IC 11

PRACTICE OF GENERAL INSURANCE

(WITH KEYNOTES)

Acknowledgement:

This course has been prepared with the assistance of:

J. G. Vaidya
M.Nazareth
A.B.Dange

This course has been reviewed by:

K. Sanath Kumar

G – Block, Plot No. C-46, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.

i
 PRACTICE OF GENERAL INSURANCE
IC 11

Revised Edition - 2023

ALL RIGHTS RESERVED

This course material is the copyright of Insurance Institute of India (III). This
course is designed for providing academic inputs for students appearing for the
examinations of Insurance Institute of India. This course content may not be
reproduced for any commercial purpose, in part or whole, without prior express
written permission of the Institute.

The contents are based on prevailing best practices and not intended to give
interpretations or solutions in case of disputes, legal or otherwise.

This is only an indicative study material. Please note that the questions in the
examination shall not be confined to this study material.

Published by: Secretary General, Insurance Institute of India, G- Block, Plot C-46,
Bandra Kurla Complex, Bandra (E) Mumbai – 400 051 and Printed at Mahalaxmi Prints,
Andheri (E), Mumbai-72.

Any communication regarding this study material may be addressed

to [email protected]

ii
 PREFACE
An Introductory Overview

Insurance is a method of transferring financial risk as a tool of risk management.

It is generally bifurcated into two categories viz Life and Non-Life (also called
General Insurance)

We live and express ourselves through our possessions. We also derive material
value from our homes and other possessions. These things fulfill our needs, act
as a source of comfort and satisfaction and also enable us to earn money. However,
human life has greater value. We treasure them all for what they are and what
they can do for us. In the language of economics we call them assets.

Such assets can be destroyed or their values affected by various unforeseen

events. Life can be ravaged or cut short by disease or death. Our properties can
be destroyed by fires or earthquakes or they can simply be taken away by thieves.
Even if these events do not occur, the fact remains that we are all the time
exposed to the chance of their happening. This situation of uncertainty about the
future can make it difficult to plan and conduct any human enterprise.

However, while the future is uncertain, it is possible to predict what will happen
to a reasonable extent. Fortunately, only a few of us suffer a certain type of loss
at the same point of time.

These two aspects - that loss affects only a few and that its chance of occurrence
can be predicted reasonably though not accurately, on the basis of past
experience - have enabled mankind to create a noble institution called insurance.
It has its traces even in ancient literature but not as insurance as such. It provides
a mechanism by which the economic losses that one would suffer as a result of
an event can be shared by all members of a group exposed to the same event.
Just as small streams and rivulets go to make the mighty ocean, the small
contributions of numerous individuals in a group get collected and pooled into a
common fund. The unfortunate few, who suffer a loss, get compensated from this
fund created by the contributions of many. Apart from economic aspects, it is the
basic human instinct to help one who is unfortunate.

In this book, we shall get introduced to the insurance. We will study the markets
– both domestic and international, the documentation and processes, individual
classes of business, underwriting, rating, claims and insurance accounting. We
will have an insight into what it is all about and how it works in various contexts.

iii
This book describes the core theory & basic practices behind the Policy conditions,
underwriting, pricing, claims management basics of accounting & investment. It
also highlights Indian market practice. The student after grasping the basic theory
and basis practices will be able to understand & appreciate the changing market
practices, newer products, advanced technological interventions, much better.

While we have dealt with IRDAI and some of the regulations, students are advised
to keep track of the regulatory changes through their website.

iv
 CONTENTS
CHAPTER PAGE
TITLE
NO. NO.
CHAPTER 1 Introduction to General Insurance 1
CHAPTER 2 Policy Documents and Forms 43
General Insurance Products – Part 1 (Fire
CHAPTER 3 71
and Marine)
General Insurance Products – Part 2
CHAPTER 4 (Motor, Liability, Personal Accident and 117
Specialty Insurance)

General Insurance Products – Part 3

CHAPTER 5 157
(Engineering & Other Insurances)

CHAPTER 6 Underwriting 191

CHAPTER 7 Rating and Premiums 221
CHAPTER 8 Claims 247
CHAPTER 9 Insurance Reserves and Accounting 273

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 CHAPTER 1
INTRODUCTION TO GENERAL INSURANCE
Chapter Introduction

In this chapter, we will see what general insurance is. We also learn about the
origin of insurance as well as the insurance market within and outside India. We
will also examine the different roles played by the insurance industry.

We will also see the framework of the insurance market place and how all the
individual roles fit in it.

a) Know about the Indian insurance market

b) Know about the international insurance market
c) Understand the roles in insurance

1
1. Know about the Indian insurance market
[Learning Outcome a]

1. The origin of insurance

 Insurance, as conceived as a method of sharing of losses, embodying the

principle of co-operation existed in the early civilisation. There is
evidence that during the Aryan civilisation, loss of profits in crafts industry
was insured against by the village co-operatives in India. Similarly,
contracts safeguarding risks of transport by sea or land were in existence
under the auspices of traders’ guilds and unions.
 Insurance understood as a technique providing protection against losses
due to the fortuitous events for a consideration had its origin in the
“bottomry bonds” which were issued by the Mediterranean merchants as
early as fourth century B.C.
 A bottomry loan was an advance of money on a ship during the period of
voyage. The loan was repayable with the agreed rate of interest, on arrival
of the ship safely at destination; if the ship was lost during the voyage,
the obligation to repay the loan was extinguished. The interest payable
constituted a sort of premium for the risk of total loss. Similar loans were
granted on the security of cargo and were called “respondentia bonds”.
 References to similar practices are also found in “Manab Dharma Shastra”
(Code of Manu) which contained rules for “sea-form” contracts which were
observed by the traders from Broach and Surat who set sail in Indian-built
ships laden with Indian merchandise to Lanka, Egypt and Greece.
 Another fore-runner of insurance was the maritime practices of
contributions by all to make good the loss suffered by one mainly on a
maritime adventure. The practice was that if a loss is suffered by one or
more due to a voluntary act in order to save the whole adventure the
others whose interests are saved would make the loss good by
contribution. On marine adventure the interests that would be involved
are ship, freight and cargo. This practice dates back to 916 B.C when the
rhodians practiced it in their Mediterranean trade involving transport of
goods. Later on this came to be called a general average act, about which
we will learn more later on.
 However, the earliest transactions of insurance as practiced today can be
traced to the beginning of the fourteenth century in Northern Italy. The
Italian merchants, who were engaged in the Mediterranean trade with
India via Constantinople and with the European countries by land,
originated the practice of breaking up the bottomry bonds into two
instruments covering separate transactions – the advance of money which
was to be repaid on safe arrival of the ship and a policy of assurance which
paid the amount stated, in the event of loss at sea. This, then, was the
beginning of marine insurance.

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  First Indian Insurance Company is said to be Oriental Life Insurance
Company, established by British in 1818, at Kolkata for insuring lives
of English men. The oldest Company still in business is National
Insurance Company which was established in 1906, again in Kolkata.
General Insurance in India has its roots in the establishment of Triton
Insurance Company Ltd., in the year 1850 in Calcutta by the British. In
1907, the Indian Mercantile Insurance Ltd, was set up. This was the
first company to transact all classes of general insurance business.

2. Indian general insurance market - Historical milestones

1938 Introduction of a comprehensive Act called The Insurance Act, 1938

1939 Insurance Rules were framed for implementing the Insurance Act,
called the Insurance Rules, 1939
1956 Government of India took over all life insurance companies by a special
enactment called the Life Insurance Corporation Act, 1956.
1968 The Insurance Act, 1938 was amended to provide for social control,
minimum solvency margin & setting-up of Tariff Advisory Committee
(TAC)
1971 The General Insurance (Emergency Provisions) Act was passed whereby
not only management but ownership of the then existing insurance
companies was transferred to the Government of India.
1972 General Insurance Business (Nationalisation) Act was passed
1973 General Insurance Corporation of India (GIC) came into existence as a
Government Company. A year later 107 insurers practicing general
insurance business were grouped and merged to form four subsidiaries
of GIC namely:

(1) National Insurance Company Ltd., with Head Quarters at Kolkata

(2) The New India Assurance Company Ltd., with Head Quarter at
Mumbai

(3) The Oriental Fire & General Insurance Company Ltd., with Head
Quarter at Delhi

(4) United India Fire & General Insurance Company Ltd., with Head
Quarter at Chennai (Madras).
1991 Introduction of Public Liability Insurance Act 1991 and Public Liability
Insurance Rules 1991
1994 The Malhotra Committee was set up by Govt. in 1993 under
chairmanship of Shri R. N. Malhotra, former Governor of RBI with a view
to reorganizing the insurance sector and even examine the entry of
private sector and suggesting the needed reforms in line with the
reforms initiated in other sectors. It submitted its report in January
1994 and recommended establishment of a strong and effective
insurance regulatory authority.
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 1996 1996 Mr N Rangachary was appointed as Chairman of Insurance
Regulatory Authority pending the passage of Insurance Regulatory
Authority Bill
1997 World Trade Organization agreement to dismantle barriers to trade in
financial services, including insurance, banking and securities, was
signed by the United States and some 100 other countries, including
India.
1998 Insurance Ombudsman Redressal of Public Grievances Rules 1998,
issued by central government under their authority derived from the
Insurance Act, 1938.
1999 Based on the Malhotra Committee Report the Insurance Regulatory and
Development Authority (IRDA) Act, 1999 was passed in December 1999
and The Insurance Regulatory and Development Authority of India
(IRDAI) was established to regulate, promote and ensure orderly growth
of the insurance and reinsurance business.
2001 In addition to the existing Government insurance companies, private
sector companies were licensed by IRDAI to conduct general insurance
business. Also maximum FDI of 26% was allowed in Indian Insurance
Companies
2002 General Insurance Business (Nationalisation) Amendment Act, 2002.The
important amendment was that the subsidiaries of GIC were
restructured as independent companies and GIC was converted into a
national reinsurer and is commonly known as GIC Re
2003 This year witnessed the introduction of broker for the first time in
Indian insurance market.
2015 The insurance Laws amendment act 2015 has amended the Insurance
Act 1938, GIBNA and IRDA Act. The highlights are increasing foreign
shareholding, health insurance as a separate branch, permitting foreign
reinsurers including Lloyds to set up branches in India. The maximum
FDI in Insurance Sector was increased to 49 %
2020 2020 The Department for Promotion of Industry and Internal Trade
(DPIIT) has amended the foreign direct investment (FDI) policy to allow
100% FDI for insurance intermediaries,
2021 Insurance Act 1938, was again amended to increase the FDI to 74%

It is important to stress here that the insurance market is very similar to any other
commercial market. The following grid illustrates the point.

Products Makers / Sellers Suppliers/ Distributors Buyers

Consumer
Manufacturers Wholesalers / Retailers Customers
Goods
Insurance Insurers Insurance Agents and Individuals,
Products & Brokers direct selling. groups & firms,
Services Digital distributor and seeking
other forms of insurance
intermediaries. protection

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Definition

a) Insured is any person or organization who buys an insurance policy by paying

premium for insurance protection

b) Intermediaries: people or organizations who sell insurance for insurers -

bringing together those who offer insurance protection ( manufacturers) and
those who want to buy it as well as those who render related services.

c) Insurers – Organizations who create insurance products and related services

and bringing or forming capital for doing so.

Indian Market (some data)

The figures given in this section is intended to give the student an idea about size
and scale of the Indian General Insurance market. As these figures will keep on
changing year after year, this is not intended for Examination / Syllabus purposes.

Non-life Insurance Industry touched a gross premium of 1,99 lakh Crores of

premium in year 2020-21 . Usually Motor & Health business constitute almost 65 %
of the total premium. A comparison of shares of different segments of Insurance
is given below. The performance in year FY 21, has been impacted by Covid
Pandemic and the growth of Industry has been slowed down.

The trend of personal lines of business growing faster than other segments can be
clearly noted. An indicative data on share of various segments is shown here for
2019-20 & 20-21 as an example.

Share of Various Segments in Non -life Insurance business

2020-21 2019-20
% to Total
Fire 10.13 8.42
Marine - Cargo & Hull 1.76 1.89
Engineering 1.49 1.41
Motor - OD +TP 34.11 36.93
Health 29.48 26.57
Aviation 0.38 0.37
Liability 1.59 1.46
PA 2.56 2.71
Agri/ Crop Insurance 15.69 17.55
Other Miscellaneous 2.81 2.69
Total 100 100

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Test Yourself 1

When did General Insurance Corporation of India (GIC) commence business

operations?

A. 1970
B. 1971
C. 1972
D. 1973

The structure of Indian general insurance market

 Insurance Regulatory & Development Authority of India (IRDAI): Is the

Regulator for Insurance Industry in India, constituted by the IRDAI Act, 1999
and performing as provided in the Act.

 Government Insurance Companies – They are also known as Public Sector

Insurers. Majority of their ownership resides with Govt. of India. Apart from
New India Assurance Co Ltd and GIC Re, 100 % shares of other PSU insurers
are with Govt. of India. They are supervised by Department of Financial
Services (Insurance Division) of Ministry of Finance. They have a self-formed
coordinating body known as General Insurance Public Sector Insurers
Association (GIPSA) based out of Delhi. The Govt. has announced its decision
to privatise more Govt. Owned Insurers, including LIC

 Private Insurance Companies: These can be either 100% Indian Owned

Companies or in joint venture with a foreign insurer; the foreign partner’s
stake restricted to maximum 74%.

 Brokers: These can be Direct Broker, Reinsurance Broker or Composite Broker

(doing both Direct and Reinsurance broking). To be licensed by IRDAI as per
Broking Regulations framed under the IRDA Act.

 Agents: To be appointed by Insurers in conformity with provisions of the

Insurance Act and training and certification criteria laid down under the IRDAI
Regulations.

 Surveyors & Loss Assessors: As required under the Insurance Act all
Motor/other property losses above an amount specified in the Regulations by
IRDAI are to be surveyed by independent licensed loss assessor & surveyors.
Licenses are issued by IRDAI, whereas empanelment is done by Insurance
Companies individually. IRDAI has specifically laid down requirements for
qualification and licensing.

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 Third Party Administrators – TPA s are separate entities licensed by IRDAI
and are involved in Health Insurance Claims and governed by specific
regulations for TPAs.

 Other distributors – IRDAI has allowed other forms of distribution channels

in the Industry. they are Corporate Agents (banks & non-Banks), Web
Aggregators, Micro Insurance agents, Insurance Marketing Firms (IMF),
Motor Insurance Service Providers (MISP), Point of Sales (POS) and has
allowed Common Service Centres to in distribution .

 Actuaries – They are professionals who are qualified in actuarial sciences

and perform various functions as regulated by IRDAI.

 Insurance Depositories. There are few approved firms who provide

depository services for Insurance customers

 Others – Some State Governments continue to have their Insurance

Departments / funds for carrying out Insurance business. Then there are
some schemes such as Central Government Health Scheme, Employees
State Insurance and Prime Ministers Ayushman Bharath scheme (which may
be run without Insurers also.)

 Training:

 Except Broker Specified persons, training for all other distribution

channels are conducted by Insurers
 Insurance Institute of India (which was previously known as Federation of
Insurance Institutes) conducts insurance diploma examinations on same
lines as Chartered Insurance Institute, London. Its College of Insurance
conducts a variety of training programmes for personnel from insurance
industry and other organisations.
 National Insurance Academy, Pune: Established in 1980 with prime
objective of training insurance executives. NIA is promoted and governed
by LIC, GIC Re and Public sector General Insurers

Test Yourself 2

Which of the following is the regulator of insurance business in India?

A. General Insurance Corporation of India

B. Life Insurance Corporation of India
C. Insurance Institute of India
D. IRDAI

7
Test Yourself 3

Which of the following is not a Distribution Channel?

A. Micro Insurance agent

B. Web Aggregators
C. Actuaries
D. Insurance Marketing Firms

3. Classification of general insurance companies

Apart from their basic classification as Public Sector and Private Sector companies,
the Indian General Insurance companies (also called Non-life Insurers) can also be
classified into different groups by the lines of business conducted by them:

Diagram 1: Non-life insurance segmentation

a) Companies conducting all lines of business: these are both within the Public
and Private Sector. Regulator is proposing more mono line insurers and
composite licenses (Life & general together)

b) Health insurance companies: this is the first initiative in the direction of

specialisation and has been undertaken by the private sector. Health

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 Insurance has always been seen by the Government as crucial, with the
original proposition in 1998 being for the market to open only for health
insurance. Companies like Max Bupa Health Insurance, Apollo Munich Health
Insurance, Star Health and Allied Insurance Company Limited are some of the
companies specialise in and do only health insurance business. They are known
as Stand Alone Health Insurers ( SAHI)

c) Agriculture insurance company: the Agriculture Insurance Company of India

Ltd. (AICL) opened for business in 2003. It was established in 2002 with the
aim of promoting crop insurance business and to protect farmers against crop
losses suffered due to natural calamities. The share capital is provided by GIC,
NABARD and the 4 public sector insurers and is headquartered in New Delhi.

d) Credit insurance company: the Export Credit Guarantee Corporation of India

Limited (ECGC) commenced business in July 1957 and provides export credit
insurance support to Indian exporters. It is owned by the Government of India
and is the fifth largest credit insurer in the world in terms of coverage of
national exports. ECGC provides only Credit Insurance while other Non-life
Insurers also provides Credit Insurance in their range of products.

