Risk Management and Insurance AIT-2020

Study Material
Risk Management and Insurance
Module 4
LIFE INSURANCE

BASIC OF LIFE INSURANCE:

Life Insurance is a contract for payment of sum of money to the person assured on the
happening of the event insured by the contract. Usually insurance contract provides for the
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payment of an account on the date of maturity or at specified date at period interval or at

unfortunate death if it occur earlier.
Among other thing the contract also provides for the payment of premiums by the assured, life
insurance is universally acknowledge as a tool to eliminate risk, substitute certainty or
uncertainty and ensure time help on the family.
Actuarial science:
Meaning
Actuarial science is a discipline that assesses financial risks in the insurance and finance fields,
using mathematical and statistical methods. Actuarial science applies the mathematics of
probability and statistics to define, analyse and solve the financial implications of uncertain
future events.
Growth of actuarial science
The 17th century was a period of advances in mathematics in Germany, France and England.
At the same time there was a rapidly growing desire and need to place the valuation of personal
risk on a more scientific basis.
Independently of each other, compound interest was studied and probability theory emerged as
a well-understood mathematical discipline.
Another important advance came in 1662 from a London draper named John Graunt, who
showed that there were predictable patterns of longevity and death in a group, or cohort, of
people of the same age, despite the uncertainty of the date of death of any one individual.
This study became the basis for the original life table.
One could now set up an insurance scheme to provide life insurance or pensions for a group
of people, and to calculate with some degree of accuracy how much each person in the group
should contribute to a common fund assumed to earn a fixed rate of interest.

Features of Life Insurance

1. Nature of General Contract

2. Insurable Interest
3. Utmost Good Faith
4. Warranties
5. Proximate Cause
6. Assignment and Nomination.

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1. Nature of general contract:

Since the life insurance contract is a sort of contract it is approved by the Indian Contract Act.
According to Section 2(H) and Section 10 of Indian Contract Act, a valid contract must have
the following essentialities:

• Agreement (offer and acceptance):

• Thus the acceptance letter sent by the insurer is not always acceptance. It would be
acceptance only when the first premium was accompanied with the proposal and the
proposal is acceptable on normal rates and terms. In other cases it would be an offer or
counter-offer.
• Competency of the parties:
• The insurer will be competent to contract if he has got the license to carry on insurance
business. Majority is attained when a person completes age of 18 years. A minor is not
competent to contract. A contract by a minor is void excepting contracts for necessaries.
• Free consent of the parties:
• In life insurance, both parties must know the exact nature of the risk to be underwritten.
If the consent is not free, the contract is generally avoidable at the option of the party
whose consent was not freely given.
• Legal consideration:
• The presence of a lawful consideration is essential for a legal contract. The insurer must
have some consideration in return of his promise to pay a fixed sum at maturity or death
whichever may be the case. The consideration need not be money only. It should be
anything valuable or to which value may be assigned. The first premium is
consideration and subsequent premiums are merely conditions to contract.

2. Insurable Interest:

Insurable interest is the pecuniary interest. The insured must have insurable interest in
the life to be insured for a valid contract. Insurable interest arises out of the pecuniary
relationship that exists between the policy-holder and the life assured so that the former
stands to lose by the death of the latter and/or continues to gain by his survival. If such
relationship exists, then the former has insurable interest in the life of the latter. The
loss should be monetary or financial. Mere emotion and expectation do not constitute
insurable interest in the life of his friend or father merely because he gets valuable
advices from them.

Insurable interest in life insurance may be divided into two categories.

Insurable interest in own life and
Insurable interest in other’s life.

3. Utmost good faith

Life insurance requires that the principle of utmost good, faith should be preserved by
both the parties. The principle of utmost good faith says that the parties, proposer
(insured) and insurer must be of the same mind at the time of contract because only
then the risk may be correctly ascertained. They must make full and true disclosure of
the facts material to the risk.

4. Warranties

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Warranties are an integral part of the contract, i.e., these are the basis of the contract
between the proposer and insurer and if any statement, whether material or non-
material, is untrue, the contract shall be null and void and the premium paid by him
may be forfeited by the insurer. The policy issued will contain that the proposal and
personal statement shall form part of the Policy and be the basis of the contract.
Warranties may be informative and promissory. In life insurance the informative
warranties are more important. The proposal is expected to disclose all the material
facts to the best of his knowledge and belief. Warranties relating to the future may only
be statements about his expectation or intention, for instance, the insured promises that
he will not take up any hazardous occupation and will inform the insurer if he will take
the hazardous occupation.

