Basic Material relating to Insurance Sector by Retd RBI Officer

Basic Principles of Insurance:

Insurance is a contract between Insurer (Insurance Company) who undertakes to protect the Insured(the person whose risk is protected) from potential risks, for payment of a premium and subject to certain conditions. The underlying principles are given below.

  1. It is a contract of utmost good faith which means it is the duty of the insured to voluntarily disclose all facts material(relevant, important) to risk covered

  2. The proposer or assured (the person who is taking the insurance) should have an insurable interest. Insurable interest financial interest which the assured possesses in what is being insured. If the assured does not have any financial interest then it is a wagering(betting) contract which is void (a contract not valid) under Section 30 of the Indian Contract Act. Compensation is limited by the value of subject matter and extent of insurance coverage. In life insurance contracts the value of human life cannot be measured in money terms. So insurers determine sum assured as a multiple of income of the life insured and remaining productive years.

  3. Agent and Broder: An agent represents one company or insurer and a broker acts on behalf of the customer looking into the products and services of different insurance companies.

Under the Indian Contract Act an agent can represent one life insurer, one nonlife insurer, one health one credit insurer and one Agricuture insurer.

  1. Insured Peril refers to the risk covered by the relevant insurance policy. An assured cannot make a claim for a loss incurred on account of a peril which is not covered. For instance if the property is insured against fire only, cannot make a claim against damage caused to the property due to riot.

  2. Proximate Cause: If the loss is caused by two or more causes acting simultaneously, it is necessary to identify the most important or effective cause which cause d the damage.

  3. Reinstatement or Replacement Insurance: Normally loss or damage to the insured property is assessed with reference to the depreciated value of the asset at the time of damge. But in Replacement Cost Insurance, cost of replacement of the asset is covered.

  4. Deductibles are specific amounts deducted from the loss before claim admissibility is calculated. For instance, in industrial policies, if the loss is due to terrorist act, 0.5% of the loss subject to a minimum of Rs. 1 lakh is deductible and no claim is admitted if the loss is below one lakh.

  5. Co- insurance: In large insurance policies, there is more than one insurer. They are all called CO- insurers. There is a `Leader’ with whom client deals with and the leader shares premium/ claims with the co-insurers.

  6. Insured responsible for Loss Minimization: The insured should take all reasonable steps to protect the subject of insurance and should behave as if a prudent uninsured would.

  7. Riders are conditions added to the main terms of the policy to provide additional/ supplementary benefits with the main risk cover in the form of accident/disability cover, critical illness support, income benefit, waiver of premium (in case of permanent disability) etc

  8. Insurance Ombudsman: Under the Public Grievance Rules 1998, the Insurance Ombudsman is appointed to resolve complaints relating to

  • Partial or total repudiation of claims

  • Disputes regarding premium paid / payable

  • Disputes about legal construction of policy relating to claims

  • Delay in settlements of claims

  • Non issue of any insurance document to customers after receipt of premium

  1. Third Party Administrators are entities duly licensed by IRDA. Their services are used by life and

non life insurance companies

  • Guiding the insured regarding claims process

  • Issue photo id cards to insured persons

  • Issue pre-authorisation to hospitals for treatment under cashless facility

  1. Paid up Value: If premium payment is stopped before maturity , the sum assured under a life insurance policy is proportionately reduced and the sum assured + any bonus accrued up to the time premium was paid is known as Paid up Value

  2. Surrender Value: Suppose the insured stops payment of premium and wishes to terminate the policy the amount which the insured can get is worked out as a proportion of paid up value known as Surrender Value

Types of Life insurance policies

  1. Whole Life Policies provide life time protection. Premiums could be payable for a fixed period or whole life

  2. Term Insurance Policies: only risk cover is provided during the term (period of coverage) of insurance. If the insured survives the term nothing is paid

  3. Endowment Policies involve both savings and life cover. Therefore if the insured survives the term of insurance he would get sum assured + bonus accrued if any.

  4. Money back Policies provide for payment of specified amount to the insured at specified intervals during the term of insurance. These amounts are called Survivor Benefits. If the insured survives the period of insurance, he would get sum assured – survivor benefits already received. Eventhough an amount is paid at regular intervals the insured gets the life cover equal to the sum assured for the entire term.

  5. Participating and NonParticipating policies : In participating policies the insurer shares his profit with the insured declared in the form of bonus declared annually as a percentage of sum assured. Such bonus amounts are accrued and paid alongwith sum assured. In Non Participating policies there is no sharing of profit by the insurer.

  6. Annuities are a series of payments at regular intervals. Sometimes the payments could be upto death. The premium may be a single premium or for a specific period of time after which the annuities start.

