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PRINCIPLES & PRACTICES OF LIFE INSURANCE

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Terminology of Insurance

1. Insurance

2. Insurer

3. Proposer

4. Insured

5. Life Assured

6. Proposal

7. Policy

8. Plan

9. Term

10.Sum Proposed

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11. Sum Assured

12. Premium

13. Mode

14. Lapsation

15. Revival

16. Date of Maturity

17. Participating Policies

18. Non Participating Policies

19. Days of Gross

20. Gross Premium

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21. Net Premium

22. Tabular Premium

23. Loading

24. FPR / Renewal Receipt

25. Notice for Renewal Premium

26. Nomination

27. Assignment

28. Actuaries

29. Mortality Tables

30. Mortality Experience / Mortality Tables

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31. Policy Reserve

32. Underwriting

33. Alteration in Policy

34. Claim

35. IRDA

36. Risk Speculation

37. Group Insurance

38. Reinsurance

39. Survival Benefit

40. Annuities

41. Loan

42. Surrender

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Life Insurance History

1. Life Insurance in modern form based on England

2. Oriental Life Insurance Company (1818)

3. 285 Companies by 1868

4. 174 Companies ceased to exist by 1870 on passing Insurance Act, 1870 by British Parliament

5. Mainly for Europeans

6. Indian lives treated sub-standard-Extra 15%0 to 20%0

7. First Indian Company Bombay Life Assurance Society in 1870

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8. Oriental Govt. Securities Life Assurance Company 1874

9. 44 Indian Company by 1914

10. 95 Indian Company by 1940

11. Insurance Act, 1938 was passed to regulate the sector

12. 209 insurers in 1948 with 713 crores business in force under 30,16,000 policies. Life Fund 150.39 crores

13. 250 Life Companies in 1956

14. Nationalization of life business in 1956

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Comparative Chart of Business

YearYear No. of Policies (in lacs)No. of Policies (in lacs) F.Y.P. (in crores)F.Y.P. (in crores)

19571957 88 1414

19991999 148148 41714171

20072007 661661 7540675406

20082008 858858 9298892988

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CompanyCompany Year 2008Year 2008

Life Life 63.6463.64

Non LifeNon Life 59.7059.70

Market Share (Public Companies

Overall Overall 29.96%29.96%

LICLIC 22.82%22.82%

Growth (YOY in 2008) Life

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Growth Rate (2008) (In percentage)

Name of Co. Name of Co. LivesLives FYPFYP Market Market ShareShare

RelianceReliance 127127 196196 2.962.96

Max New York LifeMax New York Life 108108 7373 1.711.71

Birla Sun LifeBirla Sun Life 7272 123123 2.112.11

Met LifeMet Life -14-14 140140 0.890.89

Sahara LifeSahara Life -24-24 183183 0.130.13

ICICI Prudential LifeICICI Prudential Life 5959 5858 8.938.93

Bajaj AllianzBajaj Allianz 9696 5252 6.986.98

SBI LifeSBI Life -3-3 8787 5.155.15

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Highest Individual Insurance (2007)

StateState No. of Policies No. of Policies (in lacs)(in lacs)

Premium Premium (in crores)(in crores)

MaharashtraMaharashtra 54.8354.83 71907190

Uttar PradeshUttar Pradesh 50215021 59225922

Andhra PradeshAndhra Pradesh 45904590 51505150

DelhiDelhi 18101810 38763876

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LIFE INSURANCE COMPANY OPERATIONS & ETHICS

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Life Insurance Company

Company that underwrites and issues life insurance Policies.

Form of Organization

- Sole Proprietor - Partnership- Corporation / Company- Mutual Assurance Companies

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Life Insurance & the Economy

Essential roles in the economy of many:

- Market – Driven Organizations- Providers of Financial Security- Financial Intermediaries- Large Employers.

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Company Operations

Operation – an action or a process that a company performs to conduct its business.

Life Insurance Company Operations include :

• Forming and organizing the insurance co.• Assessing customer needs• Developing Products• Distributing Products• Administering Product• Ensuring Corporate success.

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Functional Areas in life Insurance Companies

- Actuarial- Underwriting- Marketing- Customer Service- Claim Administration- Investments- Accounting- Legal

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- Compliance

- HR

- Information Systems.