5. Assignment and Nomination

The Policy in life insurance can be assigned freely for a legal consideration or love and
affection. The assignment shall be complete and effectual only on the execution of such
endorsement either on the Policy itself or by a separate deed. Notice for this purpose
must be given to the insurer who will acknowledge the assignment. Once the
assignment is completed, it cannot be revoked by the assignor because he ceases to be
the owner of the Policy unless reassignment is made by the assignee in favor of the
assignor. An assignee may be the owner of the policy both on survival of the life
assured, or on his death according to the terms of transfer. The life policies are the only
Policies which can be assigned whether the assignee has an insurable interest or not. A
nomination can be cancelled before maturity, but unless notice is given of any such
cancellation to the insurer, the insurer will not be liable for any bonafide payment to a
nominee registered in the records. When the policy matures, or if the nominee dies, the
sum shall be paid to the Policy-holder or his legal representatives.

LIFE INSURANCE DOCUMENTS

Documents are necessary to evidence the existence of a contract. In life insurance

several documents are in vogue. The documents stand as a proof of the contract between
the insurer and the insured. The major documents in vogue in life insurance are
premium receipt, insurance policy, endorsements etc.

Documents needed at the stage of the proposal

Proposal form is the basic format which is filled in by the proposer who wants to take
an insurance policy. It can be defined as the application for insurance.

A proposal form has three portions

1. The first gives details about the proposer or insured, his name, address,
occupation, the details about the type of insurance that he wants to take and the
name of the nominee to whom the money is payable in case the policyholder
does not survive to take the maturity amount.
2. The second portion relates to the details of the insurance policy that the proposer
already possesses, the present health conditions and the personal history of his
health, any sickness or accident he might have had. This is a detailed

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questionnaire and the proposer is expected to reply to each question truthfully

and honestly.
3. The last portion of the proposal form relates to the declaration. Through this
declaration, the proposer.

There are certain other documents which may be required at the proposal stage.

Age proof

Age is an important factor in deciding the quantum of premium against a policy. The document
proving the age, i.e. age proof must be reliable and the insured has to undertake as to its
truthfulness. An insurer accepts these documents as standard age proof –

1. Certified extract from municipal records, recorded at the time of birth.

2. Extract from school or college records.
3. Extract from service register in case of employees - Government or semi government
or such other reputed institutions which insist on conclusive evidence of age at the time
of recruitment.
4. Identity card issued by Defence department.
5. Marriage certificates
6. Domicile certificate.
7. Pass ‘ port.

Proof of income

This document may become necessary whenever the sum assured is very high. Normally a
sum assured which is seven to eight times of the declared income is acceptable for
insurance.

But proposals do come to the insurer when the known source of income of the proposer is
much less compared to the amount of insurance desired. A service holder normally does
not face this problem as his sources of income are verifiable. In case of business people,
the assessed income is at times much less compared to what is a desirable income for the
amount of insurance desired. In such cases the insurer at times calls for assessed income
tax returns, or Chartered Accountant’s certificate etc. Such precautions are necessary to
eliminate the possibility of moral hazard..

DOCUMENTS NEEDED DURING THE CONTINUANCE OF THE POLICY:

First Premium Receipts and Renewal Premium Receipts

The First Premium Receipt (FPR) is the confirmation of insurance. This document is
important as it gives the date of assumption of the risk but its value is nil once the policy
document has been issued.

Policy Contract:

Policy document is a detailed document and it is the Evidence of the insurance contract
which mentions all the terms and conditions of the insurance. The insured buys not the
policy contract, but the right to the sum of money and its future delivery. The insurer
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on its part promises to pay a sum of money, provided of course the insured keeps its
part of promise of paying the instalments of premium as scheduled.

The policy document is signed by an official of the insurer and dated and stamped as
per the provision of the Stamp Act to make it a completely legally enforceable
document.

