sales might be accepted as amount of loss.
(vii) Letter of Subrogation: It gives the underwriters to sue and recover compensation from third parties
where the same is due.

Documents in different types of claims:

Total Loss
(i) Insurance policy: It furnishes an evidence of the terms and contract of insurance.
(ii) Bill of lading: It is the correspondence of the insurance contract with the voyage and vessel
(iii) Copy of the invoice: A copy of the invoice relating to the goods insured should be sent. It will help in
estimating the correct value of the goods.
(iv) Protest: A copy of protest is required when the total loss is due to the loss of the vessel or other
accident.
(v) Letter of subrogation: A letter of subrogation is sent if anything remains of the subject matter insured
after the total loss or if there are rights or remedies regarding the interest or against third parties.
(vi) Notice of Abandonment: If there is a constructive total loss, the notice of abandonment is given.
Partial Loss
In case of partial average loss, (i) the policy or the certificate, (ii) the invoice for the whole shipment, (iii)
the bill of lading should be sent to the underwriters and (iv) the copy of the Master's protest or an extract
from logbook of the ship is to be presented with the policy if the particular average is recoverable in certain
circumstances according to the terms of the policy, e.g., standing of the vessel, accident, heavy weather,
etc.
(v) A Surveyor's Report; A surveyor's report prepared by some recognized surveyor should be appended to
the above documents when evidence is necessary to show that the settled franchise has reached.
(vi) Bill of Sale: When there is a sale of the damaged goods the bill of sale is required by the measures.
(vii) Letter of subrogation: The letter of subrogation should be duly furnished by the insured if required by
the insurers.

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(viii) Cost of Protection: On the proof, the cost of protection is paid by the underwriters apart from the
particular average if there was a successful claim. In unsuccessful claims, insurers are not liable to pay
these charges.
Particular Charges
When claim is made under those heads, shipping and insurance documents with evidence for the amount
of the particular charges are required. When the case is taken up by an Average Adjuster, his report or the
appropriate extract will have to be furnished to the underwriters.

General Average

While making a claim for general loss, all the documents required for claims in total losses or in particular
average losses if partial sacrifices are required to be represented to the underwriter

Salvage Charges

The documents in support of a salvage claim and the procedure to be followed are almost identical to those
for a general average claim.

EXTENT OF LIABILITY

The insured can recover from the underwriter a loss to the extent of the insurable value of the property
insured if it was an unvalued policy.

Successive Losses

The underwriter are generally not liable for more than the insured value; but they may be liable for
successive losses which may in the aggregate exceed the insured value, by payment of extra premium and
stamp duty.
For example, where a damaged ship in an unrepaired state is lost, the insurers are liable only for total loss
and not for unpaired damage.

Other Charges

The amount of claim cannot include survey fees, cost of certificates and professional average adjuster's
fees. Once the claim is proved to be recoverable, these charges can be recovered in full from the
underwriters.
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The underwriter is liable for particular charges and other expenses properly incurred pursuant to the
provision of the suing and laboring clause in order.

Effect of Over-Insurance and Under-Insurance

If two or more policies are effected by or on behalf of the assured on the same adventure and
interest or in respect of any part thereof, and the sums insured exceed the minimum amount allowable as
indemnity, the assured is said to be over-insured. Where the assured is insured for an amount less than the
insurable value, he is said to be under-insured. In this case, he is deemed to be his own insurer in respect of
the uninsured balance. Where the assured is over-insured, each insurer is bound as between himself and the
other insurers to contribute rate ably to the loss in pro-portion to the amount for which he is liable under his
contract.

Subrogation

Where the insurer pays for a total loss, either of the whole, or in the case of goods, of any apportion able
part, of the subject matter insured, he thereupon becomes entitled to take over the interest of the assured in
whatever may remain of the subject matter so paid for, and he is thereby subrogated to all the rights and
remedies of the assured in and in respect of that subject matter.

Salvage

The salvage is the remuneration or reward payable according to maritime laws to salvors who voluntarily
and independently of contract render services to maritime property at sea. Salvage charges insured in
preventing a loss by perils insured against may be recovered as a loss by those perils. This charge is not
recoverable from marine underwriters.

Claims and 'Causa Proxima'

In determining the amount of the loss, the rule of Causa Proxima Non Remote Spectature is applied. It
means that when there are more than one cause for the loss or damage the proximate cause and not the
remote cause is regarded. The underwriter will pay the amount of loss only when the real or the real or the
proximate cause is insured. The peril insured against must be the proximate cause of the loss and it must
not be due to the fault or misconduct of the insured.
What is Fire Insurance?

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A fire insurance could be bought as a part of property insurance or as a stand-alone policy. It

offers compensation for the costs incurred in the replacement, repair or reconstruction of a
property that was damaged due to fire. Since the estimation of loss from fire is unpredictable,
this policy is issued with fixed value compensation as an upper limit set by the property
insurance policy. The actual loss or the maximum amount agreed beforehand is paid as
compensation when you file a claim for fire insurance.

Definition of Fire in Insurance

The fire insurance contract is defined as “an agreement, whereby one party in return for a
consideration undertakes to indemnify the other party against financial loss which the latter may
sustain because of certainly defined subject-matter being damaged or destroyed by fire or other
defined perils up to an agreed amount”.