- Integration & Coordination among functional areas

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Risk Management in Life Insurance Companies

Risk management Includes:

• identifying risk• analysis risk• assessing risk• dealing with risk

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Types of Risks faced by Insurers

- Product Design and Pricing Risk- Underwriting Risk- Credit Risk- Market Risk- Operational Risk- Liquidity Risk- Legal and Regulatory Risk- Strategic Risk

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Ethical Decision Making

Ethics: A system of accepted standards of conduct and moral judgment that combines the elements of honesty, integrity and fair

treatment.

- Life Insurance and the Fiduciary Relationship- Ethical Dilemmas - Improving Ethics in the Life Insurance Industry- Establishing codes of Ethics- Establishing Corporate Ethics offices- Training to employees in Ethics- Consumer Education

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Organizational Structure of Insurance Companies

Functions: Generally describes a distinct type of work, an extended step in a process, or an aspect of operation and management.

Functional areas: Marketing Actuarial Underwriting Customer Service

Claim Administration Investments Accounting Legal Compliance

Human Resources Information Systems

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- Coordination key to Effectiveness Coordination key to Effectiveness Components of Organizational StructureComponents of Organizational Structure 1.Assigning Responsibility 1.Assigning Responsibility 2.Providing proper authority 2.Providing proper authority 3.Specific Accountability 3.Specific Accountability 4.Delegation 4.Delegation

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Organizational Chart Organizational Chart

Formal internal organization of c company indicating Formal internal organization of c company indicating

(1) visual display of job(1) visual display of job

(2) Chain of command/structure of authority (2) Chain of command/structure of authority

(3) Unity of command (3) Unity of command

(4) Pyramidal structure and level of authority (4) Pyramidal structure and level of authority

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- Policy owners & stockholders- Policy owners & stockholders- Board of DirectorsBoard of Directors- Company Management-CEO, strategic planning, technical planningCompany Management-CEO, strategic planning, technical planning- Centralized & Decentralized OrganizationCentralized & Decentralized Organization- Line units & staff units Line units & staff units

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Organizations of Work ActivitiesOrganizations of Work Activities

1.1. FunctionalFunctional

2.2. ProductProduct

3.3. TerritoryTerritory

4.4. Strategic BusinessStrategic Business

5.5. MatrixMatrix

6.6. New organizational New organizational

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Welcome toWelcome to

Policy ServicingPolicy Servicing

By : J. L. KapurBy : J. L. Kapur

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2 ways to ensure that claim on policy is 2 ways to ensure that claim on policy is settled in favor of beneficiary on death of settled in favor of beneficiary on death of insuredinsured

nomination Section 39nomination Section 39 assignment Section 38assignment Section 38

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NOMINATIONNOMINATION

1.1. holder of the policy holder of the policy 2.2. on his own life on his own life 3.3. to appoint a person/s to to appoint a person/s to 4.4. receive policy monies receive policy monies 5.5. death during the term of the policy.death during the term of the policy.

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How to effect Nomination

-At the time of taking policy-Proposal form

-On the back of policy by endorsement

-Notice to the Insurance Co.

-Registrations of Nomination

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Effect of NominationEffect of Nomination

does not confer on nominee any right, title does not confer on nominee any right, title or interest in policyor interest in policy

policyholder can change nominee without policyholder can change nominee without nominee’s consentnominee’s consent

death of nomineedeath of nominee

for a minor nominee, appointee is requiredfor a minor nominee, appointee is required

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ASSIGNMENTASSIGNMENT

On assignment of policy to assignee, policyholder On assignment of policy to assignee, policyholder loses all rights, titles and interest in the policy loses all rights, titles and interest in the policy

policy monies payable to assignee on maturity, or policy monies payable to assignee on maturity, or death of policyholderdeath of policyholder

1. Who can assign:-Holder of policy with 1. Who can assign:-Holder of policy with absolute rights absolute rights must be major & must be major & competent to competent to contract.contract.2.2. Must be supported by considerations.Must be supported by considerations.