Renewal Premium Receipts:

Though it is the duty of the insured to pay the renewal premium on the due date the
insurer sends a renewal premium notice to the insured out of courtesy and on receiving
the premium issues a renewal premium receipt (RPR) which is an important document
and has to be preserved as it is the only documentary proof that the due payment has
been made.

Endorsements and alteration

Endorsements Life insurance policy being a long term contract, it is quite likely that
the conditions may so change over the time that an alteration or change in the policy
conditions may be required. The insurers normally permit such changes which are in
the interest of the policyholders and also simultaneously do not adversely affect the
insurer’s interest.

The following alterations are not permitted.

(1) Alterations during the first year,
(2) Alteration from one class of assurance to another where the premium scale is
reduced.
(3) Alteration to another plan which is more risk oriented.
(4) Increase in sum assured in the same policy.

The following alterations are allowed

1) Limiting the premium paying period, but date of maturity remaining unaltered;
2) Change in the mode of payment of premium e.g. half-yearly to yearly or half-yearly
to quarterly;
3) Alteration due to age admission, if required, has to be compulsorily done;
4) Alteration or correction in the name of the assured/ nominee;
5) Bringing the policy under salary savings scheme;
6) Replacing a limiting clause by an extra premium. For example the first pregnancy
clause can be replaced by a onetime extra premium of Rs.5/- per thousand;

Duplicate policy:

A policy document is a valuable document and can be used for mortgage etc. Loss of
policy document does not absolve the insurer from the liability of payment of policy
proceeds when the claim arises. The claim can be settled on the claimants, furnishing
an indemnity bond jointly with one surety. If a policy is irrevocably lost, a duplicate
policy can be issued, after following a certain procedure. The insurer satisfies itself of
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the circumstances leading to loss. Being so satisfied the insurer insists upon an
advertisement in a newspaper, production of an indemnity bond and payment of policy
preparation charges and there after a duplicate policy is issued. The duplicate policy is
stamped “Duplicate Policy”.

Insurance premium

Meaning
An insurance premium is the amount of money that an individual or business must pay
for an insurance policy. The insurance premium is income for the insurance company,
once it is earned and also represents a liability in that the insurer must provide coverage
for claims being made against the policy.
According to Insurance law, the consideration paid to the insurer for insurance
protection, specific period of time are called as premium.
Insurance premium calculations

Premium of the insurance policy is decided considering age of the customer, coverage
period and duration of the policy. It is calculated by multiplying the rate by the number
of exposure units bought.

Insurance premium classification

Gross premium
Net premium

Gross premium

The gross premium is the premium charged by the insurer to be able to meet the
expenses of insurance and pay the amount of claims. Premium depends upon the
mortality rate, the assumed interest rate, the expenses, and the bonds loading.

Net premium
Net premium is a term that can have various meanings. One, it refers to the portion of
the premium needed to pay for future losses. Two, it also refers to the resulting amount
after deducting the agent's commissions from the gross premium. Third, as used in
actuarial valuation, it refers to the present expected value of the benefits from a policy
minus the present expected value of all future premiums.

Net premium may further be categories into:

Net single premium: in general parlance, means the present monetary worth of the
future death benefit. It is the lump sum premium amount, which together with the
interest earned thereon, is precisely.

Life insurance Classification

Whole life insurance policy:

Whole life insurance policy is defined as an insurance in which the insured person pays
the premium in the instalment basis for full duration of his/her life. After the death of

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insured, his/her nominee receives the insured amount. There are 3 types of whole life
insurance policy

Ordinary whole life insurance policy. In this policy, insured person has to pay the
premium to his/her concerned insurance company till his/her death. The insured person
can’t utilize the insured amount because this amount will be returned after his/her
nominee
Limited premium whole life insurance policy: Under this policy, the insured person has
to pay the premium for limited time and the insured amount will be returned after the
death of insured person to his/her nominee

Convertible whole life insurance policy: It is that type of policy which can be converted
to endowment life insurance policy after a certain time. It is suitable for those people
who have lower income at present and they hope for increment in income in the near
future.

Endowment life insurance policy:

It is defined as that type of insurance in which the insured person pays the premium for
a certain time and after certain time they receive insured amount. If she/he dies before
the insured period his/her nominee receives the insured amount. Generally endowment
life insurance policy is done for 10, 15 20 years and more. The insured has to pay the
premium either till the end of insured period or till the death of insured which ever is
earlier.
Term Life Insurance
Term insurance is the simplest form of life insurance plan. Easy to understand and
affordable to buy.