T.R. Smith: Fire insurance may be defined as a contract whereby the insurers, in return for a
consideration, known as premium, undertake to indemnify the insured against financial loss
which he may sustain, by reason of certain defined property, known as the property insured,
being damaged or destroyed by fire or other perils within a stated period of the liability of
insurers, being limited to a specified amount called the sum assured.

V.R. Bhushan and Prof. R.S. Sharma: Fire insurance is an agreement whereby one party, in
return for a consideration, undertakes to indemnify the other party against financial loss which he
may sustain, by reason of certain defined subject matter being damaged or destroyed by fire or
other defined perils upto an agreed amount.

Meaning of Fire in contract of Insurance

The word fire means “loss by fire” and in literal sense means a fire which has broken bounds.
Therefore, fire which is used for ordinary domestic purposes or even for manufacturing is not

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fire. ‘Fire’ is fire insurance must have the following two features:
1. Production of Ignition light and heat

According to Justice Boyles (in Everett V/s London Ass. Co. 1895) “Fire means the production
of light and heat by combustion and unless there is actual ignition, there is no fire within the
meaning of the term in ordinary policy.”

Heating unaccompanied by ignition is not fire. “Loss or damage” occasioned by fire means loss
or damage either by ignition of the articles consumed or by damage either by ignition of the
articles caucused or by ignition of that part of the premises, where the article is. In one case there
is loss, in the other case, a damage occasioned by fire. Thus, it can be stated that no claim
possible without flame. In the following cases, the loss by fire is not considered:

1. Loss of goods by excessive heat due to the closure of doors and ventilations.
2. The damages of goods due to heavy humidity.
3. Changes of particles (Sugar) in liquidity form due heavy sun shines.
4. Evaporation of items by chemical reactions or heat.
5. Damage of articles due to heavy temperature.
6. Damage by explosive provided the explosion causes no actual ignition.
7. Damage from lightning provided it does not cause actual ignition.
8. Loss or damage by earth quake, riot, military power or civil commotion.
9. Damage to uses of articles as a result of smoke without flame.
10. The loss or damage caused by electricity.

All these situations do not fall under the definition of ‘fire’ and therefore to the loss due to such
things do not be covered by the fire insurance policy.
The losses by the following instances or losses subsidiary to fire are as follows:

 Damage which occurs as a result or smoke or of putting out the fire would be covered by
the fire risks.

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 Any loss resulting from apparently necessary and bona fide efforts to put out a fire,
whether it be by spoiling goods by water or throwing articles of furniture out of window, are
covered by the fire risks.
 Even by damages to a neighboring house by explosion done for the purpose of arresting
fire, would be covered by the fire risks.
 Every loss directly or if not directly at least consequently resulting from the fire is within
the policy (In Stanley V/s Western Ins. Co., 1968).
 Loss the theft during a fire is covered as a fire risk (In Stanley V/s Bailey, 1831).
 Even loss by fire caused by the insured’s negligence is covered by the policy (IN Harris
V/s Poland, 1941).
 Any loss occured while putting out the fire.
2. Fire by accident

In the case of fire insurance, the occurrence of fire is accidental, and then only it is covered by
the policy. In case the fire is the deliberate act of the insured, the insurer is not liable to
compensate. The fire which is used for ordinary domestic purposes or even for manufacturing is
not fire as long as it is confined within the usual or proper limits. Thus, fire by accident means
the production of light and heat by combustion and with actual ignition and heating
unaccompanied by ignition is not fire.

Functions of Fire Insurance

The function of fire insurance is to make good the financial loss suffered as a result of the fire. It
is not the function of fire insurance to replace the economic loss termed the ‘fire waste’.

Such damage apart from causing financial loss to the owners dislocates the economic activity of
the community. In spite of sustained efforts made by human ingenuity to achieve complete
mastery of fire, material property continue to be liable in varying degree to destruction or
damage by the escape of fire from its contract.

Some of the insurable properties are buildings, electrical installation, contents of building such as
machines plant and equipment accessories, etc. goods such as raw materials, goods in process,

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finished goods, goods in the open or in the premises, contents in dwellings, shops, hotels
furniture, fixture and fitting and other movable and immovable properties.

Fire insurance is a device to compensate for the loss consequent upon destruction by fire.

Thus the fire insurer shifts the burden of fire losses from their actual victims over to all the
members of the society.

It is a cooperative device to share the loss. It relieves the insured from the horror of the fire
losses to which he is exposed.

Scope of Fire Insurance

The scope of fire insurance is much wider. This can be understood from Section 2 of Indian
Insurance Act, 1938. According to this provision, the scope of fire insurance involves the
following types of risks.

1. The risks directly involved by fire.

2. The risks indirectly involved (that have been traditionally included within the fire
insurance policy).
For the convenience of study, the scope of fire insurance can be classified on the following basis:
1. Ordinary Scope
Before May, 2000 three types of fire insurance policies (A, B and C policies) were issued in
India. Therefore, the scope of fire insurance policies is classified on these criteria. After May,
2000, only single type of fire insurance policy is issued in India by fire insurance companies,
which is known as "Standard and Special Peril Policy". The policy covers the following types of
perils:
Perils covered

1. Loss caused by fire: (a) Excluding loss, destruction or damage caused to the property
insured by - (i) its own spontaneous fermentation of halting, or(ii) its undergoing any heating or
drying process. (b) Burning of property insured by order of any Public Authority.
2. Lightening.