ECGC offers

 Overseas investment insurance (OII) to Indian companies

 Various credit risks insurance covers to exporters against losses suffered

by Indian exporters due to nonpayment by buyers abroad.

 Offers guarantees to banks and financial institutions in respect of loans /

advances made to exporters by the banks.

e) Reinsurance Company: General Insurance Corporation of India (brand name -

GIC Re) was originally the holding company of the 4 Public Sector General
Insurance Companies. Later in 2002, GIC was approved as an Indian reinsurer
with the aim of optimizing retention of reinsurance business within the
country and developing adequate reinsurance capacity.

GIC-Re manages the two Indian insurance pools on behalf of the industry.
These pools include:

Indian Market Terrorism Risk Insurance Pool

Indian Nuclear Insurance Pool

GIC-Re has branch offices in London, Dubai and Malaysia. It has three majority
owned subsidiaries, GIC Re South Africa Ltd, GIC Re India Corporate Member
Ltd and GIC Re Insurance LLC, Moscow. The representative office at Moscow
was changed into a subsidiary in 2018. It has a joint venture in Bhutan, GIC

9
 Bhutan Reinsurance Co Ltd. The Corporation has also exposure in the share
capital of Ken India Assurance Company Ltd, Kenya; India International
Insurance Pte. Ltd, Singapore; Asian Reinsurance Corporation, Bangkok; East
Africa Reinsurance Company Ltd., Kenya and Agriculture Insurance Company
of India Limited. Further, GIC Re also has a stake in GIC Housing Finance
Company Ltd. GIC Re also established a Syndicate in Lloyds Market in London,
the first by an Indian company, and known as GIC1947.

GIC continues to be the only company, licensed by IRDAI to conduct

reinsurance business. After the amendment of Insurance Act in 2015, branches
of Foreign Reinsurers and Lloyds market has been opened in India. Currently,
Branches of the following 9 global reinsurers are present in India. Munich Re,
SCOR, Swiss RE, AXA, Hannover Re, RGA Re, XL Re, Gen Re & Allianz . Further,
Lloyds Market also operates here in the form of a Branch.

State Govt. Insurance Departments / Funds: These are the insurance

departments of some of the Indian States like Maharashtra, Gujarat,
Rajasthan, and Kerala. They insure the property and other interests of the
respective State Governments and or financed by them.

The full and up to date list of all licensed General Insurance Companies is
available on IRDAI website www.irdai.gov.in

4. Salient features of Indian general insurance market

1. IRDAI is Regulator for the Industry on all aspects of insurance business-

both Life & Non-Life.

2. “Composite” Insurance Company conducting Life & Non-Life Insurance not

allowed.

3. “Non-Admitted Insurance” not permitted. i.e. any property situated or to

be situated in India has to be necessarily insured with an Indian Insurance
Company.

4. “Cash and Carry” market i. e. Cover commences only on Payment of

Premium.

5. Retail / direct broking is permitted.

6. Brokers to be licensed by IRDAI.

7. Agents to be appointed by Insurers in conformity with IRDAI regulations.

8. Surveyors (Loss Adjusters) to be licensed by IRDAI on the basis of

professional qualification, training and experience. Under the auspices of
IRDAI, the Indian Institute of Surveyors & Loss assessors (IISLA) has been
constituted to regulate the activities of surveyors.
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 9. Survey of losses: Section 64 UM of the Act, provides that no claim in
respect of a loss which has occurred in India and requiring to be paid or
settled in India equal to or exceeding Rs. 50,000/- for Motor Own Damage
and Rs. 1,00,000/ on any other policy of general Insurance shall be
admitted for payment or settled by the insurer, unless he has obtained a
report on the loss from a person who holds a license to act as a surveyor
or loss assessor, issued by IRDAI.

10. Reinsurance: Reinsurance regulation of IRDAI aims at maximising retention

within the country and developing adequate capacity. Reinsurance
programme of each insurer requires prior approval of IRDAI, every year.

11. Insurance premium can be collected in installments in respect of sickness,

group personal accident insurance, medical benefits and hospitalization
insurance and also in respect of policies issued for a period of more than 12
months like contractors all risk, erection risk, etc. as governed by Rule
number 59 of the Insurance Rules 1939.

12. A systems of Third party administrator(s) is introduced under relevant IRDAI

Regulations to service claims under hospitalization covers.

13. Government of India, in 1998, created a public grievance redressal

mechanism in the form of Insurance Ombudsman to adjudicate on
complaints regarding claims settlement, dispute with regard to premium,
construction of the policies, non-issuance of documents but restricted to
personal lines of insurance for life and non-life. The Ombudsman acts as
adjudicator, counsellor and mediator. The award passed by the Ombudsman
is binding on the insurer but not on the complainant. If the complainant is
not satisfied with the award he can reject it and seek other remedies but
the insurer cannot. The system is now governed by Insurance Ombudsman
Rules 2017, which has been amended in 2018 &I 2021. Under these Rules,
an Executive Council of Insurers have been constituted to administer the
institution of Insurance Ombudsman.

Test Yourself 4

Which of the following is not a Branch of GIC Re?

A. Dubai
B. London
C. Malaysia
D. Tokyo

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2. Know about the international insurance market
[Learning Outcome b]

Global Insurance – A snapshot

(The figures mentioned in this section will keep on changing year after year
and hence it is intended only to give the students the size and scale of
international operations and the trends, and not for syllabus / examination)

The data on Global premium, trends in various countries, data on major losses
and performance of Insurers are generally gathered from the reports of SIGMA,
the research wing of one of the world’s largest Reinsurers. The global Industry
largely follows Calendar year for accounting, while in India it is Financial year.

The Premium on World insurance premiums changed -1.3 percent in 2020,

adjusted for inflation, to $6.3 trillion. Non-life premiums fell to 1.5 % in 2020,
adjusted for inflation. In 2020 it touched $ 3.489 Billions compared to $ 3.396
Billion in previous year. The Report suggests the Non-life premiums will fare
better: following 2.8 percent real growth in 2021. Till 2022, nonlife premiums
are predicted to grow 2 with 3.7 percent.

The Covid 19 pandemic has impacted the Insurance Industry severely, slowing
down the growth of economies, global trade and fund flows. This has also cast
its shadow on Insurance business as well.

Largest Countries in the world on Life & Non-life premium continues to be in

United States, China, Japan and UK.

Globally, the life & non-life premium almost equals, unlike in India where Life
Insurance business is quite bigger than non-life (General Insurance).

Penetration of Non-life Insurance business (total general Insurance premium

/ GDP) and Insurance Density (Gross premium divided by Population) in India
are much lower than some of the other developed and emerging economies.
This points towards the enormous potential for Insurance Industry in this
country. The data of Insurance penetration is given below as an example for
2019.

Global insured losses from major natural catastrophes in 2021 reached nearly
105 billion, the fourth highest since 1970 and about 17 percent higher than
the ten-year average of $77 billion, according to a report by Swiss Re.
Manmade disaster resulted in $ 7 Billion of insured losses. In 2021, the two
natural disasters recorded in the US. Hurricane Ida brought floods in New York
which turned to $30-32 Billion insured losses and winter storm Uri caused
extreme cold, heavy snowfall and ice accumulation especially in Texas with
$ 15 billion insured losses. In July, flooding in Europe i.e. in Germany, Belgium
and in nearby countries caused upto $13 billion insured losses.

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 The world’s largest Insurers includes United Health Group (US), Pin g An
(China), China Life (China), AXA (France, Allianze SE (Germany) etc. LIC of
India also finds a place in the first 20.

1. Development of insurance in the U.K.

U K, by far, is the largest insurance market in the world and the dynamism with
which the UK insurance market developed and is followed by the global market,
will be interesting to note.

The practice of marine insurance gradually spread northwards to the Netherlands

and then to London, where in the sixteenth century, it got firmly established in
the mercantile transactions of Lombard Street which was a centre for commerce.

In 1575, a Chamber of Assurance was established to register policies and settle

disputes. This Chamber played an important part during the formative period of
marine insurance in London and devised a policy form. The Lloyd’s had also a
policy form common for cargo and hull which was being followed in many
countries and was also a part of the English Marine Insurance Act 1906. In 1982
the Institute of London Underwriters devised a simple form called MAR which
contains only preamble, operative clause and the schedule. The terms and
conditions are contained in the said institute’s cargo and hull clauses which are
to be attached to the policy form. This practice is followed till date.

In 1601 First insurance legislation in the United Kingdom was enacted. Modern
insurance has its roots in this law which concerned coverage for merchandise
and ships.

The early history of marine insurance is closely linked up with the origin and rise
of Lloyd’s. Ship owners, sea captains and merchants used to congregate in Coffee-
houses to deal with their various mercantile transactions and gradually, individual
merchants added the business of accepting marine risks to their other lines of
activity. One such Coffee-house made memorable in insurance history was started
by Edward Lloyd around 1688 and in this Coffee-house the practice of individual
underwriting took shape. Eventually, around the middle of the 18th century these
individual underwriters formed themselves into an association with a common
subscription. 1779 Lloyd’s of London introduced the first uniform ocean marine
policy.

In 1871 the Lloyd’s Act was framed to set up the Corporation of Lloyd’s. In 1911
Lloyd’s Underwriters were empowered to transact other classes of insurance,
commonly referred to as non-marine business. Today Lloyd’s is regarded as a
great international insurance centre. Lloyd’s Underwriters operate with giant
insurance companies in a spirit of co-operation and healthy competition.

13
Eventually in 1858 an Association of English and Scottish Fire Offices was formed
which came to be known in 1868 as the Fire Offices Committee which, since then,
has been the central tariff institution for fire insurance.

The beginning of miscellaneous insurance is directly attributable to the conditions

created by the Industrial Revolution in the 19th century.

The Employers’ Liability Act, 1880 which made employers liable under certain
circumstances to pay compensation to workers, who were injured at work created
the need for insurance protection, and the Employers’ Liability Assurance
Corporation Ltd. was founded to provide the requisite protection.

In the early years of the 19th century, there were many explosions of boilers
causing heavy damage and bodily injury. Although the Manchester Steam Users
Association was formed in 1854 to provide inspection services for boilers, a system
of combining insurance protection with inspection service was started by the
Steam Boiler Assurance Co. in 1858.

The employers’ liability insurances emphasized the need for third party Claims
from third parties against manufacturers for death or bodily injuries due to
defective products led to the introduction of products liability insurance.

The first motor vehicle entered the U.K. from the Continent in 1894 and the Law
Accident Insurance Society Ltd. started writing motor insurance business from the
year 1898 onwards.

Burglary Insurance came to be transacted towards the end of the 20th century.

Aviation insurance had its small beginning in 1909-10. The interest in aeronautics
was stimulated by World War No.1 and the demand for insurance was felt with
the first regular civil aviation service which began in 1919. Aviation business was
also transacted by Lloyd’s Underwriters right from the start and today specialist
aviation syndicates provide substantial insurance facilities to the world market.

The insurance market in the U.K. is highly developed to cater to the international
insurance requirements. The market consists of powerful domestic-insurance
companies, foreign companies and Lloyd’s Underwriters. The market is regulated
and controlled by the State through stringent legislation, London.

Whilst most tend to think of it as being synonymous with Lloyd’s, there is also a
strong non-Lloyd’s international market still operating, from the City of London.
This is the major port of call for larger and complex Indian risks such as Energy
& petrochemical, Cyber & Liability & specialty. The London market provides both
- capacity and detailed technical experience. However, for the smaller, one-off
risks (facultative reinsurance), the disadvantage of the London market is in its
high minimum policy premium requirement, with many insurers requiring at least
15,000–20,000 GBP. The market consists of Lloyd’s market, Syndicates, Other
14
Insurance & reinsurance Companies, Non Lloyd markets, and branches of foreign
insurers. The impact of Brexit is being felt in London market.

It is expected that ‘Brexit’ (Britain leaving European Union) will have significant
impact to London market. UK insurers are not now able to use their passporting
rights to underwrite the risk, so UK intermediaries may not be able to insure
certain European risks.

a) Singapore

The London market’s high minimum premium requirement is a strong incentive

for Indian companies to use the Singapore market. The Singapore market has
the advantage of being within an Asian mindset and happier to work on the
risks that London would see as too small e.g. a typical Indian 5 star hotel
requires a 10 million USD Third Party Limit, of which the Indian market can
take, say, only 2 million. Singapore’s minimum premium requirements are
much lower (in the US$ 1000–2000 region) and at the same time it is home to
many reinsurers that might have to be otherwise approached in London or
elsewhere in Europe e.g. Allianz, Ace, AXA, Liberty, Lloyd’s etc. Singapore
also has a Lloyd’s Market as a Branch. Almost all the Global insurers are also
operating in Singapore. It is a major Re-insurance hub and also have thriving
local business. As Hong Kong is facing turmoils, many of the business may shift
to Singapore as a safer haven.

b) Europe

European Union (EU) and European Economic Area (EEA) and Eurasian
Economic Union (EEU) have become formidable entities after Britain has
exited European Union. Insurance Industry is expected to have a large impact
due to ‘Brexit’ it EU is also a very strong reinsurance market but without a
convenient central location like London and would have its in Brussels or
Gibraltar. It is a market that the Indian insurer wants to use to provide a
competing deal to London. Munich Re and Swiss Re - the two biggest
reinsurance companies in the world had supported the Indian market over
many years. Allianz, Zurich, Partner Re, Francona Re, Liberty are some of the
big names among European reinsurers.

c) New York / US

The American insurance market does not have a global presence in proportion
to its size. Overall, the American insurers are reluctant to compete on
international risks with the European insurers. Besides dealing with the
London-based reinsurers, the Indian market uses reinsurers based in Singapore
and Hong Kong also. If, however, an Indian risk has a large US component then
the American insurers are more likely to be involved. US have its own Federal/
State wise market practices. And in many instances separate policy

15
 wordings .AIG, Berkshire Hathaway and CIGNA are few American firms having
global presence in a large way.

d) Bermuda (A tiny island in North Atlantic – A British Island Territory)

In the 1970’s, large corporates began to realise that a more economical way of
handling their insurance portfolio was to operate a “captive” insurance
company i.e. a wholly owned entity. With its attractive tax regime, Bermuda
became the home of choice for such corporates. This was followed by a
further boost with the excess liability insurance market in the 1980’s and the
large capital of the early 1990’s to create catastrophe reinsurance companies.
Further, capital came in following the terrorist attacks on September 11, 2001
and the hurricanes Ivan, Katrina, Rita and Wilma in the 2004–2005 period.

However, this huge capital comes at a cost and generally the Indian market
does not have the size of risks to use Bermuda which tends to look at a
minimum attachment point (where the risk starts) of 25 million USD. Today
Bermuda have more than 100 Commercial Insurance Companies apart from
captives. Bermuda retained its status as the jurisdiction of choice for
insurance-linked securities (ILS) transactions, with more than half of the
share of the global alternative capital market. Many Bermuda Reinsurers are
taking business from India.

e) Australia and Hong Kong

These are little used by the Indian market. At one time, the Australian market
was looking to expand into the Asian region but then suffered a huge setback
with the collapse of HIH Insurance Company. Hong Kong is, however, still very
much aggressive in the Asian market but Hong Kong’s main insurers are
present in Singapore also and if they are to be contacted, the first approach
is normally made there. Hong Kong was a gateway to large Chinese reinsurers,
but now they have moved to global presence.

It is a little known fact that the American Insurance Group (AIG) that most people
think of, when asked about US Non-life Insurance was not “born” in America. AIG
was actually founded in Shanghai.

16
3. Understand the roles in insurance
[Learning Outcome c]

In this section, we will look at the various roles in the insurance industry. The
industry is a fast moving one with many major roles and a number of
supplementary covers.

The Insurance Industry has created a very large ecosystem of Insurance employees,
Intermediaries, associated professions and other professions also serving the
Industry. We will examine the roles of some of them.

1 Regulator Insurance Regulatory & Development

Authority of India, irdai.gov.in
2 Insurer 1. Underwriter
2. Claims handler
3. Risk Engineer / Surveyors & Loss Assessor
4. Reinsurer / Retrocessionaire
3 Insured / Customer 1. Corporate (Large & medium & others)
2. Retail / MSME ( Micro, Small & Medium Enterprises)
3. Groups, Associations, employees
4. Govt. & Mass schemes
4 Distributors 1. Agents
2. Brokers, Direct Composite
3. Corporate Agents / Corporate Agent- Banks &
NBFC
4. Insurance Marketing Firms (IMF)
5. Motor Insurance Service Providers (MISP)
6. Micro Insurance Agents
7. Common Service Centres (CSC)
8. Point of Sales Persons ( POSPs)
9. Web Aggregators
5 Other Insurance 1. Surveyors & Loss assessors
Intermediaries 2. Third Party Administrator
regulated by IRDAI 3. Actuary
4. Insurance Depositories
6 Professionals 1. Technology Providers ( Insure tech & Fin tech)
( other) 2. Legal professionals
3. Consultants & Valuers
4. Investigators
5. Management Consultants
6. Chartered & Cost accountants & Company
secretaries- Auditors
7. Trainers & Training Institutions
8. Business Process Outsourcing ( BPO) like Tele
sales, call-centres, Pay Roll managers,
recruitment agencies

17
1. Regulator – Insurance Regulatory and Development Authority of India
(IRDAI)

 Establishment: the Insurance Regulatory and Development Authority of India

(IRDAI) was constituted by an Act of Parliament in 1999 - IRDA Act.