  7. Unit Linked Insurance Plans are savings + insurance cover. Unlike endowment policies the risk of return on the savings portion ( a portion of the premium is used for life cover) is transferred to the insured with options to the insured for investing in specific funds of equity, Income / Fixed Income Bond funds, Cash Funds or Money Market Funds or Balanced Funds which are a combination of equity and fixed income funds. Investment portion is arrived at after deducting charges for premium allocation, Mortality fund management, Policy Administration, Surrender charges and Fund Switching. Switching is an option available to the insured for a specified number of times during a year to switch the investment of the savings portion from one type of fund to another to take advantage of market fluctuations in capital markets.

Micro Insurance

  1. Micro Insurance Policy is a general or life policy with a sum assured equal to Rs. 50000 or less. They are issued on individual or group basis. It is done through intermediaries like NGOs (Non Government Organisations), SHGs ( Self Help Groups) and MFIs (Micro Finance Institutions)

A general micro insurance policy is

  • Any health insurance contract

  • Any contract covering belongings such as huts, livestock, tools or instruments or any personal accident contract

  • Issued on individual or group basis

A life micro insurance product is

  • A term insurance policy with or without return of premium

  • Any endowment insurance contract

  • Health insurance contract

  • Can be with or without accident benefit rider

  • On individual or group basis

Under term micro insurance product

  • Benefit – term insurance protection – generally life risk with accident benefit with some permanent disability benefit

  • No insurer is paying any bonus

  • Sum assured is between 5000 and 50000 or 100 times the annual premium

  • Some insurers are giving more than 110% refund of premium on maturity under term products

  • Most insurers give reund of premium for suicide during first year

  • About LIC: LIC is the largest insurer in India both in terms of policies sold and number of agents. It issues policies in the category of endowment, savings and pension.

  1. The salient features of Group Micro Insurance policies are

  • Life protection – both survival and death

  • Pension can also be built into the product

  • Some insurers offer accident / permanent disability benefit

  • Majority of products are under non medical scheme and automatic acceptance if size of group is more than 200 members

  • Provision to cover automatic cover facility after 2 years of premium payment

  • Policy bond is given and administration done through the agent

  • Some insurers may exclude risk cover for first 45 days

  • Some policies cover suicide during first year to protect third party interest and provide for return of premium

  • Maximum term is 10/15 years

  • Maximum maturity age upto 60 and premium payment upto 45/50/55

  • Most insurers give liberal surrender value after 1/2/3 years

  • Free look cancellation (option to the insured to decline the policy and seek refund of premium) available during 30/15 days after receiving policy bond

  • Health insurance products cover disability/hospitalization expenses/ loss of wages

  • Under health insurance products generally there is a condition the family needs to be covered under one sum assured any no times during the year

  1. Health Insurance Policies

  • Policies cover hospitalization expense

  • Insurance cover from 5000 to rupees 50 lakhs. Standard policies are for 1 lakh to 5 lakhs

  • Tax benefits available under Section 80D of IT Act

  • Premium depends on age

  • Normally coverage pre existing diseases restricted but covered after 48 months of continuous insurance cover

  • Policy to be renewed within 15 days

  1. Motor Insurance

  • Third party liability insurance (risk cover for damage to the person/properties of third parties, the insured is first party and insurer is second party) is compulsory in India

  • Under comprehensive insurance liability to third party + own damage is also covered

  • Sum insured for the vehicle is called `insured’s declared value’. It should reflect the current market value

  • No limit on third party personal liability but third party property damage is limited upto Rs.7.5 lakhs

  • Registration of the vehicle and insurance should be in the name of the same person

  • Minimum compulsory deductible for 2 wheelers is Rs.50 and it is Rs.500 for 4 wheelers

  • NCB(No Claim Bonus) is from 20 % to 50% on own damage portion of premium only

  • Certificate of Insurance must be compulsorily issued by the insurer and should always be carried with the vehicle along with fitness certificate and Registration copy under Rule 141 of Motor Vehicles Act

  1. Agricultural Insurance

Presently agri insurance is provided by Agriculture Insurance Corporation of India (set up in 2002) jointly owned by NABARD and the four public sector general insurance companies. It has been implementing three products National Agri Insurance Scheme, National Crop Insurance Plan and Weather based Crop Insurance Scheme. However presently 40 million hectares of gross cropped area or 20% is covered by insurance. The following issues have hampered the progress of agriculture insurance’

  • Under Area Based Insurance for notified crops the insurance is compulsory for all farmers including small farmers growing the notified crop in the area. But assessment of loss on area based crop cutting experiment are often disadvantageous to individual farmers suffering losses much higher than the area based assessment.

  • One of the main reasons for farmers defaulting repayment of crop loans is crop loss but non repayment of loans make them ineligible to claim under insurance Government of India is planning to introduce Modified National Agricultural Insurance Scheme (MNAIS) which aims to restrict the premium to 3% (from the present high level of 3-5 to 20% of crop value

Tweet
Pin
Share
+1
0 Shares