A term plan provides death risk cover for a specified period. In case the life assured
passes away during the policy period, the life insurance company pays the death benefit
to the nominee. It is a pure risk cover plan that offers high coverage at low premiums.

There’s an option to add riders to widen up the coverage.

The death benefit is payable as lump sum, monthly payouts, or a combination of both.

There’s no pay out if the life assured outlives the policy term. However, these days
there are companies offering Term Plans with Return of Premiums (TROPS), where
insurance companies payback all the paid premium amount in case the life assured
outlives the term period. But, such plans are costlier than the vanilla term insurance
plan.

Unit Linked Plans (ULIPs)

A unit linked plan is a comprehensive combination of insurance and investment. The

premium paid towards ULIP is partly used as a risk cover (insurance) and partly is
invested in funds. One can invest in different funds offered by the insurance company
depending on his risk appetite. The insurance company then invests the accumulated
amount in the capital market i.e. in bonds, equities, debts, market funds, or a hybrid
funds

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ULIP investments are mainly of four types:

• Equity Funds: Under these ULIPs the investments are made primarily in stocks and equities
on companies. They provide potential of higher returns, but they also have high risks. So, if
you have a higher risk appetite, these are the funds in which you can invest in.The volatility of
returns is higher in equity funds.
• Debt Funds: Under these funds, investments are made in debt instruments such as Government
securities, Money Markets, Corporate Bonds etc., which are issued by Governments, and
Banks. The risk factor in these investments is moderate, and they provide moderate to low
returns.
• Liquidity Funds: Under these funds the investments are made in short-term market
instruments such as Treasury Bills and Call Money. The maturity time of these funds is
minimal, which is why they are used for short-term money goals.
• Balanced Funds: These funds have moderate risk and offer less volatile returns as compared
to equity oriented funds. In this type, the sum is invested in proportions between equity and
debt. Thus, lowering the risk factors.

Money Back Life Insurance

Money back plan is a unique type of life insurance policy, wherein a percentage of the sum
assured is paid back to the insured on periodic intervals as survival benefit.

Money back plans are also eligible to receive the bonuses declared by the company from time
to time. This way, policyholder can meet short-term financial goals.

Joint Life Policy:

This policy covers the risk on two lives and is generally available to partners in business.
Policies are however, issued on the lives of husband and wife under specified circumstances.
Sum assured becomes payable at the end of the selected term or on the death of either of the
two lives assured, if earlier.

Annuities:

It is a policy under which the insured amount is payable to the assured by monthly or annual
instalments after he attains a certain age. The assured may pay the premium regularly over a
certain period or he may pay the premium regularly over a certain period or he may pay a lump
sum of money at the outset. These policies are useful to persons who wish to provide a regular
income for themselves and their dependants.

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1st Type : Life Time Payment Option

If any customer will buy this annuity plan, insurance company will pay him its benefit life time.
But if he dies, his beneficiaries will not get the principle amount which is invested by him.

2nd Type : Life Time Payment with Refund Option

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If any customer will buy this annuity plan, insurance company will pay him its benefits life
time through annuity settlements but if he dies, his beneficiaries will get the principle amount
of investment.

3rd Type : Life Time Payment Option with Certain Period

As per this annuity plan, customer will get life time payments from insurance company. But if
he dies before the certain period, same payment will start to his beneficiaries. For example,
after starting payment, the certain period is is 6 year, if you die before six year, same life time
payment will start to your beneficiary whose name is nominated by you.

4th Type : Annuity Settlement in Certain Temporary Period

In this type of annuity settlement, you will receive the payment for a set of period. It may be
10 years or 20 years. If you die before this period, your beneficiaries will get same period upto
same set of period. For example, set of period is 20 years, after 14 years, you have died. Now,
next 6 years, your beneficiaries will get the payment.

Important : In first type, there will be high rate of return because beneficiaries can not claim
for refund or payment. In other types return will be low than first type.

Child Plan

Child plan helps to build corpus for child’s future growth. Child plans help to build
funds for child’s education and marriage. Most of the Child Plan provides annual
installments or one time payout after the age of 18 years.