 Insurance regulator: IRDAI is the authority to administer the Insurance Act and
IRDA Act to regulate, promote and ensure orderly growth of the insurance
industry

 Corporate body: IRDAI is a corporate body. The Chairman and other members
of the IRDAI are appointed by the Government of India.

 Licensing authority: IRDAI has the authority to register the insurers and issue
licenses / Certificate of Registrations (COR) to intermediaries like Brokers,
Web aggregators, Corporate agents, TPAs etc.

 Industry watchdog: IRDAI has the authority to frame regulations relevant to

proper functioning of the industry like adequacy of premium rates, limits on
expenses, guidelines on investments, protection of policyholders’ rights,
solvency limits, Health Insurance, protection of Policy holders Rights etc.

 Guidelines and directions: IRDAI can issue guidelines and directions to

insurance companies and all intermediaries which are to be followed by them
on operational matters.

 IRDAI has been entrusted with a number of responsibilities but the key ones
include protection of interests of the policy holders, relating to fair pricing,
proper policy wording and claim settlement.

 IRDAI is moving towards principle based, rather than rule based regulations.
The year 2022 saw a spate of regulations towards this change.

For more information students are advised to refer to the IRDAI website
www.irdai.gov.in and especially the FAQ section in the new website
(new.irdai.gov.in)

2. Insurers

The insurer has a number of roles and these have gradually changed over the last
300 years, although the primary role of providing and managing capital has
remained unchanged. To manage capital at an operational level insurers have two
key roles:

a) that of the underwriter; and

b) that of the claim handlers

18
Failure of either of these tasks can adversely affect results of an insurance
company. Insurers also have to design & devise Insurance products and market
them after necessary regulatory approvals. In India Insurers are either Life Insurer,
General Insurer, Health Insurer or Reinsurer.

Underwriter

Without the skills of the underwriter, profitable utilisation of capital is not

possible. Underwriters decide whether insurance cover is to be granted or not. If
cover is to be granted, then the underwriters will decide at what terms,
conditions and exceptions it will be granted, depending on various factors. The
underwriting expertise required for a Reinsurer is different from that of a Direct
Insurers

Principal functions of underwriters are:

1. To identify and calculate the risk of loss on proposed insurance covers: the
underwriter decides whether or not to accept a particular risk after securing
factual information from/about the applicant, evaluating the information,
and deciding on acceptance/declinature.

2. To determine the appropriate price (premium), terms, conditions and

exceptions while recording the appropriate classification and rating
information.

3. To estimate the potential exposure, check retention and arrange reinsurance

where required.

4. To confirm terms, draft the policies to cover the risk and issue the policy.

5. Suggest risk management and loss minimizing methods even by way of

warranties and conditions.

By performing these functions, the underwriter increases the possibility of

securing a safe and profitable distribution of risk.

Definition

Underwriter

The term "underwriter" was developed in the early days of marine insurance. It
was a common practice for individuals seeking insurance for a ship and its cargo,
to meet with those desiring to write such insurance in coffee houses (e.g. Edward
Lloyd’s). A person seeking insurance for his ship and its cargo would bring a piece
of paper, describing the ship, its contents, crew, and destination, to the coffee
house. The paper would circulate, with each individual who wished to assume
some of the obligation, signing his name at the bottom and indicating how much
19
exposure he was willing to assume. An agreed-upon rate and terms were also
included in the paper. Since these people signed their names under the
description of the risk, they became known as underwriters.

Underwriting Examples

a) health insurer’s underwriter may consider the following aspects in a proposal

before deciding on the risk:

 age & occupation

 family history

 lifestyle

 current health

 History of illness

b) property insurer’s underwriter may consider the following aspects in a

proposal before deciding on the risk:

 Causes of loss to which property is exposed e.g. flood, fire, earthquake, etc.

 quality of construction, electric supply system, fire extinguishing method

 occupation, nature of business & geographical location

 safeguards taken by the applicant, Moral hazards

 Risk management philosophy & Case and portfolio underwriting

It is also important to point out that the underwriter works at both ends of the
spectrum:

 individual case underwriting looking at a specific case

 portfolio underwriting, where he reviews the performance of the total

portfolio of a prospect e.g. Fire, Liability, Marine, etc.

Market Practice

In India, the direct underwriter has to abide by the Company’s Board approved
Underwriting Policy filed with IRDAI and also the Filing of products and
Regulations such as Health Insurance Regulation, Standardization of terminologies
and exclusions. Further Industry bodies like General Insurance also frames

20
standard Policy wordings for the insurers. In Fire Insurance, for example there
are burning cost details given by IIB.

Today’s Debate: Is Underwriting a Science or an Art

In relatively recent times, underwriters prided themselves on having very little

formalized information, relying on their own experience and “gut feel” – they
saw it almost exclusively as an art. However, technology has advanced so much
towards end of the last century that underwriting is much closer to a science.

There is much greater use of sophisticated computer software and such

insurance applications are supplemented with reports from loss-control
representatives, medical reports, reports from data vendors and actuarial
studies.

Today, underwriters have access to big data, Artificial Intelligence & Machine
learning, advanced data analytics to help them in decisions. For many
standardized and pre-determined risks Companies allow auto acceptance with
the help of Computer algorithms.

There is, still, however, a desire to retain some art in a combination of skills,
enabling the underwriters to make the best possible judgement.

Risk Engineer

Risk engineers are also known as risk surveyors, risk consultants, risk control
surveyors or risk control advisers. They may work for the general insurance
companies or a professional broker. Their main role is to advise about quality of
risk, based on technical knowledge and good practice. Risk Management has
evolved as a major branch of Management sciences. IRDAI allows Brokers to
provide Risk Management services.

Definition

Risk Engineer: A common definition – or probably more correct description - of

the Risk Engineer is that of the “Eyes of the Underwriter”.

As the Indian market has grown and simultaneously risks have become increasingly
complex, there has been a corresponding increase in the requirement that large
risk is visited by a Risk Engineer / Surveyor (technical representative) of the
insurer.

Traditionally, this was common in property insurances but the practice is now
spread across many risks and gradually specialists are available in specific areas
such as:
21
 property/fire and associated risks, PML ( probable Maximum Loss ) assessment.

 business interruption

 health and safety, for employees and customers

 engineering, structural, electrical installation

 security in crime risks e.g. burglary, theft, transit of attractive goods

 liability

Diagram 2: Non-life insurance specialization

(In the above chart Health & Personal Accident Insurance, Events, Credit & l,
agriculture & crop livestock have to be added)

Example

Specialist engineers / surveyors undertake detailed risk surveys of the property /

site to be insured and advise clients and insurance underwriters about appropriate
measures to improve quality of the risk. This involves visiting a wide variety of
locations and businesses from retail outlets to large-scale petrochemical plants

22
and producing detailed reports, which help inform underwriters about the
acceptability and quality of a particular risk.

Today, Risk specialists & Underwriters use technology like satellite imagery,
drones & aerial surveys to assess the risk. Large amounts of data available in the
public domain (for example – history of catastrophes) are collected and computer
models are created.

 Engineer surveyors specializing in property, assess the risks associated with

fire, explosions, storms, flooding and malicious damage to a building and / or
contents based on the processes and activities that take place and other
features specific to the location.

 Engineer surveyors specializing in liability, assess the risks to which employers

or other individuals are exposed, based on the processes and activities that
take place.

 Large brokers (both reinsurance & direct) brokers are providing advanced Risk
management advices to Corporates . They also use subject matter experts from
abroad as well. Especially in cases of Nuclear plants, Energy & Off shore risks,
Large projects and similar risks.

Internal Claims Handler

Claim handling is the real test of an insurance policy. The settlement of claims
by an insurers is said to be the “moment of truth: Claim handling is a core function
of Insurer and cannot be outsourced.

The claims team members are frequently the unsung heroes of a core insurance
operation. The marketers take the glory of increasing premium (albeit now with
much greater emphasis on quality of risk) with the underwriters controlling the
pricing. However, claims are where the service is most critical. A poor claims
performance / service can impact the relationship between the insurers and their
clients significantly – one way or the other. IRDAI and organizations like Indian
Brokers Associations publish comparisons of claims handling of different insurers.
These information can influence selection of insurers.

1. Claims handled unfairly and / or slowly can give bad word- of- mouth publicity
or even unwelcome press and media attention.

2. Claims overpaid will impact on bottom line (profitability).

3. Omissions to chase recoveries by way of contribution, subrogation, salvage

etc. will also adversely affect profitability.

23
4. Claims handled fairly and efficiently will eventually give a company a solid,
dependable reputation.

The claims team, particularly in the complex markets of large property or liability,
aviation, marine etc. are frequently the most technical constituent of the
operations, needing to understand the client’s business and interpret the policy
wording accurately.

The claims role itself has a number of specializations, which we can identify to
a certain extent by following the flow of the claims process. There will be a
necessity for the senior claims technicians to be well versed on law so that they
are able to discuss with their own lawyers and also deal with the lawyers on the
other side.

Market Practice

IRDAI, periodically, issues many directives and guidelines on how the claimant
should be communicated, specifying Turn Around Times (TAT) for various steps
(eg. appointment of surveyors), documents to be asked for, handling delayed
submission of documents etc., interest for any delays, handling of claims in
major catastrophe / pandemic situations etc. The claims operations have to be
compliant with all these the Regulations, guidelines, circulars and other
advisories and directives.

For example, during the Covid 19 pandemic, the Regulator came out with number
of instructions on how claims have to be handled and what relaxations have to
be given. They also have been similarly proactive in the times of Natural
Catastrophes like cyclones and floods.

Task Activities
Claims Acceptance of initial circumstances, possible declinature in
Notification straightforward cases, initial decision on reserve
a) Investigating the validity of a claim
b) Obtaining information, involving expert advice where
needed
c) This can involve visiting the policyholder or their
Investigation
property, liaising with the police, lawyers and/or other
professional investigators.
d) Fine-tuning reserve
e) Checking for fraud indicators
Approve/
Examine claims Decision made on whether claim is covered
Check
Communicate Advise clients on decision supporting this, where necessary
and Negotiate Negotiation skills likely – particularly in larger claims
Settlement and
Liaise internally with finance / accounts department
Payment

24
 Investigate the areas where the insurer may be able to
recover moneys from other parties e.g. Contribution – Other
Recovery insurers
Subrogation – Third parties
Salvage – Dealers, scrap metal merchants etc.
a) Complete claim file
b) Ensure statistics are up- to- date
Closure
c) Ensure final payments recorded; and
d) Any outstanding reserves removed
Liaison with
Ensure underwriters receive all relevant facts relating to
internal
the risk and / or the portfolio
customers

Diagram 3: Claim process

Claim Process

Not Covered Claim Intimation from Insured

U/W docket checked Covere Claim Registered & Surveyor appointed.

for risk cover d

Intimation to insured Preliminary Report

If not covered

Further details called for

On Account Payment
Recommended

Final Survey report submitted

Interim payment done

Final Settlement

Ensure compliances with time limits laid down in IRDAI Regulations, Insurance Act.

Insurers, these days, using computer algorithms, Artificial Intelligence and

Machine learning to handle small claims faster and also to enable Claimant to
submit claims digitally. Mobile apps are now in the market for submission of Motor
claims, and where Insurers use Straight Through Processing (STP), robotic

25
processing and such techniques to quickly settle claims. Fraud analytics software
also are used when Claims are processed.

Loss Adjusters/ Surveyors / Loss assessors

This is claims team’s technical role, usually external, and can also go under the
title of ‘loss assessors’ or ‘claims adjusters’. The word, Adjuster is more
commonly used in connection with Marine Hull/ aviation claims, while in other
branches they are known as Surveyors & Loss assessors.

Adjusters assist the insurer in investigating technical claims and while they are
normally seen as appointed by the insurers. They have to be fair, unbiased and
ethical towards both i.e. the insured and the insurer.

Since the claims they handle, are frequently of a very technical nature, a major
loss adjusting firm is likely to employ other professionals, such as accountants,
engineers, legal officers and the like, recognizing the fact that to provide a
professional and top class service, a multi-disciplinary approach to claims
handling is needed.

The role of the Surveyor or Loss assessor (Internal or external) includes the
following:

 Checking whether the insurance company is liable under the insurance policy;
whether the loss is caused by any of the insured perils under, say, a fire
insurance policy or whether any of the exclusions apply under an all risks
policy, any breach of policy warranty / condition.

 Checking on whether any other aspects may affect an insurance company’s

liability, e.g. operation of conditions, warranties or limits under the insurance
policy

 Damage reclamation services: range from independent technical advice,

through expert guidance on loss limitation opportunities, to specific options
to recover and restore damaged property, thereby preventing wastage

 Reporting to the insurers after each and every visit, commenting on the loss
reserves and incorporating facts, opinions and recommendations, when
appropriate

 Checking the presented claim for accuracy etc. and, after agreeing on any
necessary adjustments with the claimant, present the final report to the
insurers, commenting on liability under the policy. They are not supposed to
decide on liability but only give their views.

 Checking whether someone else may have been responsible for the loss and,
if so, he will obtain statements and physical and photographic evidence to use

26
 later in negotiations, when recovery of the insurers’ outlay from a third party
is sought. Negotiate with product / service providers on time for cost of
repairs, for the purpose of making an offer of settlement to the insured

 Satisfy himself that the policyholder has an insurable interest

 Check whether there are any other policies, which may be brought into the
apportionment of loss and what it should be.

Regulator has stipulated the time limits for submission of Reports, seeking
clarifications and the maximum time taken for settlement and penal interest.
The Authority also discourages appointment of second surveyor and any other
steps that would delay the claim.

Test Yourself 5

The risk engineer is known as which of the below?

A. The eyes of the underwriter

B. The arm of the underwriter
C. The arm of the claims expert
D. The eyes of Sales team

3. Reinsurer

The reinsurer is the next line of dependence for the insurance company, wishing
to protect its balance sheet. In simple terms, it is insurance of insurance. Through
reinsurance; the insurance company taking it, becomes an insured, known in the
context of reinsurance, a reinsured or the cedant. The amount of risk transferred
is known as cession.

No insurer likes to turn down good business but there are times when the capacity
of the insurer would not cope with a major loss. Therefore, rather than declining
the business, the insurer accepts it in full and then passes on a portion thereof to
another company (reinsurer) – either a share of the risk by way of percentage or
as an amount over and above what the insured wishes to retain depending on his
financial retention capacity.

Usually, the insurer will receive an amount of commission for passing this business
if done direct, otherwise this will be earned by/shared with the reinsurance
broker. The commission is to effectively recompense the insurer for his business
development / acquisition and servicing costs.

GIC Re is the only Reinsurance Company, licensed in India and there are branches
of reinsurers and a Lloyds Office. In addition, Cross Border Reinsurers, (CBR) are
those reinsurers who do not have any physical presence in India but carry on
27
reinsurance business with Indian Insurance Companies. IRDAI allows them to do
business and has specified eligibility criteria

Reinsurance operations in India is governed by IRDAI’s Reinsurance Regulations of

2018.

Insurers Beware

A critical point is that the contractual relationship is between the insurer and
the reinsurer. The original insured has NO legal relationship with the reinsurer.
If the reinsurer fails, for whatever reason, to support the insurer’s claim
payment (and this could range from violation of the reinsurance agreement by
the insurer to bankruptcy of the reinsurer) then the insurer is responsible for
the FULL claim and the original insured does not have recourse to the reinsurer.
There are however contracts where under the reinsurer reserves his right to
get involved in the processing of the claim initially itself.

Retrocessionaire

Retrocession is reinsuring of reinsurance. The retrocessionaire is the reinsurer of

the reinsurance company and the ceding reinsurer is known as the retrocedent.

Retrocession is a separate contract and document from the original reinsurance

agreement between a primary insurer (as the reinsured) and the original reinsurer.
It has no legal relationship with the insurer whatsoever.

Diagram 4: Retrocessionnaire and retrocedants

28
In the above diagram, reinsurance companies 1, 2, 3 & 4 are all retrocedants.

Insurance Linked Securities (ILS)

These are Capital market instruments who derive the value on the events covered
by them and are strongly emerging as an alternate to traditional Reinsurance
Companies. One example is Catastrophe Bond (CAT Bonds), which are issued to
cover Natural catastrophes, is such an instrument. These are alternate capital
brought in by Investors outside the Reinsurance market to meet the Capital needs
or to explore investment opportunities in Risky Insurance areas. In India, the entry
of Alternate Capital is not allowed in Reinsurance sector as on now.