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Types of AssignmentTypes of Assignment

Absolute assignmentAbsolute assignment Conditional assignmentConditional assignment

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Absolute assignmentAbsolute assignment

Policy is assigned absolutely without anyPolicy is assigned absolutely without any

condition.condition. Must by supported by considerationMust by supported by consideration Valuable considerationValuable consideration natural love & affection natural love & affection

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Conditional assignmentConditional assignment

policy is assigned with certain conditions.policy is assigned with certain conditions.

standard condition: standard condition:

Policy will revert back to policy holder if Policy will revert back to policy holder if policy holder survives the date of maturity or policy holder survives the date of maturity or on assignee’s predeceasing the policyholderon assignee’s predeceasing the policyholder

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AssignmentAssignment

For assignment, endorsement of the fact For assignment, endorsement of the fact of transfer of interest in policy from of transfer of interest in policy from assignor to assignee is required.assignor to assignee is required.

It must be signed by assignor, duly It must be signed by assignor, duly witnessed and sent to insurance company witnessed and sent to insurance company for registration.for registration.

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• It can be made by an endorsement on the policy or by a separate deed

• Notice of assignment to insurance company / written acknowledgement attestation by witness at least one.

• Effect of assignment on nomination

• Death of Assigner

• Minor Assignee. Can not give discharge. Testamentary guardian-father may appoint guardian by will for child during minority.

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Surrender Value

Cash value payable by insurer on termination of policy contract is surrender value. Cash value of Bonus to be paid.

If premium has been paid for at least 3 consecutive years, policy acquires surrender value

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Minimum Surrender Value

Minimum surrender value =

30% (total premium paid- premiums for 1st year- extra / additional premiums)

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Guaranteed surrender value

Guaranteed surrender value of policy =

Surrender value + cash value of vested bonus

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Paid up value

Paid up value =premium paid *sum assured

total premium payable

Special Surrender value =Surrender value factor * total paid up value

+ Bonus.

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Section 113 (2)

If the policy has acquired surrender value, it shall not lapse by non payment of further premium but shall be kept alive to the extent of paid up value acquired.

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Features of surrender value

Surrender value arises out of reserves created under each policy.

Hence surrender value will differ from policy to policy

Surrender value will be as per calculationsPrinted on the policy document.

Surrender value tables are prepared by the actuarial department of the company.

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Loan Calculation

Loan can be granted against life insurance policies

Loans up to 90% of the surrender value

For paid up policies, lesser percentage of loan (up to 85%) allowed

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AlterationsAlterations

To make any alterations in policy, To make any alterations in policy,

policy must be in full forcepolicy must be in full force alteration should not result in increased risk alteration should not result in increased risk

leading to adverse selection against insurerleading to adverse selection against insurer

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Permissible AlterationsPermissible Alterations

addressaddress

mode of premium payment mode of premium payment

from without profit to with profitfrom without profit to with profit

namename

nominee / assigneenominee / assignee

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change in plan provided it does not lower change in plan provided it does not lower

premiumpremium

splitting policies into two or more policiessplitting policies into two or more policies

grant double accident benefitgrant double accident benefit

grant WOP for policy on minorgrant WOP for policy on minor

option for settlement by installmentsoption for settlement by installments

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Duplicate policyDuplicate policy

Loss or damage to policy document does Loss or damage to policy document does not absolve insurer of his liability to pay not absolve insurer of his liability to pay policy monies when claim arises.policy monies when claim arises.

Claimant must furnish indemnity bond Claimant must furnish indemnity bond with surety of financial standing.with surety of financial standing.

Insurer’s cost of issuing duplicate policy Insurer’s cost of issuing duplicate policy (cost of advertisement, stamp duty, etc.) (cost of advertisement, stamp duty, etc.) must be borne by claimant must be borne by claimant

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Welcome to Welcome to ClaimsClaims

By : J. L. KapurBy : J. L. Kapur

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Servicing of Life Insurance ContractServicing of Life Insurance Contract

Long Term Contract(20-35 years)

Start End

Issuance of first premium receipt(FPR)

Settlement of claim

Renewal notices/renewal receipts

Alterations/ endorsements etc.

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ClaimClaim

Claim is a natural culmination of the promise Claim is a natural culmination of the promise made by the company at the time of entering made by the company at the time of entering into a contract into a contract

DEATH CLAIMS

MATURITY CLAIMS

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Solvency of the company

- Effectiveness of the Unit to prevent fraudulent claims from being settled

- Protect the interest of shareholders, Body of Policyholder & Industry

- Image Building

- Feedback – emerging risks.