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3. Explosion/Implosion: Excluding loss, destruction or damage caused to the property

insured by bursting of boilers (other than domestic boilers), economizers or other vessels in
which steam is generated, machinery or apparatus subject to centrifugal force.
4. Aircraft Damage: Loss, destruction or damage caused by aircraft, other aerial or space
devices and articles dropped there from excluding those caused by pressure waves.
5. Riot Strike, Malicious and Terrorism: Visible physical loss, destruction or damage by
external violent means caused to the property insured but excluding those caused by: (1) Total or
partial cessation of any process or operations or commission of any kind; (2) Confiscation,
commandeering, requisition or destruction by order of the Government or any lawfully
constituted authority. (3) Permanent or temporary dispossession of any building or plant or unit
or machinery resulting from the unlawful occupation by any person of such building or plant or
unit or machinery or prevention of access to the same.
6. Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and Inundation.
7. Impact Damage: Impact by any rail/road vehicle or animal by direct contact not
belonging or owned by - (1) The insured or any occupier of the premises, or (2) Their employees
while acting in the course of their employment.
8. Subsidence and Land slide including Rock slide: Loss, destruction or damage caused by
subsidence of part of the site on which the property stands or land slide/rock slide excluding. (1)
The normal cracking, settlement or bedding down of new structures; (2) The settlement or
movement or made up ground; (3) Coastal or river corrosion; (4) Defective design or
workmanship or use or effective materials; and (5) Demolition, construction, structural
alternative or repair of any property or ground works or excavations.
9. Bursting and/or overflowing of water tanks, apparatus and pipes.
10. Missile Testing operations.
11. Leakage from Automatic Sprinkler Installations: Excluding loss, destruction or damage
caused by: (1) Repairs or alterations to the buildings or premises; (2) Repairs, removal or
extension of the sprinkler installation; and (3) Defects in construction known to the Insured.
12. Bush Fire: Excluding loss, destruction or damage caused by forest fire.

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2. Special Scope

Certain special kind of risks is also included in the fire policy. By paying extra premium, the
insured can include such special risks as given below within the scope of fire insurance policy:

1. The fees paid to the architect, surveyor or consultant engineer, if such fees exceed more
than 3 percent of the claim money.
2. The expenses incurred in connection with removal of wastages from the construction site,
if that amount exceeds more than I per cent of the claim money.
3. Loss to the goods kept in the cold storage due to fluctuations in electricity / power but
within the causes stated in the policy.
4. Loss arising out of earth- quake, fire of combustion.
5. Forest fire.
6. Loss due to falling the goods from forklifts, or form own vehicle of the insured etc.
7. Loss due to spontaneous combustion.
3. Comprehensive Scope

Almost all the insurable risks are included in the comprehensive scope of fire insurance. It
includes not only the ordinary and direct risks, but also the consequential losses. This way the
following risks are included within the comprehensive scope.

1. Risks of standard policies.

2. Special risks which can be insured by paying extra rate of premium.
3. Excluded perils in the standard policy.
4. Consequential losses or risks arising consequent to fire.
Principle of fire insurance
Fire, to make the insurer liable under the contract, must satisfy two conditions.

(i) Utmost good faith – In insurance contracts, the legal doctrine of utmost good faith applies.
The insured has the duty to disclose all material facts, which have a bearing on the insurance. A

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breach of this duty may make the contract void or voidable. The duty of disclosure continues
throughout the policy period.
The fire proposal form also includes a declaration by the insured saying that the statements
declared by him are true, and that they can form the basis of the insurance contract. This
principle also expects the insured to act as if he is uninsured all the time, and takes care and
safeguards his assets from the perils. Following a loss, he is then expected to salvage as much of
the property as possible.

(ii) Insurable Interest – The requirement of insurable interest gives legal validity to insurance
contracts and distinguishes them from wagers. It may be defined as the legal right to insure,
where the right arises out of a pecuniary relationship between the insured and the subject matter
of insurance. The destruction or damage to the latter involves the insured in financial loss.
Absolute legal ownership is a clear example of insurable interest. For e.g, a bank or a financial
institution which has advanced money on the security of a property has insurable interest in that
property.
In Fire insurance policy, the insurable interest should exist at the time of taking the policy,
throughout its currency period and also at the time of loss/claim. Fire insurance policies are
personal contracts, A so if the property is sold or transferred, the policy is not transferred
automatically.

(iii) Indemnity – The objective of the principle is to place the insured, as far as possible, in the
same financial position after a loss, as that occupied by him, immediately before the loss.
In simple words, the principle of indemnity means the insured is indemnified only to the extent
of his loss, no profit or undue benefit is extended. The indemnity is subject to the sum insured
and other terms of the policy. The sum insured can be fixed on the basis of Reinstatement Value
or Market Value. The term ‘Market value’ means, for insurance purposes, the present cost of
construction of similar buildings, after deducting depreciation based on age, usage, maintenance
etc.

Similarly for plant and machinery, market value is arrived at by deducting suitable depreciation
for age, usage, wear and tear etc, from the current replacement costs. In all the cases,
depreciation refers to the actual intrinsic physical depreciation and not those used for accounting
purposes.