Definition

A reinsurance company that sells reinsurance to Reinsurance Company is a

"retrocessionaire".

A reinsurance company that buys reinsurance from a Reinsurance Company is a

"retrocedent" (the operations are commonly called Retro).

4. Insured

Without the insured there will, of course, be no insurance. We have seen that the
insured has been relatively easily identifiable in the past – perhaps a merchant
who wants marine insurance or a person who wants his family to be looked after
in the event of death.

In modern marketing, this is being taken even further into recognisable groups.
The aim is to identify niche customers and approach them with the products /
solutions relevant to them. In fact, some insurers restrict themselves solely to
particular niches – the best examples in India being the health insurers. But in
other markets, this could be as specialist as Classic Cars, Bloodstock (Racehorses),
Fine Arts, etc.

Let us look at three broad categories of insured’s:

29
Diagram 4: Categories of insured

a) Retail: Individual / Personal

Here we are talking of the individuals in their personal capacity. The major
products bought by individuals include: IRDAI has classified Insurance covers into
retail & commercial.

 Personal Accident, Motor – Third Party Cover is a compulsory insurance in most

of countries

 Health & Travel Insurance – this will vary from hospitalization treatment costs
to full medical reimbursement. The Regulator themselves have introduced
Industry level retail insurance for health, PA and Covid covers. Government
of India has introduced Pradhan Mantri Suraksha Bima Yojana for Bank account
holders. Pradhan Mantri Ayushman Bharath Programme has spawned many
Govt. funded health insurance schemes.

 Building and Contents - With more Insurance awareness, residential

buildings, apartments , gold & jewelry, lap tops and Mobile phones, personal
art collection, personal boats and yachts etc. are getting insured more and
more . Policies are also taken for pets.

 Package covers for all or some of the above. Bharat Grih Raksha is a Standard
home insurance policy brought out by IRDAI while many insurers have Home
owners package policies.

Traditionally, customers have purchased either directly from the insurer or

through agents and other distribution channels. . However, as in many parts of
the industry, technology is making great inroads into the individual market, and
one strong belief is that the Indian market will follow examples such as UK, where
the individual market is almost totally served remotely by Call Centers or Web
selling. In India customers also buy personal / retail health insurance policies
through the web sites of Insurers, brokers, web aggregators, corporate agents and
30
Tele sales facilities. Corporate Agents such as Banks is also a window for purchase
of personal insurances.

b) Retail & Micro Small and Medium Enterprises (MSME)

 Much of it again, is seen as a commoditized market – frequently via a Packaged

Product, where risks can be grouped into relatively simple underwriting
sectors such as –

 small shops

 offices

 restaurants and cafes

 hotels, malls, movie theatres, auditoriums

 MSMEs

In this sector also multiple risk packages are quite common. Cooking Gas
distributors, farmers, shop keepers, traders, sericulture, handloom sector and
such other groups, today, have options of package covers available. Many insurers
are also expanding this into small manufacturing sectors but excluding obvious
heavy risks. Underwriting is simplified and terms and conditions are common
across most covers. Regulator has brought out standardized policies for Micro and
SME sectors as Bharath Soookshma Udyam Suraksha & Bhartah Laghu Udyam
Suraksha to be adopted uniformly by the Industry.

c) Large Corporates

The third general sector is the corporate market (ex SMEs). This is almost
exclusively the province of the professional insurance brokers in major markets
such as US, Europe, Australia, etc.

It can be sub-divided on the basis of sector (for example specialisation in sectors

like energy, finance, leisure markets, etc.) or size (for example, mid-size
companies, companies having national footprint, MNCs etc.) In India also
significant share of corporate insurance is handled by brokers.

Here the classes are big enough to require and warrant individual underwriting
and pricing. The risks includes energy & off shore, aviation, foreign and domestic
& legal liabilities, aviation, cargo & hull insurances, business interruptions,
project & other engineering insurances and so on.

Large Corporates also take Group Health Insurance covers for their employee,
sometimes covering tens of thousands of staff and their families. These are known
as Employee Benefit (EB) covers and have assumed large proportions. Each
31
employee/ Family member are known as Insured person or beneficiary while the
corporate is the Insured.

d) Mass Insurance

State and central governments have large Mass health insurance programmes for
their citizens, who are defined for eligibility. Prime Ministers Ayushman Bharat
and its variations adopted by State Governments is one of the largest mass
insurance schemes in the world. Almost 400 million Indians are covered by these
schemes each year. The Central Govt scheme under the Ayushman Bharath
umbrella is known as Prime Minister’s Jan Arogya Bima Yojana (PMJAY).

In this each family will be the insured person while the Government itself will be
the insured. The insured family pays only a token amount as premium and the
rest is shared by the Central / State governments. Similarly Agri/ crop Insurance
also is taken by Govt on behalf of the beneficiaries. PM FBY (Prime Ministers Fasal
Bima Yojana) is the flag ship programme of the Government. (pmfby.gov.in)

5. Intermediaries

The Indian market, prior to liberalisation, offered only two areas of

intermediation -

a) Development / Marketing Officer of the insurance company; or

b) Insurance Agent.

However, the situation has changed and now we have insurance brokers,
bancassurance, Corporate Agents, Insurance Marketing Firms, Common Services
Centres with VLE’s (Village Level Entrepreneurs), Web Aggregators, Micro
Insurance Agents, Point of Sales (POS) and Motor Insurance Service Providers
(MISP) all at different stages of making their presence felt in the Indian market.
Many of these agents and Intermediaries are equipped with digital platform
which makes transactions easier and quicker.

While agents, Micro Insurance agents and POS are not licensed by IRDAI and they
are mentioned separately whenever intermediaries are described.

Insurance Broker

This term had been unknown in the Indian market until the relevant regulations
– Insurance Regulatory and Development Authority (Insurance Brokers)
Regulations, 2002 – came into force and the broking market effectively began to
grow from 2003. At the end of FY 20, there were 463 valid brokers comprising of
397 direct brokers, 61 composite brokers and 5 reinsurance brokers.

32
The regulations allow three types of insurance brokers in India:

1. Direct Acting as an intermediary between the insured and the insurer

2. Reinsurance Acting as an intermediary between the insurer and the
reinsurer
3. Composite Combination of the above two

Reinsurance Broker

 The public sector companies have always needed support from reinsurers
abroad and so, there all along have been some reinsurance brokers in this
market. They have been assisting the insurers in placing their risks abroad
through the Facultative and Treaty routes. Most of them have since got
themselves registered and obtained licenses from IRDA. There have also been
several new entrants. They are an important connect between the cedents.
And Reinsurers and also. For retro placements by reinsurers. Reinsurers help
in finding capacity for spaciality & large insurance programmes.

Agent

The insurance agent have always been a mainstay of the Indian market up to the
end of the last century. Since then, with the growth of the private insurance
industry; the other intermediaries have been fast catching up and making their
presence felt. This phenomena can be attributed in different degrees to:

 An agent is tied up with only one insurer but a broker can work with any
insurer in the Indian market helping a real competition.

 Other intermediaries are better equipped to use improved technology

 growth of other intermediation areas e.g. banc assurance, Corporate Agents,

Web Aggregators and Insurance marketing Firms which has the benefit of
established networks.

 At the end of FY 20, 25 % of Non -life Insurance business is procured through

individual agents. When retail Insurance alone is considered, the percentage
would be much higher.

Brokerage and Agency Commissions in India:

IRDAI has laid down maximum commission or remuneration payable to agents and
intermediaries, vide IRDAI (Payment of Commission or remuneration or reward to
Insurance agents and Insurance intermediaries) Regulations, 2016. This is
amended from time to time. Regulator had prescribed the various commission
percentages given to different segments of Life & Non-Life Insurance, but they
are now in favour prescribing only outer limits and leaving the individual
percentages to Insurers.
33
It is worth noting as to who pays remuneration to the agents and brokers:

 Agent – Appointed and paid by insurance company,

 Direct Broker – Engaged by insured but paid by the insurer,
 Reinsurance Broker – Engaged by insurer and paid by reinsurer,
 Composite Broker – As above for the direct or reinsurance broking
activities.

Third Party Administrators (TPA)

Third Party Administrators, referred to as TPAs, have come into the insurance
market as intermediaries since 2001. They are only for servicing claims under
health insurance policies. There are separate IRDAI Regulations to govern the TPA
activity. Insurers appoint TPAs to interact on their behalf with the hospitals and
handle health claims. The TPAs negotiate with the hospitals and get them
included in the approved list of hospitals in which the policyholder may seek
treatment. TPAs are required to be companies with a share capital of at least
Rs.1 crore. At least one of the directors must be a qualified medical practitioner.
One of its officers has to undergo prescribed training and pass a prescribed
examination, before it can obtain licence from the IRDAI to be a TPA. TPAs get
paid by the insurers but insurers may factor their remuneration into the premium
charged.

Lloyd’s Broker
An unusual characteristic of the Lloyd’s market is that ONLY accredited Lloyd's
brokers can place risks in the Lloyd's market on behalf of insured’s. There are 176
broking firms working at Lloyd's, many of whom specialise in particular risk
categories.

Lloyd's operates an accreditation process for brokers seeking access to the Lloyd's
market. Lloyd's performs a careful assessment of all applicant brokers, assessing
their reputation and financial standing and investigating the character and
suitability of their officers and employees, before making the decision to accredit
them. All brokers must satisfy all relevant training and regulatory requirements.
Firms receive provisional accreditation for three years before becoming entitled
to use the term "Lloyd's Broker". Even an accredited Lloyd’s Broker is required to
have a formal agreement with a particular syndicate, to be able to place business
with that syndicate. Syndicates are group of underwriters attached to Lloyd’s.

Lloyd’s Branch office in India is in nascent stage of its operations.

Actuaries

Until recently, actuaries tended to be restricted to the life insurance industry

and were very few in numbers. However, as the practice of non-life insurance is

34
continuously evolving, the role of actuaries is growing, with the result that
several students now go for courses dedicated to this line.

The actuary is, effectively, a high level mathematician who:

 performs actuarial analysis of correlation between the claims and pricing

structures at macro level, going down to the micro level of particular trade /
risk classifications

 is experienced in reviewing and analysing insurance operations, claims

reserving, underwriting procedures and reinsurance programmes

 provides technical assistance regarding actuarial matters to policy examiners

and other technical staff

He or she is involved in the areas of pricing, product design, financial

management and corporate planning.

In the Indian market, they also have certain regulatory duties including -

 rendering actuarial advice to the management of the insurer, in particular, in

the areas of product design and pricing, insurance contract wording,
investments and reinsurance;
 Advising insurers on maintaining solvency margin as required under Insurance
Act.
 Calculation and certification of assets and liabilities of the insurers

According to the regulations, the actuary is a professional, who has passed the
examination conducted by the Institute of Actuaries of India and who is a Fellow
of the Institute of Actuaries. He must also possess a certificate of practice, issued
by the Institute of Actuaries of India.

IRDAI has made it compulsory for the insurers to have a qualified ‘Appointed
Actuary’

Insurance Surveyors & Loss assessors

They are the loss assessors for claims under insurance policies and have to obtain
license from the IRDAI. Specific qualifications have been prescribed and an
Institute of Surveyors is also constituted under the auspicious IRDAI, to govern
their roles. Their conduct and practice are also governed by Indian Institute of
Surveyors & Loss assessors (IISLA)

35
6. Other professionals
Non-life Insurance Industry has created opportunities for a large number of
various professionals and practitioners and is rapidly creating opportunities for
employment & specialization.

Professional Valuers: these can be in many areas; with the modern insurance
markets using them for valuing buildings, specialized plants, classic cars, works
of art etc. There is a system of licensing by the government for professionals for
doing valuation work.

Legal professionals: in the past the Indian market has not had (or needed)
specialist insurance lawyers in a big way; however, in developed insurance
markets there are not only insurance lawyers but there are lawyers specialising
in certain areas such as marine, professional indemnity, IT, etc. In India there are
such specialized legal firms. Motor Accident claims management needed very
large number of lawyers across the country. Lawyers also appear in Consumer
cases, arbitrations, HR & Industrial disputes and High Courts and Supreme Court
on behalf of insurers.

Consultants: presently these form only a small group in the country; but are sure
to grow significantly. It comprises technical experts who are not involved in sales.
In a growing market, they work on short term technical projects. They advise
customers on their Insurance strategy and give expert advices to Insurers on
Corporate governance, strategic management and business plans. Many global
management consultants are operating in India in this sector.

Insurance Software Specialists: These firms are called Insure tech firms and are
part of the Fintech players. The Indian information technology (IT) market has
been very quick to see the potential here, although much of their work is related
to serving international markets. Many of the major Indian operators, such as
Wipro, TCS, L&T Infotech, HCL and Infosys have insurance verticals and there are
also a number of international insurance majors who use India as a technical
support hub e.g. Alliance, Willis, Aviva, etc.

Auditors - Insurance Companies need Statutory, internal and secretarial auditors

as required by the Regulator & company’s act provisions.

BPO – IRDAI allows non-core functions of insurers to be outsourced subject to

strict conditions. There are many Business process outsourcing entities who
handle Human Sources Management, Call centres, Tele marketing, risk monitoring,
housekeeping & security, maintenance of data centres, internal audit, data
collection, publicity & advertisement and more.

Another categories are Insurance Depositories. Regulator has introduced a system

by which a customer, if he wants, can request the insurer to send the policy to a

36
Depository, specifically open de for Insurance for upload and safe keeping in
digital format. All the policies of the insured can be kept in such depository.

Educational Institutions

Down the ages, India has been a renowned center of learning. Takshashila and
Nalanda bear testimony to that. That tradition continues to this day and Insurance
Education is a shining example.

 At the highest level, there is the Insurance Institute of India (III) in Mumbai
that provides a number of professional courses for qualifications from
Licentiate through Associateship to Fellowship, embracing the two main
streams of insurance - Life and Non-life. The Institute also conduct regular
training to Indian & overseas candidates on technical & management subjects,
related to Insurance. They also run diploma courses in subjects of Health
Insurance. Its training arm, College of Insurance has a heavy schedule of
sessions throughout the year.

 The National Insurance Academy (NIA) at Pune offers training in a wide range
of subjects. It also offers a two- year post graduate diploma course in
Management & insurance.

 Institute of Actuaries of India conducts examinations for actuarial sciences. It

offers diplomas at the Fellowship Level.

 There are also a number of educational institutes & Universities in different

parts of the country, offering insurance courses. Indian Institute of Risk
Management, promoted by IRDAI, also conducts actuarial & Risk Management
courses.

 There are also a number of Agency Training Institutes spread across India.

Test Yourself 6

A reinsurance company that buys reinsurance is known as a __________

A. Retrocedant
B. Retrocessionaire
C. All of above
D. None of the above two, as reinsurance companies are not allowed to buy
reinsurance

37
SUMMARY

 The origin of insurance can be traced back to the fourth century B.C. in the
“bottomry bonds” which were issued by the Mediterranean merchants

 In India, nationalisation of life insurance companies took place in 1956 and

that of the general insurance companies in 1972. But in 2000 reforms were
initiated by the Government and the insurance sector was liberalised and
opened up to private and foreign players.

 During the nationalisation era the non-life insurance landscape was dominated
by the four public sector insurers with GIC as their holding company. In 2000,
GIC’s role was changed to national re-insurer and its four subsidiaries were
restructured as independent companies.

 At the end of FY ’21 there are 34 Non-life insurers, with some amalgamations
& mergers in process.

 There are Agents, Micro Insurance agents & POS are not licensed by IRDAI, but
all other intermediaries are licensed by the Regulator.

 The insurance market comprises a number of role-players like insured,

intermediary, insurer, reinsurer, etc., as also the lawyers, consultants,
surveyors, etc.

 Reinsurance companies themselves also purchase reinsurance, a practice

known as retrocession.

 Insured segment can be further divided into retail individual, SME and large
corporates, mass & government driven insurance

 Insurance Regulatory and Development Authority of India (IRDAI) is the

regulatory body for insurance sector in India created by a special enactment
in the parliament viz IRDA Act, 1999.

Some important terms / definitions you have learnt in this chapter

a) Insured, insurer and intermediary

b) Direct, reinsurance, composite intermediaries ( brokers )
c) Retail, SME, corporate
d) Bancassurance
e) Actuary

38
Answers to Test Yourself

Answer to TY 1

The correct option is D

General Insurance Corporation (GIC) commenced business operations in 1973.

Answer to TY 2

The correct option is D

IRDAI

Answer to TY 3

The correct option is C

Actuaries is not a distribution channel.

Answer to TY 4

The correct option is D

Tokyo is not a Branch of GIC Re

Answer to TY 5

The correct option is A

The risk engineer is known as ‘the eyes of the underwriter’

Answer to TY 6

The correct option is A

A reinsurance company that buys reinsurance is known as a retrocedent.

39
Self-Examination Questions

Question 1

Which of the below cannot be an intermediary?

A. Insurer
B. Insurance Broker
C. Agent
D. Bank

Question 2

Which is the correct statement?