In case of an unfortunate event, the insured parent passes away during the policy term
- immediate payment is payable by the insurance company. Some child plans waive off
the future premiums on death of the life insured and the policy continues till maturity.

Retirement Plan

Retirement plan helps to build corpus for your retirement. Helping you to live
independently financially and without worries. Most of the child plans provide annual
installments or one time payout after the age of 60 years.

In case of an unfortunate event, life assured passes away during the policy term -
immediate payment is payable to the nominee by the insurance company. Death benefit
will be higher of coverage or fund value or 105% of premiums paid. Vesting Benefit
will be payable if the life assured survives the maturity age. In which case, payout will
be fund value which has to be utilized for buying an annuity.

Annuities

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Annuity is a contract in between the insurance company (i.e., the party granting the
annuity) and the annuitant (receiver of annuity) whereby in consideration of the
payment of a purchase price by the annuitant, the other party (i.e., the insurance
company) undertakes to make a yearly or annual payment to the annuitant from a
certain predetermined time until the annuitant’s death or for a fixed period.

An annuity is a periodical level payment made in exchange for the purchase money for
the remainder of the lifetime of a person or for a specified period.

An annuity is a contract between you and an insurance company that requires the
insurer to make payments to you, either immediately or in the future. You buy an
annuity by making either a single payment or a series of payments. Similarly, your
payout may come either as one lump-sum payment or as a series of payments over time.

Merits and demerits of annuities

Merits of annuities
Tax Deferral –
Annuities stand alone as the only investment that is inherently accorded tax-deferred
status. All money invested into annuities of any kind grows tax-deferred until it is
withdrawn. Annuities have no limit on the amount of money that can be placed into
them, and there are also no income phaseout schedules that apply to contract owners or
annuitants. This gives them a substantial advantage over Individual Retirement
Accounts (IRAs) and qualified plans for wealthy investors who can shelter millions of
dollars from taxation inside these contracts.

Guaranteed Payout –
Annuitants who choose any type of life payout option can rest assured that they will
receive some sort of payment until they die, even if they completely exhaust the value
of the contract beforehand.

Protection from Probate and Creditors –

Annuity contracts are generally exempt from creditors in most cases and are
unconditionally exempt from probate proceedings nationwide. Exemption from
creditors can vary somewhat from one state to another; for more information on this
matter, call your state insurance commissioner.

Demerits of Annuities

Costs and Fees –

Annuities are one of the most expensive types of investments available in the financial
marketplace. A breakdown of the fees for each type of annuity will be provided in later
sections.

Illiquidity –
Most annuity contracts charge stiff surrender penalties for early withdrawal, plus a 10%
premature distribution penalty to investors who take withdrawals before age.

Complexity –
Although annuities can provide tremendous benefits for investors when used correctly,
they are by nature complex instruments, especially indexed and variable contracts. Even

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experienced investors sometimes have difficulty understanding these vehicles, and a

great deal of education is usually required to understand how they work.

Taxation –
All withdrawals received from an annuity contract that are not considered to be a return
of principal are taxed as ordinary income, regardless of the holding period of the
contract (see below). There is no chance to qualify for capital gains treatment.

Difference between Annuity VS Life Insurance

An annuity contract is just opposite of the insurance contract,

1. The annuity contract liquidates gradually the accumulated funds whereas the
life insurance contract provides gradual accumulation of funds.
2. The annuity contract is taken for one’s own benefit but the life assurance is
generally for benefits of the dependents.
3. In annuity contract generally, the payment stops at death whereas in life
insurance the payment is usually given at death.
4. The premium in an annuity contract is calculated on the basis of longevity of
the annuitant but the premium in life insurance is based on the mortality of the
policy-holder.
5. An annuity is a protection against living too long whereas the life insurance
contract is protection against living too short.

Classification of annuities

IMMEDIATE ANNUITIES

These are basically a mirror image of a life insurance policy. Instead of paying regular
premiums to an insurer that makes a lump-sum payment upon death, the investor gives the
insurer a lump sum in return for regular income payments until death, or for a specified period
of time, typically starting one to 12 months after receipt of the investment. Payments are
typically higher than other annuities because they include principal, as well as interest, and so
also offer favourable tax treatment.