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(iv) Subrogation – The principal of subrogation is the corollary of the principle of indemnity. If
the loss suffered by the insured can be recovered from third parties who are responsible for the
loss, the insured’s rights of recovery are transferred or subrogated to the insurers , when they
indemnify the loss.
(v) Contribution – The principle of contribution, which is also a corollary of the principle of
indemnity, provides that if the same property is insured under more than one policy, the insured
can recover a rate able proportion of the loss under each policy. Under no circumstances can he
recover more than his loss, and make a profit.
(vi) Proximate cause – A cause which immediately precedes and produces the effect, as
distinguished from the remote, mediate, or predisposing cause. An act from which a loss or
injury results as a natural, direct, uninterrupted consequence and without which the loss or injury
would not have occurred.
It is the primary cause of a loss or injury. It is not necessarily the closest cause in time or space
nor the first event that sets in motion a sequence of events leading to an injury.

Proximate cause produces particular, foreseeable consequences without the intervention of any
independent or unforeseeable cause. It is the active, direct, and efficient cause of loss in
insurance that sets in motion an unbroken chain of events which bring about damage,
destruction, or injury without the intervention of a new and independent force. It is also called
legal or direct cause.

Types of Fire Insurance

1. Valued Policy:
In this policy the value of the subject-matter is agreed upon at the time of taking up the policy.
The insurer agrees to pay a pre-determined amount if the subject-matter is destroyed or damaged
by fire. The principle of indemnity is not applicable to this policy. The agreed value may be
more or less than the market value at the time of loss. These policies are generally issued for
those goods or property whose value cannot be determined after their loss or damage. These
goods may include works of art, jewellery, paintings, etc.

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2. Specific Policy:
Under this policy the risk is insured for a specific sum. In case of loss of property, the insurer
will pay the loss if it is less than the specified amount. It can be explained with an example: An
insurance policy is taken for Rs. 50,000 and the value of the property is Rs. 80,000. If the
property worth Rs. 40,000 is lost, the insured will get the whole amount of loss. If the loss is up
to Rs. 50,000, it will be paid in full. In case loss exceeds Rs. 50,000, say it is Rs. 60,000, the
indemnity will only be upto the amount insured i.e. Rs. 50,000. Under this policy the insured is
not punished for getting a policy for lesser sum. The actual value of property is not taken into
consideration.

3. Average Policy:
If the ‘average clause’ is applicable to a policy, it is called Average Policy. Average clause is
added to penalise the insured for taking up a policy for a lesser sum than the value of the
property. The compensation payable is proportionately reduced if the value of the policy is less
than the value of the property.

Suppose a person takes up a fire insurance policy of Rs. 20,000 and the value of the property is
Rs. 30,000. If there is a loss of property worth Rs. 50,000, the underwriter pays compensation of
Rs. 10,000 (20,000/30,000 x 15,000) and not Rs. 15,000. It discourages the insured to get under-
valued policy.

4. Floating Policy:
A floating policy is taken up to cover the risk of goods lying at different places. The goods
should belong to the same person and one policy will cover the risk of all these goods. This
policy is useful to those businessmen who are engaged in import and export of goods and the
goods lie in warehouses at different places. The premium charged is generally the average of the
premium that would have been paid, if specific policies would have been taken for all these
goods. Average clause always applies to these policies.

5. Comprehensive Policy:
A policy may be taken up to cover up all types of risks, including fire. A policy may be issued to
cover risk like fire, explosion, lightening, burglary, riots, labour disturbances etc. This is called a
comprehensive policy or all risk policy.
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6. Consequential Loss Policy:

Fire may dislocate work in the factory. Production may go down while the fixed expenses
continue at the same rate. A policy may be taken up to cover up consequential loss or loss of
profits. The loss of profits is calculated on the basis of loss of sales. A separate policy may be
taken up for standing charges also.

7. Replacement Policy:
The underwriter provides compensation on the basis of market price of the property. The amount
of compensation is calculated after taking into account the amount of depreciation. A
replacement policy provides that compensation will be according to the replacement price. The
new asset should be similar to the one which has been lost. The amount of compensation will
depend upon the market price of the new assets so that it is replaced without additional cost to
the insured.

8. Declaration policy
A declaration policy is suitable for assets whose value changes during the year, like stocks in a
business. Under this policy, a provisional sum insured is taken and the premium is paid for the
same. The sum insured would represent the maximum risk of the insurance company. Once a
month completes, the highest value achieved by the fluctuating asset is recorded and declared.
Thereafter, the average of the declared value is calculated and it becomes the actual sum insured
of the policy. If the actual sum insured is lower than the provisional sum insured, you can claim a
premium refund.
9. Floater declaration policy
This policy is the combination of floater policy and declaration policy. Assets stored at different
locations whose values fluctuate over the year can be covered under a single policy through this
cover.
Process Rate fixing in fire insurance
The actual process of rating consists of three steps: 1. Classification, 2. Discrimination and 3.
Fixing rates or schedule rating.

1. Classification:

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Properties to be insured are of various nature and risk. Since the premium is fixed in relation to
the class of risk, the properties are classified accordingly. Properties are generally divided into
three main classes, viz., (i) common or ordinary, (ii) hazardous and (iii) doubly hazardous.