A. 107 insurers were amalgamated into 4 PSUs

B. 57 insurers were amalgamated into 4 PSUs
C. 145 insurers were amalgamated into 4 PSUs
D. 70 insurers were amalgamated into

Question 3

Which of the following Ex-RBI Governors examined the insurance market and
made recommendations for reforms?

A. Dr. Manmohan Singh

B. Bimal Jalan
C. R. N. Malhotra
D. C Rangarajan

Question 4

Who examines/suggests the pricing of insurance products?

A. Surveyor
B. Loss Assessor
C. Risk Engineer
D. Actuary

Question 5

Which of the below companies is a Stand Alone Health Insurer?

A. Max Bupa
B. ICICI Lombard
C. Bajaj Allianz
D. HDFC Ergo
40
Answer to Self-Examination Questions

Answer to SEQ 1

The correct option is A.

An insurer cannot be an intermediary. Banks can be intermediaries through

Bancassurance / Corporate Agency

Answer to SEQ 2

The correct answer is A.

107 insurers were amalgamated into 4 PSUs

Answer to SEQ 3

The correct answer is C.

R N Malhotra examined the insurance market and made recommendations for

reforms.

Answer to SEQ 4

The correct answer is D.

Actuaries examine/suggests the pricing of insurance products.

Answer to SEQ 5

The correct answer is A.

Max Bupa is a specialist in health insurance

41
 CHAPTER 2
POLICY DOCUMENTS AND FORMS
Introduction

A critical thing that needs to be remembered is that an insurance document is a

legal document. Many of the words and phrases used in an insurance policy
document have been tested over the years in the courts of law. While we should
now be looking towards plain English form of wording and getting rid of complex
words like hereinafter it is important that we try to understand these terms.
Certain terms need to be maintained, as they have historical / traditional
meaning. Over- simplification can create ambiguity giving rise to disputes in
interpretations.

In this chapter, we propose to look through the major documents used in the
insurance industry, like the policy document, the proposal forms and some other
documents. First, we will review the concept of contract before looking at the
policy document.

The Legal sanctity of such contracts are laid down by Indian Contract Act 1872.

a) Understand the insurance contract

b) Understand the structure of an insurance policy
c) Learn how to interpret a policy
d) Learn about insurance proposal forms and certificates

43
1. Understand the insurance contract
[Learning Outcome a]

1. Insurance Contract

A contract of insurance is an agreement whereby

a. One party – the insurer,

b. In return for a consideration – the premium,

c. Undertakes to pay to the other party – the insured,

d. A sum of money (or its equivalent) – the claim, upon the happening of
certain specified events, called insured perils.

2. Elements of a contract in General

The usual rules of contract law govern the contracts of insurance. Specific
elements of insurance contract are:

1. Offer and acceptance

2. Consideration

3. Legality (illegal contracts are void) and being capable of performance

4. Agreement (the consent of the parties is necessary for a contract to be

enforceable). This is described as ‘ consensus ad idem ‘

5. Contractual capacity (certain persons e.g. minors, persons of unsound mind

cannot be party to a contract)

6. An intention to create a legal relationship

7. No intention to commit fraud or cheat

The absence of one or more of these will make the contract void, voidable or
unenforceable, depending on the circumstances of each case.

3. Additional principles relating to an insurance contract

Utmost Good Faith: It is important to remember that contracts of insurance differ

to an extent from normal commercial contracts, as they are governed by the
principle of utmost good faith. The basic differences are because:

1. here, we do not deal with a physical sale / purchase; and

44
2. The true facts of the risk are better known to the proposer than to the insurer;
the insurer is relying on the proposer to disclose all material facts about the
proposed risk. In normal purchase and sale the physical product is available
to the buyer for inspection. The principle applicable is ‘ buyer beware ‘

Failure on the insured’s part to reveal all material facts may make the policy void
(i.e. totally ineffective) from inception. However, to activate such avoidance of
liability on grounds of non-disclosure, the onus is on the insurer to prove that the:

 Undisclosed facts were material.

 facts were within the actual or presumed knowledge of the insured

 facts were not communicated to the insurer

Furthermore, on discovering the non-disclosure, the insurer must exercise the

right to repudiate the contract within a reasonable time, for example, if after
discovering the non-disclosure, the insurer continues to accept the premium, the
insurer would be deemed to have waived the right to repudiate and the contract
will be binding, as if there was no non-disclosure. Section 45 of the insurance act
specifically provides that a life insurance policy cannot be called in question on
the ground that the proposal form or a similar document contained an inaccurate
or false statements unless such a statement was on a material matter or
suppressed fact which were material to disclose and or that it was fraudulently
made. The Insurance laws amendment act 2015 places a limit of 3 years from the
date of policy/revival/inclusion of riders for this section.

There are other specific principles which we will examine a little later.

45
2. Understand the structure of an insurance policy
[Learning Outcome b]

Proposal form:

In terms of the basic principles of contract as studied earlier viz offer and
acceptance, the proposer (the person or entity interested in the subject matter
of insurance) makes an offer through a proposal form to the insurer for effecting
insurance. Generally the insurers have a specified format of a proposal to elicit
all the relevant information for risk evaluation and rating for premium. As
mentioned earlier the proposal has to make full disclosure and the proposal form
helps the proposer to give information which would be material to the insurer.
The contract of insurance is based on the information furnished through such
proposal form and hence it is made the basis of the contract. It contains
affirmation by the proposer, warranting truthfulness of the information furnished.
It generally avoids non-disclosure of material fact and or suppression thereon.
Not answering any question therein would amount to non-disclosure.

The proposal can be on written or electronic format IRDAI mandates that except
in Marine Insurance, proposal form is a must in all other Insurance contracts.

Policy:

Components of an insurance policy

Over the last decade or so, policy wordings have changed significantly in looks –
particularly in the personal insurances market i.e. Motor Insurance, Householders
Insurance, etc. where plain English wordings have begun to take precedence.
However, the basic seven components of an insurance policy are still remains the
same. These are as follows:

Policy Components
1. Heading
2. Preamble
3. Operative Clause
4. Policy Schedule
5. Signature
6. Exceptions
7. Conditions

1. Heading

Every policy document has a heading that includes the name of the policy type,
the name of the insurer and usually their logo / address, together with other
contact details e.g. phone numbers, website, etc.

46
2. Preamble

This is generally similar throughout the market. It consists of four main points:

1) The proposal form and any questionnaire are part of the contract and are
incorporated by reference within it. Therefore, the insured must be
particularly careful when completing these,

2) The Sum Insured.

3) The premium is mentioned.

4) The preamble states that the insurer will provide the cover as agreed.

5) Names of the different parties to the contract – the insured person and the
company providing the insurance.

3. Operative Clause

This is a key part of the policy where the actual cover provided is outlined. It is
also called the ‘insuring clause’ and includes the phrase ‘the Company will….’

4. Policy schedule

The previous components which we have looked at are all pre-printed and so, are
not customised / unique to individual insured’s. The schedule, however, is the
part of the policy document that is specific / unique to each insured person, who
has bought the policy. The information that is contained in the Schedule, includes,
but is not restricted to:

 Insured’s title

 Insured’s address

 Nature of the business

 Period of insurance

 Sum Insured

 Location of the risk (where applicable)

 Premiums

 Limits of liability

 Policy number

47
  Any special exclusions / conditions or aspects of cover

5. Signature

Under the preamble or close to it, will be printed the signature of an authorised
official of the company. This would be the actual signature. But nowadays, due
to increased volumes, even a printed copy is accepted by the courts in cases of
dispute.

6. Exceptions

This section details what the insurer will not pay for or the policy does not cover.
Whilst ideally the policy holder would like a policy that covers all eventualities,
this is impractical in terms of premium, reinsurance agreement, insurer’s
solvency etc. Besides, insurance covers only fortuitous loses and not what are
inevitable or any loss caused deliberately.

Exceptions can be general exceptions like Nuclear perils, war etc. and specific
exclusions for that particular policy.

Certain policies name the perils which are covered and also name the exclusions.
These are called ‘named perils ‘policies. Certain other policies are ‘All Risk
‘which cover all causes of damage except those specifically excluded. The
exclusions are specifically mentioned and what is not excluded stands covered.
Such policies generally state ‘......... If any of the insured property be
accidentally, physically lost, destroyed or damaged other than by an excluded
peril / cause......... ‘ . The old policy wordings, which are generally the tariff
wordings in India, have a typical style of language whereas in modern times
different wordings are being used. The former are legally tested whereas the
latter are customer friendly. However whatever branches of insurances were
earlier tariffed, have to use the tariff wordings only like fire, engineering, motor,
employee’s compensation, etc. De-tariffing is only for pricing but the tariff rules
and wordings remain the same.

Example

Example of “War” exclusion: this policy does not cover loss, destruction or
damage, caused by war, invasion, act of foreign enemy, hostilities or warlike
operations (whether war be declared or not), civil war, mutiny, civil commotion
assuming the proportions of or amounting to a popular rising military rising,
rebellion, revolution, insurrection or military or usurped power.

48
7. Conditions

These are as critical to the understanding of the cover, as are the exceptions.
They describe to the insured what he or she must do or must not do. Traditionally,
conditions appear towards the end of the policy. Some of the common conditions
are as follows:

Condition Comment
Terms The insured must comply with the terms of the policy.
Alteration to The insured must notify the insurer should there be a change
the risk to the risk.
Claims This will vary from cover to cover.
procedure
Fraud The benefit of the policy will be forfeited should it be
discovered that the claim is in any way fraudulent.
Reasonable care Insured is to take reasonable care to prevent/minimise loss.
Contribution Applies if other policies are also in force, covering the same
loss.
Cancellation Will outline the terms to be applied and procedures to be
followed, should the company choose to exercise its right to
cancel the policy.
Estimates / This will detail the procedures to be followed, should the
policy premium be based on an estimated figure (e.g. wages
Declarations / profit).

Express or Implied Conditions: the points mentioned above are known as express
conditions, i.e. they are specifically stated as opposed to implied conditions.
Implied conditions are those, which are applicable and accepted without being
mentioned i.e. being part of the principles of insurance e.g. insurable interest,
utmost good faith, legality of the contract, etc.

Conditions subsequent to the contract: this is a condition that refers to an act or

event that cancels a contractual right e.g. any act of fraud within the claim
process on the part of the insured, would immediately cancel the insurer’s
obligation to consider the claim. It might be even while obtaining the policy or
subsequent to it or even at the time of claim.

Conditions precedent to the contract: these are contractual obligations that

require one party to the contract, to do something, before the other party to the
contract is required to do something, to fulfill its contractual obligation.

49
Example

For example, if thieves break into the insured’s house and steal his or her TV set
and laptop then the insured must immediately inform the insurer of the loss as
also give them details of the stolen property within a defined number of days of
the loss.

Having established that a contract has been entered into, the next task is to
determine what it means. The starting point is always to construe the contract in
accordance with the ordinary meaning of the words used. The approach is no
different when trying to work out the meaning of a contract of insurance.

Getting the meaning right is, therefore, of vital importance to insurers, as they
need to be confident that

 they know what risks are to be covered

 the wording adequately reflects that intention

 It is also of equal importance that the insured understands those aspects

with the same meaning (consensus ad idem)

In the context of consumer contracts, the use of plain lucid English is

recommended, since the commercial advantage of allowing the policy to clearly
set out, what is being covered, is obvious. At the same time accepted and
established terms should not be over simplified. Simplification should not be at
the cost of clarity.

However, historically any complex words like ‘heretofore’, ‘wherewithal’ and

‘notwithstanding’ are in use. But this is changing. The structure of the policy
itself can also play a large part in helping to set out clearly, what cover is provided
by the policy, and on what conditions.

Most insurance policies are in a printed form, prepared by the insurer. A policy
customarily identifies the following:

1. parties, by names 2. subject matter of insurance

3. sum insured or limit of indemnity and 4. policy duration
the premium payable
5. contingencies insured against 6. conditions
7. exceptions

It should also contain provision for a signature or attestation on behalf of the

insurer. Details that vary from policy to policy are often grouped in a schedule.
The policy by reference incorporates the proposal form, as completed by the
insured.
50
Endorsements: with the consent of both parties, the policy may be amended from
time to time. The insurer then prepares an endorsement for attachment to the
policy. It is a practice with reference to insurance contract that any change,
correction in the policy document is not made on the policy itself by rewriting or
over writing but is done by way of an endorsement which is a separate document.

Endorsements are normally used when the terms of an insurance contract are to
be varied. Endorsements are attached to the policy document and the two
together constitute the evidence of the insurance contract. Endorsements may
be issued during the currency of the policy, e.g., when alterations in the risks are
to be recorded. They could also be issued at the time of the issue of the policy
to provide specific exclusion from the cover or specific extension to include an
additional peril. Endorsements are issued on standard forms, or are separately
typed, or are written on the policy itself. There are certain standard
endorsements with specific wording as laid down in Motor or Engineering
insurances and they are to be attached to the policy document.

The alterations normally required under a policy relate to

- Variations in sum insured (increase / decrease)

- Change of insurable interest by way of sale, mortgage, etc.

- Extension of insurance to cover additional perils.

- Change of risk, e.g. change of construction, or occupancy of the building

etc.

- Change in address or any other details.

- Transfer of property to another location.

- Cancellation of insurance etc.

The insured should make it a point to carefully examine the policy document to
confirm that it provides the cover required and take note of any conditions that
he must observe. Policies should be stored in a safe place ensuring that they are
available when required.

Market Practice

In India, the business of Health Insurance is extensively regulated. The Proposal

forms, the prospectus, customer Information sheet, the Policy and other
connected documents are all clearly defined by the Regulations. Similarly the
Regulations on Protection of Policy holder’s rights also very clearly lays down the
importance of proposal & policy in other types of Insurance as well. Students

51
should understand that, the practice of non-life Insurance are governed by these
Regulations, guidelines, circulars and directives.

Test Yourself 1

The contractual term for the premium is known as __________

A. Contribution
B. Consideration
C. Commitment
D. Consolidation

Test Yourself 2

The operative clause is also known by which other name?

A. Insuring clause
B. Preamble
C. Signature clause
D. Policy condition

Test Yourself 3

Which of the following is a true statement? Legality is a ______________.

A. Implied Condition
B. Assumed Condition
C. Condition Precedent
D. Condition Subsequent

52
3. Learn how to interpret a policy
[Learning Outcome c]

1. Legal Document

Whatever be the cover provided by the policy – a Householders Insurance policy

covering Rs. 10 Lakhs of Household Goods or a Professional Indemnity Policy
covering an IT major for USD 40 million – one must always remember that we are
dealing with a legal document, which should be enforceable in a court of law.
In the event of any dispute between the policyholder and the insurer, the policy
will be interpreted by the court. The Industry has been trying to make these
documents with less legal jargons and to be in plain English as much as possible.

2. Insurers’ Responsibility

As with any contract, it is for the parties to a contract of insurance to make their
intentions clear in their contract. The courts will not be able to enforce a contract
one way or the other, the terms of which are uncertain. Courts generally see,
when there is no enough clarity in the wordings of the contract as to what was
the intention of the parties with reference to the evidence available.

If the policy does not correctly represent the agreement, either party may apply
to the court to have it rectified. If the parties are not of the same mind i.e. one
party intends one thing and the other something else, then there has been no
agreement and the policy is ineffective.

As it is, the insurer who drafts the policy is primarily responsible for any
ambiguities and they are interpreted against him.

3. Principles of Construction

The principles of construction in insurance contracts are the same as in the case
of other contracts:

1. The construction of a policy of insurance is a matter to be decided by the

Court.
2. Where the Court has already decided the meaning of words used in a policy
of insurance in the cases coming before it, the doctrine of precedent will be
applied.
3. This means that the same interpretation will be given, should the meaning of
the same words be in dispute in a later case.

However, when the words have not been previously interpreted, the Court is
guided by certain principles of general application and more so with reference to
the intentions of the parties while making the contract

53
4. Written Words v/s Printed Words

The written words will be given more weightage than the printed words. Most
policy wordings are in standardised printed formats for consistency and efficiency.
The insurance policy sets out the terms and conditions of the contract in a
standard printed form. However, following a change in risk and / or endorsement,
the insurer may have added further words and clauses, either in handwriting or
in typescript – which take precedent.

Ruling:

1. Both the pre-printed and the handwritten words must be taken into
consideration.
2. When there is a conflict between the printed and the handwritten clauses,
greater consideration will be paid to the handwritten clauses.

The logic is that the written words reflect the latest language and terms selected
by the insurer (and accepted by the insured) for expressing the intentions. The
pre-printed words, on the other hand, are, broadly speaking, adapted equally to
the specific case as also to all other insured’s with that type of policy.

The policy must be construed in accordance with the ordinary laws of grammar.
The general rule is that the grammatical meaning of the words used in the policy
will be adopted.

This may not always be possible e.g. in connection with a policy of marine
insurance, the meaning of certain phrases has been understood for many years
among ship owners and merchants in a specific sense. Examples of this would
include such terms as General Average, Any One Bottom etc.

In case of ambiguity the contra proferentem rule will be applied.