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Definition of Death claimDefinition of Death claim

A claim is called a death claim if the life A claim is called a death claim if the life assured dies while the policy is in forceassured dies while the policy is in force

If the policy was in full force at the time of If the policy was in full force at the time of death, full sum assured along with accrued death, full sum assured along with accrued bonuses will be paid bonuses will be paid

All unpaid premiums along with interest will All unpaid premiums along with interest will be deducted from the claim amountbe deducted from the claim amount

Intimation of death to be made in writing to Intimation of death to be made in writing to the Insurance companythe Insurance company

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Difficulties in death claim settlementDifficulties in death claim settlement

Lodged Policy Document:Lodged Policy Document:

for loan taken against policy, policy would for loan taken against policy, policy would be lodged with the creditor (insurer or any be lodged with the creditor (insurer or any other creditor)other creditor)

Assignment of the policy to the creditor Assignment of the policy to the creditor

should have been done in case of loansshould have been done in case of loans

Discharge from assignees is necessary Discharge from assignees is necessary before settling the claimbefore settling the claim

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Difficulties in death claim settlementDifficulties in death claim settlement

Stolen Policy Document :Stolen Policy Document : police complaint must be lodged police complaint must be lodged company must have copy of FIR company must have copy of FIR any loss treated with caution due to any loss treated with caution due to

possibility of moral hazardpossibility of moral hazard indemnity bond to hand original policy, if indemnity bond to hand original policy, if

ever found, to insurerever found, to insurer

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Cont….Cont….

Policy is irretrievably lost:Policy is irretrievably lost:

cause may be mutilation /fire/flood etc.cause may be mutilation /fire/flood etc.

indemnity bond can be dispensed with if indemnity bond can be dispensed with if remnants of the policy are produced as remnants of the policy are produced as proof of lossproof of loss

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Policies under MWPA:Policies under MWPA:

claim has to be necessarily settled with claim has to be necessarily settled with named trustees. named trustees.

cannot be claimed by creditorscannot be claimed by creditors

Cont….Cont….

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Cont…..Cont…..

Policyholder is missing:Policyholder is missing:

death cannot be inferred automaticallydeath cannot be inferred automatically

claimants must approach appropriate court toclaimants must approach appropriate court to get decree drawing presumption of deathget decree drawing presumption of death

this decree must be presented to the insurancethis decree must be presented to the insurance companycompany

payment of premiumpayment of premium

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Types of death claimTypes of death claim

EARLY CLAIMS(Death within 2 years from the date of FPR)

EARLY CLAIMS(Death within 2 years from the date of FPR)

NON-EARLY CLAIMS(Death after 2 years from the date of FPR)

NON-EARLY CLAIMS(Death after 2 years from the date of FPR)

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Procedure for settling Death ClaimProcedure for settling Death Claim

Ascertain Policy details (No,relevant branch etc)Ascertain Policy details (No,relevant branch etc)

Ascertain the condition of the policy(full force/partly paid Ascertain the condition of the policy(full force/partly paid up/lapsed)up/lapsed)

person giving Intimation of death(nominee/ relative/ person giving Intimation of death(nominee/ relative/ stranger etc) stranger etc)

place,time & cause of death place,time & cause of death

place from where intimation has been received place from where intimation has been received

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Cont….

Death Certificate

- Primary Evidence of Death

- Establishes the identity of the decreased

- Name, Age, Date, time and place of death to be cross checked with other information

- Issued by - Municipal Corporation. - Secretary of Gram Panchyat

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Cont…Cont…

Ascertain the cause of deathAscertain the cause of death

In case of unnatural death,FIR, medical report,court verdict In case of unnatural death,FIR, medical report,court verdict etc to be called foretc to be called for

Murder of a policy holder needs special attention & Murder of a policy holder needs special attention & investigationinvestigation

Accidental death has to be proved and cannot be presumed Accidental death has to be proved and cannot be presumed

Claim form to be completed by the claimant Claim form to be completed by the claimant

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Requirements for early death settlementRequirements for early death settlement

Intimation of deathIntimation of death

Policy documentPolicy document

Proof of age, if age not admitted alreadyProof of age, if age not admitted already

Death certificate from an authorised agencyDeath certificate from an authorised agency

Statement from last medical attendant, giving particulars of last Statement from last medical attendant, giving particulars of last illnessillness

Cont..Cont..