Different premium rates are fixed for each class. These classifications do not hold good for a
long time because of varied nature of risk. Now the risks are classified into various classes
according to factors affecting fire risk.

(i) Construction or Structure:

The construction of the building has always been of great importance in rating. Building made of
brick will be sounder than the building made of wood. Today, the construction of building is
divided into two types of structure. First fire-proof building and second, building without
fireproof.

The height of the building, the area, the number of unprotected floor openings, construction of
walls, floors, roof, etc., is considered in calculating the fire hazard.

(ii) Occupancy:
The risk considerably varies according to the nature of occupancy, i.e., the use to which the
building is devoted. One building may be used as a dry goods store or hardware store, or
furniture-store or for residential purposes.

The building may have different risks because of the different substances and processes which
they contain and the different uses to which they are put. There is inherent connection between
the building and its contents. It is essential for companies to change their rates to meet changing
business conditions.

Rate making in fire insurance does not present constant factors. Justice demands that the insurer
should recognise the important changes. A building occupied as a residence or an office is a
better risk than a retail shop.

A storeroom used for the storage of highly combustible goods is more hazardous from a fire
insurance viewpoint than a grocery shop. The process of manufacture, the nature of raw
materials used, the type of machinery are important factors to influence the physical hazard,
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(iii) Nature of Flooring:

The nature of flooring influences the risk to a greater extent. Existence of wooden floors in the
building introduces an additional physical hazard. Wooden floor becomes a fuel in the event of
fire. It may collapse easily causing damage to property.

The risks inspection in based upon general features, lighting, heating and power; process of
manufacture, exposures appliances, management and supervision and so on. A risk inspection
report must satisfy three essential requirements of clarity, conciseness and completeness. The
report must be free from ambiguities.

(iv) Height:
The height adds difficulty in fighting a fire on the upper floors. There may be risk of water
damage to property on the lower floors when water is used to extinguish a fire on the upper
floors. The floors involve heavy risk of collapse of the upper floors.

(v) Floor and wall opening:

Openings in the floor for lifts and belts constitute higher physical hazard. It may cause greater
chances of ignition of fire and difficulty of extinguishing the fire.

(vi) Exposure:
The chances of risk may differ from property to property according to the degree of exposure. A
building or property may be situated in a congested conflagration locality involving greater
danger to the property. Exposure stands second as a cause of fire and is more than the occupancy
hazard.

(vii) Lighting, Heating and Power:

The fire may occur due to short-circuit. Combustion can also arise from faulty installation and
dampness. The lighting system e.g. by gas or oil, leakage of fuel and naked flames cause more
hazard to property.

(viii) Place or Situation:

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The location of the property, nature of adjoining premises, the distance from a fire brigade
station or the source of water supply, the degree of congestion in the area are some of the
important factors to influence the degree of risk.

(ix) Protection:
The availability of protection against fire influences the degree of risk. The protection facilities
may be public or private. When protection facilities are available the fire may be extinguished in
its incipiency.

The fire extinguishing apparatus, water supply, police system, etc. can reduce the degree of risk.
Smaller premium is charged where modern devices for preventing and extinguishing fires are
present. It would be injustice to charge the same rate for all types of risk.

(x) Time:
The time of loss must be kept into consideration. The annual loss ratio is by no means uniform
every year. So, the rate fixation must account for good or bad years to determine approximately
the real loss. Therefore, a long period of time is taken into consideration while calculating the
premium.

2. Discrimination:
The differentiation of the rates for individual risks in a particular class is known as
discrimination. Each additional feature of risk is charged extra premium. The better types of risks
are encouraged and attracted by the insurer. Lesser premium is charged where fire extinguishing
appliances or fire-resisting construction are present.

The tariff system is based on the law of average and graded schedule is formulated where
different rates are ascertained for the different types of risks. Thus, the different risks are put in a
specified class, and are differentiated from each other according to the merits and demerits of the
individual risk.

It aims at a more equitable basis of rating. For example, dwelling house is a class and, therefore,
all the dwelling houses are put in the same class. Since the dwelling houses are of different type,
the class may be sub divided into several classes according to the degree of hazard.

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An appropriate discount could be given for those houses which have fire extinguishing
appliances, nearness to fire brigade station and absence of exposure in the vicinity. There are
Non- manufacturing risks. Industrial/Manufacturing risks, Utilities located outside the industrial,
manufacturing risks, storage risks and Tank farms risks

3. Schedule Rating:
It is a plan by which hazards with respect to any particular risk are measured. It is defined as,” an
empirical standard for the measurement of relative quantity of fire hazard.

Schedule rating takes into consideration the various items influencing the peril of fire. It is based
on the theory that the aggregate fire hazard of any risk is capable of ultimate analysis into its
component factors to each of which could be assigned an appropriate charge.

A standard or average premium is determined as a base for calculating the premium. The average
premium rate for a class of risk is determined taking into account the total loss and the sums
assured during a period of year. The period should be such that the experience of good as well as
bad years may be taken into account.

A large number of items, as far as possible, are taken so that the law of average may apply.
Larger the number, the more representative will be the rate of premium.