Definition

Contra proferentum rule: this rule (which effectively says against the offering
party) states that where contractual language is capable of two alternative
interpretations, it will be construed against the insurer who drafted the contract
and in favour of the insured, who accepts the wording. This is because the insurer
will have chosen the language used and should not be able to benefit from any
ambiguity contained within it.

5. Policy v/s Proposal:

Where there is an inconsistency between the wording of the policy and that in
the proposal or other earlier document/s generally the policy is to be regarded
as the true intention of the parties, in the absence of valid evidence to the

54
contrary. However, if a proposal is accepted in to by the insurer without notifying
and reservation or qualification and premium is charged accordingly but the
policy document mentions something else, the acceptance would prevail upon
the policy wordings.

Test Yourself 4

Which of the following statements is true?

A. Printed word takes precedence over the written word.

B. Written word takes precedence over the printed word.
C. Printed and Written words are treated on the same footing.
D. Printed word takes precedence over the typed word.

6. The principal rules of construction are as follows:

One example of bad drafting seen is where a word conveying a broad definition
is followed by words of limitation or definition, which introduce words of
narrower significance e.g. insurance on a grain dealer’s “stock-in-trade consisting
of corn, seed, hay, straw, fixtures and utensils in business” does not cover hops
for malting. Unless there is a strong underwriting reason for excluding the hops
etc. this may result in a badly handled claim, dissatisfied insured and, possibly,
poor reputation for the insurer.

Similarly, where a clause framed in general terms and capable of a wider

significance (e.g. a declaration that the answers to questions are correct and true,
which declaration, together with the proposal, is to be the basis of the contract)
is followed by another clause of narrower significance (e.g. a provision avoiding
the policy in the event of any fraudulent concealment or untrue statement in the
proposal), the second clause is to be regarded as explanatory of the first and
limiting its application accordingly.

7. Policy Endorsement

During the period of insurance, there are likely to be times when certain policy
details have to be amended. These can arise from a number of incidents including
such changes as the following:

 Personal details – title, address, etc.

 Policy details – change in renewal date, amendment in cover, etc.

 Coverage details – increase / decrease in sum insured, addition / deletion of

items, etc.

 Cancellation of cover
55
Such amendments or in fact any changes will be effected by means of a policy
endorsement, which may call for additional or return premium or in some cases,
neither. Such amendments will, of course, only be completed after the
underwriting and rating of the changes has been completed.

It must be remembered that the policy is a legal document and the endorsement
forms part of this. Whilst some of the changes will be straightforward; others
could be quite complicated and care needs to be taken over the wording.

8. Renewal Documents

Marketing adage: It is much more expensive to obtain a new customer than retain
an existing one.

In the past, during the nationalised era, there was a lot less fear over competition
and issues such as proactive renewal of a policy was taken much less seriously.
However, with a very aggressive public and private insurance market, the
development teams are very much aware of the need to ensure policy renewal.

With the smaller clients, the renewals will be automated and a standard increase
or decrease will be implemented by the system. It may be that a reporting
mechanism will advise the concerned business team of significant changes. What
is important, though, is to ensure that the client is geared to renewing his or her
policy with little effort.

The renewal document is likely therefore, to include promotional / marketing

items to give a positive feel and be very clear in what the insured is expected to
pay and what he is receiving for that premium. At the same time, dispatch of the
renewal notice must be done in such time as to enable the insured to pay
promptly and notify changes if any in the risk or details.

In these days, players intensely compete for business and market share, renewal
retention is a very important focus point. Competitors are aggressively attacking
the renewal of others through electronic media, tele calling, mailers, offering
add-ons and or discounts. This is especially so in profitable segments.

Renewal Notice / Letter

The renewal document is likely to consist of the following:

With a corporate client, this should also include all

subsidiaries, which are crucial to get the interest
Name and address
correct and may raise further questions as to the
business.
Policy number This will remain the same

56
 Contact information
of the insurer
Contact information
of the Agent / Broker
Address of client Correspondence addresses
Period of insurance For the forthcoming year
This may include details of the relevant commission
Renewal premium
paid to the agent or broker
A reminder that the insured must give details of any
Declaration reminder
amended information
A reminder that the insurance will not be effective
64 VB reminder unless the premium is paid before cover is to
commence

Regulator is insisting, in health insurance business the customers should be

informed about the status and coverage of the Policy at least twice In the Policy
period through SMS/ Mail or other forms.

57
4. Learn about insurance proposal forms and certificates
[Learning Outcome d]

As mentioned earlier, principle of Utmost Good Faith is critical as far as insurance

is concerned. The insurer must have maximum possible information for the
relevant insurance proposal to be able to take a fair decision. To make this as
simple and easy for the insured as possible, the insurer has developed proposal
forms for virtually all the major classes. Discussed below are the contents of a
typical insurance proposal form.

Market Practice

In India, all Insurance products have to be filed with IRDAI and approval taken
under the ‘File & Use’ regime. (IRDAI has recently introduced Use & File
procedures also). There are some situations like group Insurance govt. insurance
schemes which can be ‘Use & File’. When filing the full set of documents such as
proposal form, prospectus, Policy document and claim forms have to be filed.
Once approved the insurers cannot deviate from the approved version. Each
document will be allotted a UIN (Unique Identification Number) and all such
products and connected documents have to be shown in the web site of insurers.

1. Insurance proposal form

(a) Generic questions

These are questions, common to all insurance proposal forms:

Name With a corporate client, this should also include all subsidiaries,
which are crucial to get the interest correct and may raise
further questions as to the business
Website This will give additional amount of information about the client
Contact
information
Address It is mainly the address for communication
Location These are the places where the risk is actually located
Business This should be descriptive of the clients’ business with words
such as “engineering”, “consultant”, etc. requiring expansion,
so that true occupation can be identified. Certain trades may
also require expansion as to the processes involved. Also, certain
covers such as liability, are likely to request details of activities
and / or processes
Period of To be selected
insurance
Insurance This will ask who they were insured with earlier and whether
history they have been declined insurance in the past

58
 Claims This will normally be for the last 3 years – if possible, maybe even
experience for last 5 years. Question will also be asked whether there have
been incidents that did not lead to a claim.
Convictions This may give lead into moral hazard.
Declaration A signed declaration to confirm that all answers are true and
correct

(b) Insurance-specific questions

This section will have questions related to the insurance cover required.

Exposure The insurer will want to understand more details about the risk
to be covered.
 Property insurance: this will be a description of the subject
matter; some details will be high level e.g. buildings
(situated at .........) and some details will be very specific
e.g. Lenovo X61s laptop serial number...........
 Liability insurance: this will be the turnover of the business,
if products liability then it will be turnover of the relevant
product line
 Motor insurance: details of the vehicles and the drivers
Policy This will relate to the limits the insured wishes to insure up to
Limits  Property insurance: this will be the sum insured, with modern
covers, it is usually the reinstatement value
 Liability covers: this will be the limit of indemnity required
 These are of two types i.e. limit per any one accident ( AOA )
and for the entire policy period ( AOY )
Specific  Liability insurance : may ask whether hazardous chemicals
Questions are handled or whether heat is involved
 Motor insurance: may ask questions relating to the garaging
of the vehicle or whether the vehicle has been modified,
fitted with anti-theft device etc.

(c) Specific Questionnaires

With a number of covers, there will be a requirement for an additional

questionnaire to be completed as the proposal form itself will not have the
detailed questionnaires (and it is not possible for all the questions to be included
in a standard proposal form)

Examples of these specific covers relating to individual areas could include the
following:

Contractor’s All Risks

 Tunneling

59
 Bridges and Dams

Liability covers relating to areas such as

 Heat Work Precautions
 Work in High Hazard Environments

Crime covers relating to areas such as

 Armoured car / cash carryings
Marine covers relating to areas such as
 Ship details

Attention of the students is again drawn to the Indian regulator’s directives that
there should be clear & transparent communication to the Policy holder through
information in prospectus, customer information sheet, full details of the Policy
in the web site and other means

2. Insurance Certificates

The most common form of certificate issued within the insurance world is that
relating to the existence of the motor insurance. Third Party Motor insurance is,
the major compulsory insurance throughout the world, with all the developed and
developing countries requiring some form of Third Party Insurance for Liability
for bodily injury to Third Party or damage to Third Party property. Such
compulsory insurance is accompanied by an insistence that a certificate is issued,
proving the existence of the cover and policy of insurance. This is required by a
number of authorities including the registration authorities and the police.

In practice, with all the policies being issued through digital means, insurers issue
Policy and certificates in motor Insurance simultaneously.

3. Motor Vehicles Act, 1988

In India, the Motor Vehicles Act, 1988 ( amended in 2019) with Chapter XI -
Insurance of Motor Vehicles against Third Party Risks section is the relevant one
relating to the certificate. Cover notes are getting less common now. Student
may go through Central Motor Vehicle Rules, 1989 (as amended in 2019.), Chapter
VII for directions on Policy, cover notes. And certificates.
The certificate itself is very simple with the following being the principal headings:

Identification of the Policy number and certificate number

certificate
Effective date of the Usually the annual period of the insurance cover
insurance
Details of the insured Name and address
Details of who can drive the Usually the insured and any other driver as long
vehicle as they have a license and are not disqualified

60
 Details of the vehicle Registration number, year of manufacture,
identification details such as engine number
Purposes as to use Usually excludes hire or reward, carriage of
goods, racing etc.

If the certificate cannot be issued immediately, then a Cover Note should be

issued for the interim time period – this will be an abbreviated version containing
much of the information detailed above but with the Policy Number. The cover
note is restricted to a 60 days period and will be accepted by the relevant
authorities as a temporary replacement for the certificate or policy of insurance.
The Motor Vehicles Rules prescribe the formats of certificate of insurance (Form
no. 51) and cover note (Form no. 52) and they have to be issued in those formats
only.

4. Marine Insurance

Within marine insurance, the certificate can effectively take over the role of the
insurance policy.

Further, bearing in mind the principle of insurable interest and the fact that the
rights under a certificate can be assigned by the seller to the buyer, it is
important that there exists only signed ORIGINAL of each document and that the
Certificate is TYPED.

Duplicate policies should be boldly printed or stamped as COPY. However,

occasionally, Letters of Credit call for a signed DUPLICATE Certificate. A duplicate
would stand in law, in place of the original document, in all respects. While one
should resist issuing duplicates, in case it becomes unavoidable, it should be
stamped in the following manner:

“This policy (or certificate) is issued in original and duplicate, one of which
being accomplished, the other to stand null and void.”

It is also important that marine certificates are completed accurately, to ensure

that any claims can be handled in an efficient manner with the minimum delay.

The details required are:

Certificate This is normally computer generated

number
Date issued This is the date when the certificate is completed
Open policy This will be given in the policy schedule and must be
number mentioned in all the certificates issued. The number does not
change during the policy period.
Premium Ensure mention is made of the Gross Cargo and War & SRCC
premium, Stamp Duty and Service Charges. Special Discount,
if any, in lieu of Agency Commission too could be shown here.
61
 Similarly, if Customs Duty is insured, then Duty premium too
should be mentioned.
Assured The name of the insured should be inserted. Where a bank or
similar organisation requests their interest to be shown, this
can be completed in the field. e.g. “The ABC Company & / or
the XYZ Bank.”
Sum Insured The insured value should be calculated in accordance with the
agreed basis of valuation in the policy, unless agreed
otherwise, with the company. Insured value should not exceed
the limit of liability any one vessel, aircraft, road or rail
conveyance or postal sending. The value should be shown in
figures and words, stating the currency e.g. ‘Rs 150,000’ “One
Lakh and Fifty Thousand Rupees.”
Voyage from / Mention the name of the overseas vessel (where known);
to and via otherwise show the means of transport, for example: ‘Vessel’,
‘Aircraft’, ‘Road Conveyance’, ‘Rail Conveyance’, ‘Post’.
From Mention place of origin, for example ‘Warehouse –
Birmingham, UK’
To Mention the final destination, for example ‘Warehouse – New
York, USA’
Via If known, this should be completed. This is of particular
importance if transshipment is involved.
Bill of Lading If not known write “sailing on or around……… (date)”
date
Interest (i.e., Complete with full description of subject matter insured and
subject matter all shipping marks, including type of packing and numbers of
insured) & packages plus any other information such as ‘Shipped on
marks and Deck’, ‘Special Stowage’, ‘Full Container Load’ (FCL) or
numbers ‘Group age’.
Identification of postal packages may be shown as “fully
addressed”.

Where a Letter of Credit is involved, banks will show the

precise words, which they require to be shown on the
certificate. The description of the subject matter insured and
the marks and numbers should be copied exactly.

Marine cover note

When letters of credit are involved it is the practice to issue a cover note where
the bank interest is also noted. This is issued if the transit is not likely to
commence within a few weeks. Notional premium may be charged with the
express condition that premium will be paid at least seven days before
commencement of transit, when a certificate of insurance will be issued.

Cover notes may also be issued when incomplete information of the risk is
available.
62
Market Practice

Marine Open Covers are issued for (usually as an annual document) Marine export
& import covers. Customs, Banks and shipping department may insist for
individual stamped policies to clear the documents. While certificates are issued
more commonly based on periodic declarations of Inland/ coastal transit under
an Open Policy.
With increasing containersation, Combined Transport Operators (Multimodal
Transport Operators/ Container Operators) issues Mutimodal Transport Document
which will cover the Container rote which may include road, rail & ship or Air.
This will replace the traditional Bill of lading, Lorry receipts (LRs), Railway freight
and others. In India this is regulated by Multimodal Transport of Goods Act, 1993

Test Yourself 5

The Motor Cover note can only be issued for how many days?

A. 15
B. 30
C. 45
D. 60

5. Insurance Claim Form

The prime aim of any insurance company has to be to shield the insured from
possible losses and pay claims and compensate the insured as per the terms of
the policy, when the situation arises. The utmost good faith concept is as
important at the time of claims, as it is at the time of issue of policy. Furthermore,
the insurer ought to investigate the claim as thoroughly as possible, to ensure
that payments are made fairly and equitably. At the same time, it is critical that
the insurer collates as much information as possible to build up the claims
database.

With both these aims in mind, the insurer usually requests for completion of a
claim form, once initial advice of a claim has been received. The format will vary
from class to class and from insurer to insurer, but many of the headings will be
relatively common across both. The claim form may ask for details as mentioned
below.

Common Questions

Name This information will be used to check whether the insured

is the same. This can be particularly important with
corporates, where there may be a number of subsidiaries.
Also likely to be used for filing purposes, whether online or
manual.
63
Business This is increasingly being captured as part of cross-selling
/ marketing initiatives generally and will, in any case, be
a necessity in certain classes of insurance in the corporate
classes to ensure that the underwriting information is
consistent
Policy number To be used for identification purposes
Contact This will include telephone details and e-mail etc.
information
Contact address Detailed address of the insured / business place
Any other This will be used for those risks where contribution may be
insurance in force a factor – mainly in property insurance
Date (and time) This will vary with the class – obviously immediate
of incident (or accidents such as Motor or Fire can be defined by the time
discovery of as well as the date, however with Liability Insurance
incident) Claims it may not even be clear which year the incident
actually happened (i.e. illness or diseases claim). Such
claims may be filed only when the event was discovered.
Location of This will be important for the database and may also be
incident relevant as regards whether the claim is valid, as it may
happen outside the geographical limits of the policy
Circumstances of Details of what led to the incident
the incident
Reporting to This will normally relate to theft and the like, where there
other authorities will be a requirement to report to authorities such as the
police
Information on This will relate to liability insurance as well as property
the items lost or
damage
Declaration A signed declaration to confirm that all answers are true
and correct

64
Summary

 An insurance contract is a legal document and has all the elements of a valid
contract.

 For most classes, the policy structure is standard and divided into 7
components.

 An insurance proposal form includes general questions, insurance related

questions and specific questions.

 Claim forms are used for both; obtaining claims information and building
database for analysis.

Market Practice

IRDAI, has brought in various regulations stressing the importance of clear &
transparent communication and information to policyholders. They also have
standardized many policies, policy wordings and connected documents such as
proposal, claim forms etc. policyholders.gov.in, is a site maintained by IRDAI
which is designed to provide information, in a simple manner, to the policy
holders. This contains FAQs, Comics, videos to propagate the message of
Insurance. Students are advised to visit the same as many concepts are explained
very well there.

Some important terms / definitions you have learnt in this chapter

a) Preamble
b) Express or Implied Conditions
c) Principles of Construction
d) Contra preferentum rule

65
Answers to Test Yourself

Answer to TY 1

The correct option is B

Contractual term for premium is consideration.

Answer to TY 2

The correct answer is A

The operative clause is also known as insuring clause.

Answer to TY 3

The correct option is A

Legality is an implied condition.

Answer to TY 4

The correct option is B

The written word takes precedence over the printed word

Answer to TY 5

The correct answer is D

Motor Cover note is to be issued for 60 days.

66
Self-Examination Questions

Question 1

If the insurer wants to avoid liability on grounds of non-disclosure he must prove

certain facts – which of the following is incorrect

A. Undisclosed facts were material

B. Facts were within the actual or presumed knowledge of the insured
C. Facts were not communicated to the insurer
D. The fact which reduces the risk

Question 2

Which of the following is not part of the fundamentals of a contract?