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Requirements for early death settlementRequirements for early death settlement

Statement from the hospital, where the policyholder was Statement from the hospital, where the policyholder was last admitted.last admitted.

Statement from the person who has seen the dead body Statement from the person who has seen the dead body and attended the funeraland attended the funeral

Statement from the employer – Sick leaveStatement from the employer – Sick leave

Alternative proof of death may be accepted under certain Alternative proof of death may be accepted under certain circumstances(e.g air crash,missing at high sea etc.)circumstances(e.g air crash,missing at high sea etc.)

Investigation report by the investigating officer Investigation report by the investigating officer commenting on any non disclosure of material factcommenting on any non disclosure of material fact

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Sec 45 of Insurance Act 1938

No policy shall be questioner after 2 yearsfrom the date of risk by the insurer on the ground that the statement or answers given in the proposal or medical report or any document was inaccurate or false unless the insurer shows that such statement was

- On material matter- It was fraudulently made- Policy holder knew that it was false

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Investigation

- Identify areas where suppression / mis- representation concerning past health & habits

- Leave record from employer

- Consulting Doctor / Hospital / Medical Claim history

- From the neighbors – Life style health & habits.

- From other Insurance Companies Existing & previous Insurance

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Maturity ClaimsMaturity Claims

Maturity claims include the following:Maturity claims include the following:

1)Survival benefit claims1)Survival benefit claims

2)Fixed percentage of basic sum assured in 2)Fixed percentage of basic sum assured in case of money back policiescase of money back policies

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Documents required for maturity claimsDocuments required for maturity claims

Completed Claim formCompleted Claim form Discharge voucher signed by the original Discharge voucher signed by the original

claimants claimants Original policy documentOriginal policy document Proof of assignment/reassignmentProof of assignment/reassignment Discharge voucher from the assignee incase Discharge voucher from the assignee incase

the policy is assignedthe policy is assigned Proof of age if not submitted earlier Proof of age if not submitted earlier

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Conditions applicableConditions applicable

In case of outstanding loans on the policy, In case of outstanding loans on the policy, the survival benefit amount will have to be the survival benefit amount will have to be adjusted towards repayment of outstanding adjusted towards repayment of outstanding loan with interestloan with interest

When a policy is financed through the funds When a policy is financed through the funds of a HUF , the claim has to be settled with of a HUF , the claim has to be settled with the Karta of the HUFthe Karta of the HUF

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Section 113 (2)

If the policy has acquired surrender value, it shall not lapse by non payment of further premium but shall be kept alive to the extent of paid up value acquired.

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Features of surrender value

Surrender value arises out of reserves created under each policy.

Hence surrender value will differ from policy to policy

Surrender value will be as per calculationsPrinted on the policy document.

Surrender value tables are prepared by the actuarial department of the company.

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Loan Calculation

Loan can be granted against life insurance policies

Loans up to 90% of the surrender value

For paid up policies, lesser percentage of loan (up to 85%) allowed

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REVIVALREVIVAL

Risk cover ceased on lapsed policiesRisk cover ceased on lapsed policies Insurer also lose future incomeInsurer also lose future income Agent loses his commissionAgent loses his commission Adverse selection– insurer liability highAdverse selection– insurer liability high Revival is possibleRevival is possible Policy brought back into full forcePolicy brought back into full force Revival after 5 year lapse is not allowedRevival after 5 year lapse is not allowed

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REVIVAL CONT…REVIVAL CONT…

Underwriting process is identicalUnderwriting process is identical Proof of continued insurabilityProof of continued insurability Revival’s normal requirementsRevival’s normal requirements

InsurabilityInsurability Arrears of premiums with interest Arrears of premiums with interest

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1. Ordinary revival scheme1. Ordinary revival scheme

A- Without evidence of good healthA- Without evidence of good health

(!) Revival with in 6 months of first FUP(!) Revival with in 6 months of first FUP

(2) POLICY MATURING WITHIN A YEAR(2) POLICY MATURING WITHIN A YEAR

(3) In force for at least 5 years-12 months of FUP(3) In force for at least 5 years-12 months of FUP

(4) No death cover(4) No death cover

B- With satisfactory evidence of good healthB- With satisfactory evidence of good health

(1) Up to 7months if issued at OR(1) Up to 7months if issued at OR

(2) New proposal can be considered under (2) New proposal can be considered under

non-medicalnon-medical

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( 3 )Policy has completed half of the term or( 3 )Policy has completed half of the term or

( 4 )10 years which ever is more and FUP is ( 4 )10 years which ever is more and FUP is

Between 12 to 18 months.Between 12 to 18 months.