DEFERRED ANNUITIES

These delay payments until a future date (greater than one year). They enable people to increase
their income stream later in life for less money because the insurance company is not on the
hook as long when income payments are deferred. These appeal to people who want guaranteed
income in the future, not now, or who want to create a ladder of income over different periods
later in life. For example, they may want to work in retirement but know that eventually they
will stop working and, at that point, and not before, will need guaranteed income from an
annuity.

GUARANTEED ANNUITY

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This type of annuity scheme has a provision of annuity payment to the annuitant for a specific
number of years, without taking into consideration the fact wheather the annuitant remains
alive or die during the period. In case the annuitant outlives the specific number of years the
annunity payment continue till his/her death.

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Know your Rights and Duties:

Duties:

When you buy a policy:

• Fill the proposal form yourself correctly and truthfully, it is the basis of the insurance
contract
• Do not leave any column blank, do not sign a blank proposal form
• You will be responsible for any information in this document as it bears your signature.
Disclose “all material information” about the risk you want to cover
• Select the term of the policy as per your needs
• Select the amount of premium you can afford to pay
• Choose between Single Premium or Regular Premium
• Choose your premium paying frequency such as annual, half-yearly, quarterly or
monthly
• Opt for electronic payment of your premium (ECS) for your convenience, safety and
records
• Ensure to register nomination under your policy. Fill the nominee’s name correctly

After you buy the policy:

• Once the proposal is submitted, you should hear from the insurance company in 15 days
• If not, take up the matter in writing
• If any additional documents are asked for, comply immediately
• Once the proposal is accepted by the insurance company, the policy bond should reach
you within a reasonable amount of time
• If not contact the insurance company about it
• When policy bond is received, check it and be sure that the policy is the one that you
wanted.
• Go through all the policy conditions and be sure that these are the same that were
explained to you by the intermediary/ insurance company official at the time of sale
• In case of doubts, contact the intermediary/ insurance company official immediately for
clarification.
• If necessary contact the insurance company directly

Maintaining the policy:

• Pay your premium regularly on the due dates/ within the grace period
• Do not wait for a premium notice. It is only a courtesy. It is your duty to pay the
premium to avoid lapsation or other penalties
• Do not wait for your intermediary or anyone to pick your cheque up. Make your own
arrangement for paying the premium on time
• If there is a change of address, please intimate the insurance company immediately.

Nomination:

• After the policy is issued, you can change the nomination by:
• Filling a notice of change of nomination and
• Sending them to the insurance company for them to register it in their records
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• If the nominee is a minor, appoint an appointee to receive any claim paid while the
nominee is still a minor
• Get the appointee to sign in the endorsement showing consent to act as an appointee

If your policy lapses:

• If you fail to pay the premium in time, your policy may lapse. Contact the insurance
company for reviving it.

If you lose your policy:

• If you lose your policy bond, report it to the insurance company immediately
• Get a duplicate policy by complying with the formalities
• The duplicate policy confers the same rights as the original policy bond

At the time of a claim:

• Comply with all the requirements of the insurance company

• Whenever required, you should help the insurer in a prosecution or for recovery of
claims which the insurer has against third parties

Rights:

You have the right to

• Cancel a life insurance policy within 15 days from the date of receipt of the policy
document. If you disagree to any of the terms or conditions in the policy
• You can
o Return the policy stating the reasons for objection
o You will be entitled to a refund of the premium paid
o A proportionate risk premium for the period on cover and the expenses incurred
by the insurer on medical examination and stamp duty charges will be deducted
o If it is a unit linked insurance policy (ULIP) in addition, the insurer can
repurchase the units at the price on the cancellation date

ULIPs

• You have the right to partial withdrawal

• You have the right to switch funds
• You can surrender the policy after the lock-in period from the date of commencement
of the policy
• The nominee/assignee under a life insurance policy has the right to the death claim
amount
• You can ask for alterations in the policy such as:
o Mode of payment of premium
o Term of the policy
o Increase in sum assured and
o Premium redirection

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IRDA Act
In order to control private sector insurance companies, the Government of India passed the
IRDA Act (Insurance Regulatory and Development Authority Act, 1999) which enabled it to
regulate the private sector companies in insurance business. What was the sole monopoly of
the LIC is now thrown open to the private sector for covering the life and property of
individuals. Now, the IRDA controls the entire insurance business in India.