A. Offer and acceptance;

B. Legality (illegal contracts are void) and being capable of performance;
C. It must be in writing
D. Agreement (the consent of the parties is necessary for a contract to be
enforceable);

Question 3

An endorsement follows a request for change/s in the policy. Which of the

following will not be a subject for an endorsement?

A. There was no claim under the policy

B. Change in renewal date
C. Increase in sum insured
D. Cancellation of cover

Question 4

Which of the following will be correct in the case of non-compliance with Section
64 VB of the Insurance Act?

A. insurance will not be effective

B. insurance will not be effective unless the insured reaffirms the declaration
relating to material facts
C. insurance will not be effective if the cover is amended from that of the policy
to be renewed
D. insurance will not be effective if there is any change in the agent or broker

67
Question 5

The conditions relating to the Motor certificate are laid down in which act?

A. Motor Certificate Act, 1990 and Subsequent amendments

B. Motor Vehicles Act, 1988 and Subsequent amendments
C. Insurance Company Act, 1938 and Subsequent amendments
D. Motor Insurance Act, 1986 and Subsequent amendments

68
Answer to Self-Examination Questions

Answer to SEQ 1

The correct option is D

The fact which reduces the risk need not be disclosed

Answer to SEQ 2

The correct answer is C

The contract does not necessarily have to be in writing

Answer to SEQ 3

The correct answer is A

No endorsement is required if there is no claim under the policy

Answer to SEQ 4

The correct answer is A

Insurer is prohibited from accepting the risk unless full premium is paid in advance
as per Section 64 VB of the Insurance Act 1938.

Answer to SEQ 5

The correct answer is B

The Motor Vehicles Act 1988 and Subsequent amendments covers the conditions
relating to the motor certificate.

69
 CHAPTER 3
GENERAL INSURANCE PRODUCTS – PART 1
(FIRE AND MARINE)
An Introductory Overview

The conventional classification of general insurance as provided under Section 2

of the Insurance Act, 1938 is as under:

(a) Fire Insurance: This branch covers the insurance of property against the
risks of fire, riot, flood, earthquake, etc. and also includes insurance for
loss of profits due to such damage.

(b) Marine Insurance:

(i) Cargo Insurance: This branch deals with insurance of goods in transit
by road, rail, sea or air against various risks,
(ii) Hull Insurance: Hull insurance relates to the insurance of ocean-going
steamers, motor launches, fishing vessels, etc., against such risks as
fire, collision, storm, stranding, etc.

(c) Miscellaneous Accident Insurance: This branch consists of a wide variety

of policies and deals with all types of insurances which are not transacted
in fire or marine branches. Motor insurance, Engineering insurance,
Burglary insurance, Fidelity Guarantee insurance, Public Liability
insurance and Workmen's Compensation insurance, crop insurance are
some of the major classes of business in this branch.

(d) Health Insurance: Sickness benefits or medical, surgical or hospital

expenses benefits whether in-patient or out-patient travel cover and
personal accident cover.
(Insurance Laws Amendment Act 2015)

However, over the years, the global market has changed significantly and to keep
pace with the evolving business concepts, insurance terminology followed in India,
also has changed. In recent times, general insurance is classified differently as
under. It is only as a market practice and not modified by any enactment as such.

(a) Insurances of property: Fire insurance, marine insurance, burglary insurance,

engineering insurance, motor vehicle insurance, aviation hull insurance, crop
insurance and cattle insurance are important classes of insurance falling
under this classification.

(b) Insurances of persons: Personal accident, travel insurance and health

insurance will come in this classification.

71
(c) Insurances of personal honesty: This classification comprises mainly the
fidelity guarantee insurance.

(d) Insurances of liability: Public (third party) liability insurance, products

liability insurance and professional indemnities fall under this classification.

(e) Others- Apart from above Insurance industry offers protection to many other
situations. Cancellation of events, business interruption & Advanced Loss of
Profit, Delay in Start Up Insurance, denial of access, Cyber / virus attacks,
Ransom and kidnaping, Film insurance, drug testing, speed trials of motor
cars and more.

The students may come across the term 'Reinsurance'. It is also dealt with earlier
in this book. This is an arrangement whereby an insurer transfers a part of the
risk to another insurer so that his share of a heavy loss is reduced. It may be
called as insurance of insurance. Reinsurance is based on the same basic principle
of insurance, i.e., to spread the risk of a 'few' over the 'many'. Contracts of
'reinsurance’ are entered into between the insurers and the reinsurers. These are
distinct from insurance contracts between the insurers and the insured’s.

In the global scenario there are a number of ways the insurance markets classify
insurance products, such as:

Retail and wholesale: where ‘retail’ connotes a direct product, usually aimed at
the individuals, directly or through an agent e.g. home, personal, motor and
individual health etc.; ‘wholesale’ connotes the brokered product – usually aimed
at corporates.

Property and casualty (P&C): It is picked up from the US markets, where property
tends to be the first party covers, such as fire insurance, and casualty relates to
the third party covers, such as liability insurance. However, the differentiations
have become much greater with the newer forms of insurance, plus the stand-
alone markets such as marine and aviation.

In this chapter, we will learn about the perils covered by the Standard Fire and
Special Perils Policy and Consequential Loss (Fire) policy, how it can be modified
/ customised to meet the specific needs of customers.

How insurance takes care of the individuals’ insurance needs, will be clear in this
chapter.

Market Practice

IRDAI came out with File & Use Guidelines for general Insurance products in
September 2006, effective from 1st April 2007. Gradual relaxations were given
later.

The regulator talks about 5 types of products, in general.

72
A Class rated products
1) Internal tariff rated products: These are standard products that can be sold
by any of the offices of the insurer with the rates, terms and conditions of
cover, including choice of deductible where applicable, as set out in an
internal guide tariff.
2) Packaged or customized Products: These are products specially designed for
an individual client or class of clients

B. Individual rated products

I. Individual experience rated products: These are products where the rates,
terms and conditions of cover are determined by reference to the
requirements of and the actual claims experience of the insured
concerned.
II. Exposure rated products: These are products where the rates, terms and
conditions of cover are determined by an evaluation of the exposure to
loss in respect of the risk concerned, independent of the actual claims
experience of that risk.

C Insurances of large risks: For the purpose of these guidelines, large risks are:
(1) insurances for total sum insured of Rs.2,500 crores or more at one location for
property insurance, material damage and business interruption combined; (2)
Rs.100 crores or more per event for liability insurances.

a) Understand the cover provided under Fire Insurance Policy

b) Understand widening of the scope of cover by special endorsements
c) Understanding special policies
d) Understand the cover provided under Consequential Loss (Fire) Policy
e) Understand the cover provided under Marine Cargo Policy
f) Understand the cover provided under Marine Hull Policy

73
1. Understand the cover provided under Fire Insurance Policy
[Learning Outcome a]

Standard insurance policies are designed to provide a basic minimum cover at a

reasonable premium, to make possible the purchase of this insurance by the
majority of people. Fire Insurance is designed to provide financial protection for
property against loss or damage by fire and other specified perils.

The perils covered under Fire Insurance is generally grouped in to three in

operational parlance. FLEXA (fire, lightning, explosion/ implosion and aircraft
damage); NATCAT (Flood, Storm and allied perils, landslides/subsidence); and
Other Perils (Riots, Strikes, Malicious Damage, bush fire, bursting of
pipes/overflowing of tanks….)

Examples of Insurable Property

o Buildings

o Contents of buildings such as machinery, plant & equipment, accessories,

furniture fixture, etc.

o Goods (raw materials, in process, semi-finished, finished, packing materials,

etc.) in factories, warehouses and in the open.

o Contents in dwellings, shops, hotels, etc.

o Furniture, fixture and fittings, etc.

1. The Standard Fire and Special Perils Policy

The perils specified in the policy are as under. Certain other perils can be
included in the coverage by endorsements with suitable additional premium and
other terms, which are called ‘Add on covers ‘

Fire
Excluding destruction or damage caused to the property insured by

(a) (i) Its own fermentation, natural heating or spontaneous combustion.

(ii) Its undergoing any heating or drying process.

(b) Burning of property insured by order of any Public Authority:

(Note: Spontaneous Combustion can be covered at extra premium)

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Lightning

Explosion / Implosion

Explosion / Implosion cover excludes loss, destruction of or damage:

(a) To boilers (other than domestic boilers) or their contents resulting from their
own explosion / implosion.

(b) Caused by centrifugal forces.

(Note: This risk of steam generating boilers can be covered under Boiler Explosion
Policy in Engineering Insurance).

Aircraft Damage

Destruction or damage caused by Aircraft, other aerial or space devices and

articles dropped therefrom excluding those caused by pressure waves.

Riot, Strike and Malicious Damage but with certain exclusions

Loss of or visible physical damage or destruction by external violent means

directly caused to the property insured by riot, strike, malicious damage.

Terrorism Damage

This cover was included in the above mentioned cover. However it was separated
in 2002 and hence the standard policy has a specific terrorism exclusion warranty,
as in the policy form it was included.

Terrorism Cover

It is now a separate cover. When the insured opts for Terrorism Damage cover it
is to be included on paying additional premium as provided, by attaching a
specific terrorism inclusion warranty. This cover is granted in conjunction with
standard fire policy. However for very large risk a separate policy altogether for
terrorism cover is also available as standalone cover.

Deductibles for Terrorism cover

Every claim under terrorism cover will be subject to a deductible as under:

Industrial Risks: 0.5% of Total Sum Insured subject to a minimum of Rs. 1 lakh.

Non-industrial Risks: 0.5% of Total Sum Insured subject to a minimum of Rs.

25,000
75
Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and Inundation
(STFI):

The cover for natural perils is defined as: Loss, destruction or damage directly
caused by Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood or
Inundation excluding those resulting from earthquake, volcanic eruption or other
convulsions of nature. ”add on cover”

Earthquake

Wherever earthquake cover is given as an “add on cover” the words “excluding

those resulting from earthquake, volcanic eruption or other convulsions of nature”
are deleted from the above wording for storm etc.)

Impact Damage

“Loss or visible physical damage or destruction caused to the property insured

due to impact by any Rail / Road vehicle or animal by direct contact not belonging
to or owned by

a) The insured or any occupier of the premises or

b) Their employees while acting in the course of their employment.

Subsidence and Landslide Including Rock Slide

“Loss, destruction or damage directly caused by subsidence of part of the site on

which the property stands or Landslide / Rockslide excluding ……..”

(a) The normal cracking, settlement or bedding down of new structures

(b) Demolition, construction, structural alterations or repair of any property or

underground works or excavations.

Bursting and / or Overflowing of Water Tanks, Apparatus and Pipes

Missile Testing Operations

Accidental Leakage from Automatic Sprinkler Installations

Bush Fire Excluding destruction or damage caused by Forest Fire.

76
2. Exclusions under Fire Insurance Policy

General Exclusions:

“This Policy does not cover

a) The first amount of 5% of each and every claim subject to a minimum
(varies according to the risk) in respect of each and every loss arising out
of “Act of God” perils such as Lightning, STFI, Subsidence, Landslide and
Rockslide.

b) The first Rs ___/- (amount specified varies according to the risk) for each
and every loss arising out of other perils.
(The deductible or excess in (a) & (b) is not applicable to dwellings)
c) Loss, destruction or damage caused by war, and kindred perils.

d) Loss, destruction or damage directly or indirectly caused to the property

insured by nuclear peril.

e) Loss destruction or damage caused to the insured property by pollution or

contamination excluding
i) Pollution or contamination which itself results from a peril hereby
insured against.
ii) Any peril hereby insured against which itself results from pollution or
contamination.

f) Loss, destruction or damage to bullion or unset precious stones, curios or

works of art for an amount exceeding Rs.10,000/-, manuscripts, plans,
drawings, stamps, coins or paper money, cheques, books of accounts or
other business books, computer systems records, explosives etc. unless
otherwise expressly stated in the policy.

g) Loss, destruction or damage to the stocks in Cold Storage premises caused

by change of temperature.

h) Loss, destruction, or damage to any electrical machine, apparatus, fixture

or fitting arising from or occasioned by over-running, excessive pressure,
short circuiting, arcing, self-heating or leakage of electricity from
whatever cause (lightning included) provided that this exclusion shall
apply only to the particular electrical machine, apparatus, fixture or
fitting so affected and not to other machines, apparatus, fixture of fittings
which may be destroyed or damaged by fire so set up.

This is known as “Electrical Risks” exclusion. These risks can be covered

under Machinery Insurance policy (Engineering Insurance).

77
 It is to be noted that only damage to the particular electric machine,
apparatus etc. by specified electrical risks is excluded; but resulting fire
damage to other machines, property, etc. is covered.

i) Expenses incurred on (a) Architects, Surveyors and Consulting Engineer’s

Fees and (b) Debris Removal necessarily incurred by the Insured following
a loss destruction or damage to the property insured by an insured peril
in excess of 3% and 1% of the claim amount respectively.

(Note: Cover for expenses in excess of 3% and 1% can be arranged by

endorsement)

The other exclusions under the policy are:

a) Loss or damage by spoilage from the interruption of any process caused by

any of the perils covered.

b) Loss or damage by earthquake.

c) Loss or damage to insured property if removed to any building or place other

than the insured premises (except machinery temporarily removed for repairs,
etc. for a period not exceeding 60 days)

d) Theft during or after the occurrence of any insured peril.

(Note: Add-on cover at additional premium is available for (a), (b) & (c))

3. General Conditions of Fire Insurance Policy

There are 15 conditions in the policy. Provisions of these conditions are briefly
explained.

i. This policy shall be voidable in the event of mis-representation, mis-

description or non-disclosure of any material particular. This condition deals
with the principle of utmost good faith.

ii. All insurance under this policy shall cease on expiry of seven days from the
date of fall or displacement of any building or part thereof. Provided such
a fall or displacement is not caused by insured perils. However, the company,
subject to an express notice being given as soon as possible but not later
than 7 days of any such fall or displacement, may agree to continue the
insurance subject to revised rates, terms & conditions as may be decided by
it and confirmed in writing to this effect.

iii. Under any of the following circumstances the insurances ceases to attach as
regards the property affected unless the insured, before the occurrence of
any loss or damage, obtains the sanction of the company signified by
endorsement.

78
 (a) If the trade or manufacture carried on be altered, or if the nature
of the occupation of or other circumstances affecting the building
insured or containing the insured property be changed in such a
way as to increase the risk of loss or damage by the Insured Perils.

(b) If the building insured or containing the insured property becomes

unoccupied and so remains for a period of more than 30 days.

(c) If the interest in the property insured passes from the insured
otherwise than by will or operation of law.

These are material changes in the risk and hence must be notified to the
company. However, on the death of the insured the legal heirs
automatically become the insured.

iv. If there is a marine policy covering the loss; the fire policy will pay only the
excess over the amount payable under the marine policy.

v. This condition deals with the cancellation of the policy by either of the
parties to the contract. If the cancellation is by the insured then the
premium is retained by the company on short period basis. The insurance
company can also cancel the policy by giving 15 day’s notice to the insured
and in such a case the premium will be refunded on pro-rata basis.

vi. This condition deals with duties of the insured on happening of a loss which
are :

(a) Notice of loss / damage should be given to the Insurer forthwith.

(b) Within 15 days or further time as allowed by the insurance company

submit a claim statement giving item wise details of amount of loss not
including profit of any kind.

(c) Particulars of other insurances should also be submitted.

Non-compliance of this condition will make the claim untenable.

The second part of this condition makes two provisions.

a) The insurer is not liable for any loss after the expiry of 12 months from
the date of loss unless the claim is the subject of pending action or
arbitration.

b) If liability is disclaimed by the insurer and the insured has not filed a suit
in a court of law, within 12 months of the date of disclaimer, the claim is
deemed to have been abandoned by the insured. It is not recoverable
thereafter.

79
vii. This condition provides for certain rights of the insurers following the
occurrence of a loss. Insurers can

(a) Enter and take possession of the building or premises where the loss has
occurred.

(b) Remove, sort, arrange or salvage the property

If the insured or any person on his behalf does not co-operate or hinders the
process in any way then all benefits under this policy shall be forfeited.

The insured does not have any right to abandon damaged property whether
the insurer takes possession or not.

viii. If the claim is fraudulent then the insured loses all benefits under the policy.

ix. This condition gives the insurer the option to reinstate or replace the
property that is lost / damaged instead of paying the amount of claim to the
insured.

x. This is called the condition of average. An insured is expected to insure his

property for its full value. In the event of claim if it is found that he has not
covered the property for its full value, then he has to bear a portion of the
claim for his own account.

The loss payable is worked out on the Equation loss * Sum insured / Value =
Amount Payable as compensation. The following example would explain the
position.

Example:

Value of Property Rs. 2,00,000

Sum Insured Rs. 1,50,000

Loss Rs. 80,000

The amount payable

= 1, 50,000 x 80,000 = Rs. 60,000

2, 00,000

xi. This condition provides that in the event of more than one policy covering
the loss; all policies will contribute towards the claim amount in the
proportion that the particular policy’s sum insured bears to the total sum
insured under all the policies (contribution).