Where L represents the losses and V represents the values of insured amount. The rate arrived at
will be net premium which is just sufficient to meet all the losses in that particular risk.

This basic or net premium is loaded with expenses of management, commission, rents and a
margin for profit to arrive at the gross premium or office premium. .

The rate so calculated is called ‘normal rate’ or average rate for the particular group. In each
group, risks may differ from one another and in order to maintain equity between different types
of risk and between the insurer and the insured, it is necessary to apply the principle of
discrimination, i.e., differentiation, of individual risks in a group taking into account their
particular features.

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Extra rates are provided for bad features, i.e., for inferior construction, timber flooring, height,
situation in a congested area and discounts are granted for good features, i.e., for fire
extinguishing appliances, automatic sprinklers etc. The rebate will be allowed taking into
account the efficacy of the means adopted.

The schedule contains name and address of the proposer, brief description of the property
insured, sum insured, period of insurance, perils covered, rates of premium and the serial number
of the cover note.

Procedure for Settlement of Claims under Fire Insurance

When the subject matter of insurance is lost or damaged in fire, the insured victim looks towards
the insurance company for rehabilitating himself. Generally, the following procedure is adopted
while settling the claims under fire insurance.
(i) Notice of loss: First of all, the insured, immediately after the occurrence of a fire, has to
send a notice of loss to the insurance company. The notice enables the insurer to take such
measures to determine the cause of loss, estimate the extent of loss and deal with the salvage.
This notice need not be in writing; it may be verbal i.e. by telephone or personal call. The
notice need not be given by the insured personally and may be given on his behalf. Notice
given to agents does not discharge the insured from his duty unless expressly allowed to do
so and the failure of the failure of the agents to transmit the message to insurers, may give
grounds for repudiation of liability.
(ii) Evidence of loss: if possible, the evidence of loss and other details such as time, place and
circumstance under which the loss occurred, may be sent along with the notice of loss to the
insurer. Besides, he should send particulars about the preventive measures taken by him
during fire to mitigate the loss. The duty of providing full particulars and proof of loss rests
entirely upon the insured.
(iii) Police Report in case of Arson: In case, the loss or damage due to fire is caused by
arson (i.e. act of setting something on fire intentionally and unlawfully by an unscrupulous
person), the matter will have to be brought to the knowledge of the nearby Police Station.
Even if there is a slight suspicion of anybody’s involvement in this arson, the same should be
mentioned in the complaint report submitted in the police station. The police officials will
after making proper investigation, issue a report. Such report has to be submitted to the

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insurer. If the fire-brigade was summoned, the fire brigade records should also be produced
with the insurer.
(iv)Formal Claim Form: After having received the notice of fire loss, claim form is issued by
the insurer to the Insured and he is requested to return it after completing and giving therein
all the information about the loss. The claim form contains the following information.
(a) Name of the insured, Policy number and address,
(b) Date, time, cause and circumstances of the fire
(c) Details of damaged property
(d) Sound value of the property at the time of fire, where the insurance consists of several
items, a declaration is required of the value of each item under which the claim is made.
(e) Amount claimed after deduction of salvage value.
(f) Situation and occupancy of the premises in which the fire occurred .
(g) Capacity in which the insured claims whether as owner, mortgagee or the like.
(h) If any other person is interested in the property damaged; and
(i) If any other insurance is in force upon such property.
In case the amount of the loss is small and the claim is simple and straight forward, the
insurer will admit the claim and send the cheque in full settlement without further enquiry.
(v) Inspection of loss: If the loss is known or expected to be large and serious, the insurer will
depute a independent loss surveyor to ascertains the cause and extent of loss. The surveyor
would inspect the damaged property or goods at the scene of fire and contact the insured, his
neighbours, employees and other persons connected with the fire and collect the desired
information. This investigation enables the surveyor to have an idea of the nature and extent
of loss and origin and cause of fire. The surveyor also prepares a detailed item-wise list of the
property or goods left at the scene of fire and get it attested by the Insured in order to avoid
any attempt of exaggerated claim by the insured at some later stage. Besides, the surveyor
also carryout salvage operations i.e., the wreckage of the property or goods having some
scrap value, will be taken into account to reduce the net cost of the claim. If the insured
wants to retain the salvage, an appropriate amount is subtracted from the amount of claim.
The damaged and undamaged goods have to be separated in order to avoid any further loss
due to fire.
(vi) Ascertainment of loss: having inspected the site of loss and gathered the relevant
evidence, the surveyor will now determine the liability and find out the total amount of loss.
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While determining the liability of the insurer, the surveyor has to take into consideration
several factors such as (a) the time of occurrence of fire. This is an important factor as no
liability arises when fire occurs before commencement of risk or after the expiry of the
policy; (b) the number of policies taken on the property, in order to made a distinction
between the concurrent insurance and non-concurrent insurance and apportion the amount of
loss; (c) the exact cause of fire as it directly affects the liability of the insurer. For this
purpose, the surveyor consults all the persons connected with fire, and study the policy
report, fire-brigade report or newspaper reports of the fire accident.
After analyzing all the above factors in detail, the surveyor is now in a position to
ascertain the final loss in accordance with the policy conditions. The amount of
compensation is to be fixed within the framework of the principle of Indemnity. However the
amount of compensation cannot be more than the insured value. In case the insurer and the
insured fail to arrive at consensus regarding the amount of compensation, the matter will be
taken to the court of arbitrator.
(vii) Application of Average clause: While ascertaining the extent of the actual loss, the
surveyor has to see if the policy is subject to average clause. The average clause necessitated
the valuation of the undamaged property also. These amounts are generally determined by
mutual agreement between the insurer and the insured. This clause is inserted to penalize
under- insurance by the corresponding under-payment (pro-rata) of loss. Hence, in an
average policy, the insurer can be called upon to pay only such proportion of the loss as the
sum insured bears to the total value of the property.
(viii) Estimating claim when more than one fire takes place: Sometimes, more than one fire
may take place in the property or godown of the insured during the currency of one fire
insurance policy i.e. one fire takes place in January, and the other in April, still a third in July
of the same year. In such a situation, the insurer will pay only the aggregate a sum upto the
original amount of insurance. Nothing more than the maximum amount insured will be paid.
(ix) Estimating claim when property is insured with more than one insurer: If an Insured
has insured his property, which is destroyed in fire later, with two or more than two insurers,
the insurer will settle his claim by applying contribution clause in the policy i.e., the liability
of the insurer is limited to its ratable proportion. Thus, in such a situation each insurer will
pay a rateable proportion of the loss.