Powers of IRDA
The following are the powers of IRDA

1. All insurance companies have to register with IRDA compulsorily.

2. Companies can undertake only insurance business.

3. The capital structure of the companies will be determined by IRDA.

4. Companies have to deposit with RBI the amount stipulated by IRDA.

5. Accounts and balance sheets of companies have to be submitted to IRDA.

6. Insurance companies have to appoint actuaries and they will value the liabilities of the
insurance companies and report the same to IRDA.

7. Investment of assets will be prescribed by IRDA in the form of approved securities.

8. The nature of general insurance business will be prescribed by IRDA.

9. Statements of investment assets to be submitted to IRDA every financial year.

10. All insurance companies have to devote certain percentage of their business including
insurance for crops. This should cover unorganized sector including the economically weaker
sections.

11. The appointment of chief executive officer requires prior permission of the IRDA.

12. All insurance agents must obtain license from IRDA.

13. IRDA has powers for levying penalty on companies which fail to comply with the rules
and regulations.

Composition of IRDA
One chairperson and not more than 9 members of whom not more than 5 would be full time
members and they are appointed by the government. Those who have experience in life and
general insurance, actuarial service, finance, economics etc., are appointed.

Duties of IRDA
1. Regulates insurance companies
The working of insurance companies will be regulated in the following aspects

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Risk Management and Insurance AIT-2020

§ the persons to be employed,

§ the nature of business,
§ covering of risks,
§ terms and agreements for covering risks etc., will be prescribed by IRDA.
2. Promotes insurance companies
Corporate set-up is a must for establishing an insurance company and they have to submit
periodical reports to IRDA. Different kinds of policies and different types of insurance are also
suggested by IRDA to these insurance companies.

3. Ensures growth of insurance and reinsurance companies

Here, the promotion of new companies is encouraged. Even banks are also permitted to
promote insurance companies as a subsidiary.

Functions of IRDA
1. Issuing certificate of registration.

2. protecting the interest of policy holders.

3. issuing license to agents.

4. Specifying code of conduct for surveyors and loss assessors.

5. Promoting efficiency in the insurance business.

6. Undertaking inspection, conducting enquiries etc., on insurance companies.

7. Control and regulations of rates, terms and conditions by insurance company to policy
holders.

8. Adjudication of disputes between insurance company and others in the insurance business.

9. Fixing the percentage of insurance business to rural and social sectors.

Insurance Ombudsman by IRDA:

On the lines of Bank ombudsman, an insurance ombudsman was created by IRDA. The main
purpose of the creation of the ombudsman is to cover disputes arising between the insured and
the insurer. Any complaint made on insurance companies will be settled by the insurance
ombudsman. It is more a watch dog by which the functioning of the insurance company will
be disciplined.

Insurance Ombudsman is basically a consumer protection exercise. The insured need not worry
about their policy amount as any complaint lodged with the ombudsman will have legal sanctity
and even criminal action can be initiated against the erring insurance company.

Thus, enough judiciary powers are given to insurance ombudsman by which speedy settlement
of cases connected with individual policy holder is possible.

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 Risk Management and Insurance AIT-2020

Insurance Market Dynamics

Insurance markets have changed radically and deeply in the past twenty years. Deregulation,
globalization of insurance institutions, intensified competition, electronic commerce,
bancassurance, and the emergence of new risks are among the challenges faced by insurance
markets. Although important global trends are reshaping insurance markets, the emphasis on
globalization overlooks the local diversity of insurance markets worldwide. This article
reviews the global developments and local factors affecting insurance markets and evaluates
the advantages and disadvantages of globalization. Among the important global trends are the
increasing sophistication of insurance products, the globalization of risk diversification through
reinsurance, the emergence of mega-financial intermediaries, and the growing importance of
supranational agencies such as the World Bank and the World Trade Organization. On the other
hand, there remains significant heterogeneity among countries and regions that has a profound
impact on insurance markets. Among the important local differences are political, legal, and
cultural components as well as differences in financial markets, taxation, regulatory systems,
insurer investment strategies, and insurance distribution systems.