( 5) RISK IS TO BE CALCULATED AT THE ( 5) RISK IS TO BE CALCULATED AT THE TIME OF REVIVAL.TIME OF REVIVAL.

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Special revival schemeSpecial revival scheme

Unable to pay the full arrearsUnable to pay the full arrears No surrender value acquiredNo surrender value acquired Lapsed period 6months—2yearsLapsed period 6months—2years One revival permittedOne revival permitted New policy is dated back as original was in New policy is dated back as original was in

force but not more than 2 yearsforce but not more than 2 years DOC is changed, term remain same.DOC is changed, term remain same. Age revised Age revised

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Difference of original & revised premium to Difference of original & revised premium to Be paid.Be paid. Endorsement attached with policy.Endorsement attached with policy. Endorsement feeEndorsement fee Financial burden is much lessFinancial burden is much less

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Installment RevivalInstallment Revival

Assured not able to pay arrears in lump Assured not able to pay arrears in lump sum & not eligible for special revival sum & not eligible for special revival

Lapsed for more than one yearLapsed for more than one year No loan outstandingNo loan outstanding RequirementsRequirements

• -six months premium to be paid-six months premium to be paid• -arrears spread over 2 years & due dates in the -arrears spread over 2 years & due dates in the current policy yearcurrent policy year -policy endorsed accordingly -policy endorsed accordingly

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Loan cum revival schemeLoan cum revival scheme

( 1 ) Loan for payment of arrears of premium & ( 1 ) Loan for payment of arrears of premium & interestinterest( 2 ) Policy have sufficient SV ( 2 ) Policy have sufficient SV STEPS:STEPS: - Loan value calculated- Loan value calculated

- amount utilised towards arrears - amount utilised towards arrears - Balance , if any, paid to insured or- Balance , if any, paid to insured or recovered from himrecovered from him - Evidence of insurability required. - Evidence of insurability required.

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M W P ACT POLICYM W P ACT POLICY

Section 6 of MWP act, 1874Section 6 of MWP act, 1874 Creation of a trust for beneficiariesCreation of a trust for beneficiaries Wife & children normally coveredWife & children normally covered No control of life assuredNo control of life assured Creditors/ banks have no accessCreditors/ banks have no access Benefit to named parties jointly or to the Benefit to named parties jointly or to the survivors or survivor.survivors or survivor. An addendum is to be completed.An addendum is to be completed. No loan availableNo loan available

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Policy for handicappedPolicy for handicapped

Physically handicapped are insurable.Physically handicapped are insurable. Loss limbs, eyes, hearing completelyLoss limbs, eyes, hearing completely Partially handicapped insured generally Partially handicapped insured generally without any extra.without any extra.

Key man insurance Key man insurance 1. only term insurance plains1. only term insurance plains 2. firm or company is policyholder & pay 2. firm or company is policyholder & pay the premium. Claim to PH .the premium. Claim to PH .

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UNDER WRITINGUNDER WRITING

Medical & non- medicalMedical & non- medical Special reports Special reports Agent’s confidential report````Agent’s confidential report```` Age proofAge proof Under writing decisions;Under writing decisions; 1. accepted at OR 1. accepted at OR 2.accepted for shorter term2.accepted for shorter term

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Under writing conti……Under writing conti……

3. accepted for a different plan3. accepted for a different plan 4.accepted with extra4.accepted with extra 5. accepted with lien5. accepted with lien 6. accepted with extra exclusions6. accepted with extra exclusions 7. postponed for a specific period7. postponed for a specific period 8. decline8. decline FACTERS considered for under writing FACTERS considered for under writing

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1.physical- health, age, height, weight1.physical- health, age, height, weight 2. financial2. financial 3. moral hazard3. moral hazard 4.physical hazard4.physical hazard

NUMERCAL RATING SYSTEMNUMERCAL RATING SYSTEM