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(x) Estimating claim when accounting records are destroyed: Sometimes, the entire
accounting records, which contain details about the value of stock of lying in the godown,
may be destroyed in fire. As a result, the insured is not in a position to ascertain the value of
stock lost in fire and the amount of claim to be made. In order to ascertain the value of stock
lying in the godown on the date of fire and the amount of claim to be made, a Memorandum
Trading Account is prepared for the period of interval from the date of last account till the
date of fire. The value of opening stock to be shown in memorandum Trading Account is
known with the help of the closing stock of the last balance sheet. Credit Purchases are
verified by the Creditors directly and the cash purchases are interpolated on the basis of past
records (past ratio or cash to credit purchases). Likewise, Cash and Credit Sales are found
out. Other things remaining the same, the past ratio of gross profit to sale is applied to current
year also and the grow profit is estimated. With the help of data collected from different
sources mentioned above, the Memorandum Trading Account is prepared. The balance figure
found in Credit side of the Account is taken as “Stock on the date of fire”. The value of stock
salvaged in the fire, if any, is deducted from the value of stock on the date of fire to ascertain
the actual loss of stock which will be ultimately paid to the insured.
(xi) Payment of Claim: After ascertaining the actual amount of loss incurred by the insured
from the various steps discussed above, the surveyor will determine the amount of
compensation to be paid. Before paying compensation, the surveyor will take a declaration
from the insured regarding his acceptance of his claim money and final settlement of his
claim. This declaration and surveyor’s final and comprehensive report is sent to the insurer.
Thereafter, finally, the insurer will settle the claim in accordance with the terms of the policy.
There are four ways in which claims are settled: (a) Cash Payment (b) Replacement of
insured property; (c) Repair of insured property and (d) Reinstatement. The basic principle
which applies in this respect is the principle of indemnity. The fee of the surveyor is paid by
the insurer but the insured has to bear the cost incurred in the preparation of his claim and
documents.

Reinsurance:

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When an insurer transfers a part of his risk on a particular insurance by insuring it with
another insurer or other insurers, it is called” Re-insurance”. Reinsurance means insuring again
by the insurer of a risk already insured. Every insurer has a limit to the risk that he can bear. If at
any time a profitable venture comes his way, he may insure it even if the risk involved is beyond
his capacity which is his retention limit. In such cases, in order to safeguard his interest, he may
reinsure the same risk for an amount in excess of his retention limit with other insurers, so that
the loss due to risk is spread over many insurers.

Definition
W.A Dinsdale: “When the amount of any risk or risks from one hazard is such that it is beyond
the limits, which it is prudent for one insurer to carry, it is necessary to effect reinsurance”.
Federation of Insurance Institute, Mumbai: “Reinsurance is an arrangement whereby an
insurer so has accepted all insurance, transfers a part of the risk to another insurer so that his
liability on any one risk is limited to a figure proportionate to his financial capacity”.

Definitions of Terms used: Before going deep into the concept of reinsurance, it is necessary to
understand the meaning of the various terms used in it.
(a) Direct insurer: An insurance company which accepts the risk from the proposer and which
is solely responsible to the policy holder for the obligations undertaken.
(b) Reinsurer: The insurance company which provides reinsurance cover to the ceding company
is called the Reinsurer. The offer made by the ceding company is accepted by the Reinsurer.
The Re-insurer may be (i) a direct insurer, who in addition to accepting direct business, also
accepts reinsurance business; or (ii) a professional reinsurer who accepts only reinsurance
business but does not transact direct business.
(c) Ceding company: insurance Company that places reinsurance business of the original risk
with a reinsuring company; or the original risk with a reinsuring company; or the original
insurer; the insurer who obtains a guarantee (on fire policy).
(d) Cession: This is the amount reinsured with the reinsurance i.e., ceded to the reinsurer
(e) Reinsurance policy: The contract of reinsurance; in fire insurance, it is called guarantee
policy.