INDIAN INSURANCE INDUSTRY: THE CHANGING DYNAMICS SAYS IT ALL

The insurance sector is just not tiny instead, a giant sphere where no one is untouched. Entire
populous can relate themselves with insurance. The insurance industry is divided into two
groups ‘Life Insurance and Non-Life (General) Insurance. Where non-life insurance involves
two wheeler insurance, car insurance, home insurance, personal accident insurance, travel
insurance, and other insurance services. In Indian territory, if you own a vehicle whether car,
two-wheelers or even a truck you need to have motor insurance as per the Motor Vehicles Act,
1988. The insurance companies in India are approved by the Insurance Regulatory and
Development Authority of India (IRDAI). It is a statutory body regulating and promoting the
insurance and re-insurance industries in India. In the Indian market, there are twenty-four (24)
life insurance and thirty-three (33) non- life insurance companies serving common people with
various insurance products all over India. These insurance companies compete on price and
services to stimulate customers, according to the requirement in the market.
What is IRDAI?
Insurance Regulatory and Department Authority of India is an autonomous, statutory body of
India responsible for regulating and promoting the insurance and re-insurance industries. The
body performs well to protect the interest of people regarding insurance.
IRDAI focus on the following tasks

§ The body is responsible for the rapid growth of the insurance industry for people’s benefit by
providing long term funds for raising the growth of the economy.
§ It helps in raising the standards with high integrity financial soundness and appropriate dealing
to set the desired goal.
§ To increase the genuine number of claim settlement and to prevent insurance frauds as well as
other malpractices. Also, encourages to believe in much transparency and orderly conduct in
the financial market to build trustable management information.
§ Heading towards taking action against inadequate or ineffective enforces to bring an optimum
amount of self-regulation nowadays according to the requirement.

Insurance sector 10 years ago and now

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 Risk Management and Insurance AIT-2020

Nothing can stop changes in the world and the same goes with the insurance sector. And, there
have been lots of changes in the insurance industry in 10 years. In 10 years, the Indian insurance
industry recorded specific growth. ”The Indian insurance industry is expected to grow to US$
280 billion by FY2020, owing to the solid economic growth and higher personal disposable
incomes in the country. Overall insurance penetration in India reached 3.69 percent in 2017
from 2.71 percent in 2001. Gross premiums written in India reached Rs 5.78 trillion (US$ 82.8
billion) in FY19, with Rs 4.08 trillion (US$ 58.5 billion) from life insurance and Rs 1.69 trillion
(US$ 24.3 billion) from non-life insurance”. (Source: IBEF India Brand Equity
Foundation, www.ibef.org)
Insurance has become easier now
Insurance is something people used to get scared of because of its long and complicated process
that was almost hard handled. Today the scenario has completely changed over the past years.
Technologies have played a crucial role in the field of insurance as well. The time the internet
introduced to the world, it has changed the entire atmosphere in every business stream.

§ We Became Paperless: Yes! Now, most of the people prefer buying insurance online rather
choosing any other medium. Online they can have various options as they can compare policies
premium and choose the best one. Along with that, they can avail the best discount offer as per
insurers ‘policies and guidelines.
§ Low Risk: The risk of losing insurance documents in the form of a hard copy now no more
haunt you. You can simply download the copy of an insurance policy from your account
whenever needed otherwise keep it safe there. Whereas, earlier it would be very difficult for
people to carry hard copy every necessary document of insurance policy every time. But, the
online medium has made it easy to access.
§ Convenient ever: As per the perspective of customers, buying insurance online is quite a
convenient way for them. Policyholders can now see all their procedures of insurance policy
along with their claim status and other requirements. Whereas earlier, these were not easy to
investigate. For every single inquiry, people used to visit the branches wherever allocated.
§ Social Media Intervention: The penetration of social media has played a crucial role in the
insurance sector for sellers as well as customers. It has become an easy platform accessible for
all in regards to query related insurance claims, policy renewal, and many others. Through a
social media platform, an insurer can make people aware about various insurance products
along with offers. Even customers can create policy via a social platform. And, 10 years ago
we can’t imagine this ease.

Final Words, Coming to the conclusion after going through various points, facts and numbers
insurance sector is going forward with increasing employment in the private sector. These
features developing strong growth in the automotive industry in the coming years in the motor
insurance market.

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