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(f) Retention: This is the amount retained by the ceding company for its own account i.e.,
maximum it is prepared to lose on any one loss. It is also known as ‘net limit’ or ‘net
holding’ or ‘net line’.
(g) Surplus: This refers to the difference between the sum insured under the policy issued by the
ceding company and its retention.
(h) Reinsurance Commission: It refers to the amount paid by the reinsurer to the insurer
(ceding offer) as a contribution to the acquisition and administration costs. Usually, it is a
fixed percentage of premiums received by the reinsurer.
Emerging Trends in Insurance

The Indian insurance industry is mostly expected to search for growth through new service-based
models, innovative products and better focus on prevention, etc.

The following are the new trends that will shape in Insurance Industry in 2021

(1) Digitalization (2) New Insurance Products (3) Rise in Demand for Standardised Products (4)
On-demand Insurance (5) Wellness Products and IoT

1.Digitalization

The insurers have started to realize the fact that the traditional approach of selling insurance
products to the customers will no longer be near enough for the insurers who wish to stay ahead
of their competitors. The foundation of the entire insurance industry is based on offering
products and services to the customers that help them stay protected against loss as a result of an
unfortunate event. And, in the new year, while this will continue to remain an important element
of what insurers do, we will also witness a technology-driven shift in the way insurance is sold.
The insurers will focus more on selling insurance products through tele-medical process which is
need of the hour. This will be complemented by e-KYC process for completing the verification
process of the customers to buy a health and tern insurance plan. During the ongoing COVID-19
pandemic, the digital shift towards selling insurance policies has gained significant traction is
sure to continue in the years to come. Buying insurance through digital channels ease the buying
process and gives customers a plethora of options to select the right insurance product as per
their choice and requirement.
2.New Insurance Products

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The awareness around need for protection has increased by many folds since the onset of the
pandemic. The need for insurance has become ubiquitous with maximum people investing in
insurance products as per their requirements. Interestingly, demand for insurance products for a
plethora of risks that were usually not covered by insurance companies has started gaining
traction. These covers range from protection against a pandemic to protection against seasonal
illnesses like dengue. Though they would prefer to pay a decently priced premium for these
policies. For instance, the Corona Rakshak plan, that is available for a time period of 3.5 months
to 9.5 months and is available for a premium as low as Rs. 100/month. With the availability of
such products digitally as well, these will rightly cater to the digitally-savvy generation of
people.
3.Rise in Demand for Standardised Products

The year 2021 will be the year of Standard Insurance Products. In the year 2020, all general and
specialised health insurers on the directions of the IRDAI came up with standard health
insurance product – Arogya Sanjeevani. Later, the regulatory guided all life insurers to come up
with a standard term life insurance plan – Saral Jeevan Bima from January 1st 2021. Later, the
regulator asked insurers to come up with a standard Personal Accident Cover and, now the
regulatory body has asked insurers to launch a standard Travel Insurance from April 1st 2021.
The introduction of standard insurance products across all major insurance sectors – Health, Life
and Travel – IRDAI is leaving no stone unturned to increase the insurance penetration rate in the
country. The regulator aims at bringing maximum people under the insurance umbrella and
provide them with maximum financial help.
All these standard products are expected to gain pace in the year 2021 with many more people
enrolling themselves under these products. A majority of people in India are not covered under
any insurance product and these standard products will give first-time buyers a boost and
confidence. The standard features and wordings of these products will make them the first choice
of buyers who cannot afford a comprehensive insurance policy. Moreover, many more standard
insurance products are expected to come up in the new year.
4.On-demand Insurance

Another category of insurance products that will be in high demand in the year 2021 is Switch-
on and Switch-off insurance. Today’s consumer looks for products that offer their adequate

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coverage only when they need it. An excellent example of one such product is Usage-based car
insurance. This new type of car insurance policies – launched under the sand-box category of
IRDAI – allows car owners to insure their vehicles for kilometers they tend to drive instead of
the run of the mill full year. For all those looking for a car insurance policy that’s priced based
on how much you actually drive, pay-as-you-use insurance may be the answer. For drivers who
aren’t constantly on the road, these plans could offer an opportunity to reduce car insurance
costs. Moreover, the option to have multiple vehicles covered under one policy makes this policy
more value accretive.
5.Wellness Products and IoT

Over the years, the structure and features of health policies have evolved significantly in order to
cater to the specific needs and requirements of the customers. Customers have started practicing
a healthy lifestyle backed by efficient and effective wellness and preventive healthcare measures.
The coming year will see insurers come up with plans that focus on making customers fit and
health. Even the insurance regulator has issued guidelines to insurers on wellness and preventive
features. The insurers are expected to come up with a plethora of exciting benefits to offer to the
policyholders. Some of such benefits include discounted OPD consultations or treatments,
Pharmaceuticals, Health check-ups/diagnostics, redeemable vouchers to obtain health
supplements, memberships in yoga centers, sports clubs and many more.
Yet another prominent technology that will play an important role in shaping the online
insurance industry in the coming years is Internet-of-Things (IoT). The technique will help the
insurers – especially the auto insurance industry – to cut their overall costs while enabling the
customers to automatically initiate the damage repair and claim process. At the same time, a
significant focus of the insurers on customer interaction and experience will brought about the
need for Voice Analytics – an efficient voice recognition tool to analyze and record a spoken
conversation.

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