80
xii. If the loss is caused by a third party the insured is required to give assistance
to the insurers to enable them to recover the loss from the third party
responsible for the loss. The insured’s rights of recovery against the third
party are subrogated to the insurers. This is the subrogation condition.

xiii. Any dispute regarding the amount of claim payable (liability having been
admitted by the insurer) shall be referred to arbitration as per the provisions
of the Arbitration and Conciliation Act, 1996.

Arbitration is a private method of dispute resolution out of Court of law and

is faster and cheaper than the process of litigation.

xiv. Every notice and other communication to the company required by these
conditions must be written or printed.

xv. Upon the settlement of any loss under this policy, prorata premium for the
unexpired period from the date of such loss to the expiry period of insurance
for the amount of such loss shall be payable by the Insured to the company.
This is for the purpose that the sum insured should be maintained to the full
extent for the remaining policy period.

The additional premium referred to above shall be deducted from the net claim
payable under the policy. However, the sum insured shall stand reduced by the
amount of loss in case the insured immediately on occurrence of the loss exercises
his option not to reinstate the sum insured as above.

Market Practice

In Indian market, the Policy wordings of Fire Insurance is standardized by General

Insurance Council, in the absence of Tariff Advisory Committee. The Segment has
been de-tariffed, but the wordings of the Policy continued to be guided by
General Insurance Council by common agreement. The Policy wordings are
available in their web site. The site ‘gicouncil.in provides simple details of all
policies. The Tariff on Fire, Engineering, Motor and Workmen Compensation have
been withdrawn with effect from 1st January 2007.

With effects from 1st April 2021, the following sections of old Fire Tariff has been
de notified and Regulator introduced new Policies, wordings, conditions and
clauses. For other risks conditions, clauses and wordings and to some extent
premium will be continued to be guided by All India Fire Tariff (2001).

(a) Dwellings: Any Sum Insured

(b) Offices, Hotels, Shops, Industrial/Manufacturing risks, Utilities located
outside the compound of industrial/manufacturing risks, Storage risks outside the
compound of industrial/manufacturing risks and Tank farms/Gas holders outside
the compounds of industrial/manufacturing risks where the total value at risk
does not exceed Rs.50 Crores across all asset classes at any one location. (These
standard policies are described later)
81
2. Understand widening of the scope of cover by special endorsements
[Learning Outcome b]

Add-on Covers

The following ‘Add-On’ covers are available at extra premium.

a) Architects, etc. Fees (in excess of 3% of claim amount)

Under this head standard policy allows compensation only upto 3% of the
claim amount. This extension provides cover for a higher limit i.e. upto
7.5% of the adjusted loss, at an additional premium.

b) Debris Removal Expenses (in excess of 1% of claim amount)

Following a loss, the insured may have to incur costs and expenses

i. For removal of debris from the insured premises and clearing the site.
ii. Dismantling or demolishing.
iii. Shoring or propping up of the portion of the property, insured destroyed
or damaged by insured perils.

The sum insured for the extension is separately fixed not exceeding 10%
of the total sum insured.

c) Deterioration of Stocks in Cold Storage premises

There are two types of extension of cover for deterioration of stocks

caused by change of temperature.

(A) Destruction of or damage to the insured property by change of

temperature in consequence of failure of electric supply at the
terminal ends of electric service feeders from which the insured
obtains electric supply directly due to damage by an insured peril to
property at any Electric Station or Sub-Station of Public Supply
undertaking from which the insured obtains electric supply.

(B) Destruction of or damage to insured property by change of

temperature in consequence of failure of electric supply following
damage to property at the insured’s premises.

The extension does not cover any loss due to any act of government,
municipal authority etc. or due to rationing etc. of power supply.

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d) Spontaneous Combustion

This extension covers loss or damage by fire only of the insured property
caused by its own fermentation, natural heating or spontaneous
combustion.

Spontaneous combustion means burning which results from internal

heating and not from external causes. This takes place in certain
commodities e.g. groundnuts, dyes, chemicals, paints and varnish,
gunnies, hay and grass, copra cake, etc.

e) Forest Fire

The extension covers loss or damage to the property insured directly

caused by burning, whether accidental or otherwise, of forests and jungles
and the clearing of lands by fire.

f) Impact Damage

Impact damage due to Insured’s Own Rail / Road Vehicles, Forklifts,

cranes, stackers and the like and articles dropped therefrom.

g) Earthquake (Fire and Shock)

Earthquake (Fire and Shock) add-on cover is available in two types:

i) If option to delete STFI perils under Standard policy is not exercised.

The extension covers loss or damage (including loss or damage by fire)

to property insured by earthquake including flood or overflow of the
sea, lakes, reservoirs and rivers and / or Landslide / Rockslide resulting
therefrom.

ii) If option to delete STFI perils under standard policy is exercised the
cover applies for loss or damage (including fire) by earthquake including
Landslide / Rockslide resulting therefrom but excluding flood or
overflow of the sea, lakes, reservoirs and rivers caused by earthquake.

The extension is subject to the following:

Excess is 5% of each and every claim subject to a minimum of Rs.10, 000/-.

Coverage applies to both fire damage and shock damage.

h) Spoilage Material Damage cover under a separate item in the policy relates
to

(i) Loss of stock in process; and

83
 (ii) Damage to machinery, containers and equipment (including cost of
removal of debris and cleaning).

The policy is extended to cover “loss or damage by spoilage resulting from

the interruption or cessation of any process or operation caused by any of
the perils covered by the policy.” Subject to the proviso that liability for
damage to the property insured is first admitted by the company.

All stocks must be covered with a separate sum insured for each block
subject to pro-rata average, if under-insured.

i) Temporary Removal

The extension provides cover in respect of insured stocks while

temporarily removed to any other premises for fabrication.

j) Loss of Rent is covered if the insured building or any part thereof is unfit
for occupation as a result of damage by insured perils.

- The owner-occupant to insure both buildings and contents.

- The tenant to insure the contents of the premises for which this
extension is sought.

k) “Start-up Expenses”: The policy is extended to “cover Start-up costs

necessarily and reasonably incurred by the insured consequent upon a loss
or damage covered by this policy”.

l) Escalation Clause: This clause, applicable to policies on Buildings,

Machinery and Accessories only, can be incorporated in policies on
payment of additional premium.

The clause allows automatic regular increase, not exceeding 25%, in the
sum insured throughout the period of the policy. The automatic increase
operates from the date of inception upto the date of occurrence of any of
the insured perils. Pro-rata condition of average will apply as usual.

84
3. Understanding special policies
[Learning Outcome c]

Floater Policy

These policies cover stocks at various specific locations under one sum insured.
The insured may have stocks in two or more godowns. He is able to declare for
insurance the total value of goods in all godowns but not separate values for each
godown.

Unspecified locations are not allowed. Similarly, in a manufacturing risk, the

stocks in the process blocks, godowns and / or in the open can be covered under
one sum insured.

Declaration Policies

To take care of frequent fluctuations (at same location) in stocks / stock values,
Declaration Policy (ies) can be granted subject to the following conditions:

a. The policy is issued for a sum insured selected by the insured. (Insurers
stipulate a minimum sum insured).

b. Monthly declarations based on the average of the value at risk on each day or
highest value on any day of the month shall be submitted by the Insured. If
declarations are not received within the specified period, the full sum insured
under the policy shall be deemed to have been declared.

c. Refund of premium on adjustment based on the declaration / cancellations

shall not exceed 50% of the total premium.

Illustration

Sum insured : Rs.1,00,00,000 (1 crore)

Rate : Rs.1.00 per mille (Re. 1 for every Rs. 1000 sum insured)

Premium : Rs.10, 000/-

Monthly Declarations

January 52,00,000
February 56,00,000
March 46,00,000
April 46,00,000
May 30,00,000

85
 June 30,00,000
July 30,00,000
August 30,00,000
September 40,00,000
October 40,00,000
November 40,00,000
December 40,00,000
Total Declarations 4,80,00,000
Average Sum Insured 40,00,000
Premium 10,000
Premium on average sum insured 4,000
6,000

According to rules, refund cannot exceed 50% of the total premium. Therefore,
refund is Rs.5,000/- and not Rs.6,000/-.

Reinstatement Value Clause

This is the fire policy with the reinstatement value clause attached to it. The
clause provides that in the event of loss, the amount payable is the cost of
reinstating property of the same kind or type, by new property.

This basis of settlement differs from the basis under the standard fire policy
where the losses are settled on the basis of market value i.e. making deductions
for depreciation, etc.

The reinstatement value clause incorporates the following special provisions:

a) Reinstatement must be carried out by the insured and completed within 12

months after the destruction or damage, failing which the loss will be settled
on the normal indemnity basis i.e. according to the Fire Policy.

b) The reinstatement basis of settlement will not apply

(i) If the insured fails to intimate to the insurer within 6 months or any
extended time his intention to replace the damaged property.

(ii) If the insured is unable or unwilling to replace the damaged property. In

such cases the loss will be settled on the normal basis of indemnity.

c) The work of reinstatement may be carried out upon another site and in any
manner required by the insured provided the liability under the policy is not
thereby increased.

86
These insurances are granted to insured’s whose bonafides are satisfactory and,
are generally issued only in respect of building, plant and machinery in
comparatively new condition. These insurances are not granted on stocks.

Agreed Bank Clause

All policies in which a Bank has a partial interest are to be made out in the name
of the Bank and Owner or Mortgagor and the Agreed Bank Clause incorporated in
the policy.

The salient features of the clause are:

a) The claim is payable to the bank whose receipt shall be a complete discharge
and binding on all parties insured.

b) Any settlement, compromise etc. in relation to dispute if made with the bank
shall be valid and binding on all parties insured.

Fire Proposal Form

The fire proposal form elicits details of the insured, address of corporate office,
(if any), and works, nature of business, system of working (i.e. whether single or
multiple shifts), Description of the property etc. It will also include the following
information:

(i) Construction of external walls and roof, number of storeys.

(ii) Occupation of each portion of the building.

(iii) Presence of hazardous goods.

(iv) Process of manufacture.

(v) The sums proposed for insurance block wise.

(vi) The period of insurance.

(vii) History of previous losses.

(viii) Insurance history – whether previously other insurers had declined the risk,
etc.

Some special types of polices

87
Industrial All Risks Insurance Policy

This is a package cover designed for industrial risks (both manufacturing and
storage facilities). It cannot be issued to Non -Industrial Risks. Initially the
minimum sum insured required was Rs. 100 crores over all for all locations, if
more than one. However now it is left to individual insurer to decide what should
be the minimum sum insured. The cover is on all risk basis subject to certain
exclusions. It has two sections viz Material Damage and Business Interruption. The
BI following machinery breakdown can be opted out in which case there would be
deletion of certain conditions. For a claim to be admissible under BI section the
claim under material damage section must be tenable.

Under insurance of up to 15% is permitted. Apart from the reduced costs of

premium, there is administrative convenience both for the insured and the insurer
as they have to deal with less documentation as compared to separate policies
for each cover.

Standard Products

Regulator has introduced some standard policies for Home Insurance, SME and
MSMEs where very aspects other than the premium rates are clearly mentioned.
Students should have a brief idea about these policies. Full details are available
at irdai.gov.in – Standard Products.

Bharat Grih Raksha Policy

This is a comprehensive policy for residential houses and its contents, valuable &
jewelry. It covers the risk against Fire, Lightning, Explosion & Implosion, aircraft
damage (FLEXA perils), Storm, tempest, cyclone, inundation & flood (NATCAT
perils) and other associated perils like bush fire, subsidence, landslide, riot &
strike, terrorism, theft within 7 days of occurrence of the peril, Policy can be
taken for residences, flats, apartments, bungalows and the sum insured should
be on reinstatement value. There is no under insurance which is a unique feature.

Bharat Sookshma Udyam Suraksha Policy (Meant for Micro & Small enterprises)

This is a Fire Package Insurance for sum insured up to Rs. 5 Cr for Offices,
restaurants, hotels, shops, Industrial & Manufacturing risks, storage, tanks & gas
holders and utilities outside Industrial areas, basement storage, boundary walls
and others. The risks covers as above, i.e. FLEXA, NATCAT, R & S & terrorism and
other perils.

Standard cover also include floater covers for stocks, Additions, alterations or
extensions Property, Loss to stocks located at more than one named location,
Temporary removal of stocks Loss to stock temporarily removed to other premises
for fabrication, processing or finishing upto 10% of value. Cover for Specific
Contents, Start-Up Expenses, Professional fees Reasonable fees of architects,
88
surveyors and consulting engineers, Cost for Removal of debris and Costs
compelled by Municipal Regulations.

Additional covers are limited to declaration facility for stocks and floater cover

The sum in Insured should be Reinstatement for building, plant & machinery. It
should be on landed cost for raw materials. And input costs for finished goods.
Underinsurance is waived up to 15%.

Bharat Laghu Udyam Suraksha (Meant should be for Medium Enterprises)

This policy is mean for similar risks as mentioned in Sookshma Udyam Suraksha
mentioned above but for sum insured exceeding Rs. 5 Cr. and up to Rs. 50 Cr.
Additional covers are limited to declaration facility for stocks and floater cover.
Here also underinsurance is waived up to 15%. But the number of standard covers
given in the above policy, are not covered here.

89
4. Understand the cover provided under Consequential Loss (Fire)
Policy
[Learning Outcome d]

Fire insurance is designed to provide protection in respect of loss of or damage

to buildings, machinery, furniture and fittings, goods and merchandise, etc. by
fire and other specified perils. The insurance affords cover for “material damage”.
However an indemnity for the “material damage” does not provide complete
protection to the insured who may also suffer trading losses due to total or partial
stoppage of the business.

The purpose of consequential loss (also known as Loss of Profits i.e. LOP or
Business Interruption Insurance) is, therefore, to make good these losses, namely
net profit, standing charges and increased cost of working.

Turnover of a business consists of the following elements:

a. Variable Charges: These are expenses incurred in producing the goods (e.g.
purchase of raw materials, wages, etc.)
b. Standing Charges: These expenses are fixed in amount irrespective of the
volume of the business transacted (e.g. taxes, bank interest, salaries to
permanent staff, etc.)
c. Net Profit: This is turnover minus variable and standing charges.
d. Gross Profit: Standing charges and net profit together constitute the gross
profit of the business.

The policy form defines Gross Profit = Net Profit + Standing Charges

Indemnity Period

The profits policy provides indemnity in respect of loss of gross profits during the
indemnity period which is selected by the insured. The indemnity period chosen
by the insured may vary from 3 months to 3 years.

The indemnity period is to be distinguished from the period of insurance which is

usually a year; the insured peril must occur during the period of insurance and
the indemnity period which commences on the date of loss and terminates when
the business returns to normal level.

The Sum Insured

The sum insured is to be fixed by the insured. As the indemnity provided by the
consequential loss policy is in respect of loss of gross profits for the indemnity
period naturally the sum insured should represent the gross profits of the
indemnity period selected. Where the indemnity period is 12 months or less, the
sum insured should be the annual amount of the gross profit i.e. the annual
90
amount of the net profit and the insured standing charges. Where the indemnity
period is 24 months, the sum insured should represent twice the annual gross
profit and so on.

The sum insured is to be computed from the Insured’s accounts. The standing
charges have to be specified by the insured. Some examples of the standing
charges are:

- Interest on loans, bank overdrafts and debentures, including brokerage on

deposits;

- Rent

- Directors fees and remuneration;

- Legal, auditing and other professional fees and expenses;

- Insurance Premiums;

- Advertising and Publicity expenses;

- Conveyance, Stationery, Postage, Telephone, Telex, Telegram expenses;

- Office and General Establishment expenses;

- Salaries to permanent staff including Employees State Insurance Contributions;

- Wages (including Employees State Insurance Contributions), etc.

The loss becomes Payable when:

a. Fire or other insured peril occurs at the insured premises.

b. Property used for the business of the insured at the insured premises must be
destroyed or damaged.
c. The business must be interrupted or interfered with, as a consequence.

The resulting loss is paid in accordance with the provisions of the policy.

(Note: A formula is incorporated in the policy to calculate the loss. This is known
as “Specification”)

Payment of loss under the L.O.P. policy is subject to payment or admission of

liability of the loss under the material damage insurance i.e. Fire and special
perils policy. (This is the ‘material damage’ provision).

91
Test Yourself 1

Replacement cost is paid for the property by the insurer under which clause?

A. Declaration clause
B. Reinstatement Value clause
C. Floating clause
D. Consequential Loss Policy

92
5. Understand the cover provided under Marine Cargo Policy
[Learning Outcome e]

1. Different types of marine insurance policies

Marine insurance, the oldest branch of insurance, comprises:

(a) Cargo insurance and

(b) Hull insurance.

 Marine Hull Insurance – covers loss or damage to the actual structure of the
vessel and its machinery. The body of the vessel is called Hull.

 Marine Cargo Insurance – covers loss or damage to the cargo on the carrying
vehicle, vessel, etc. and during incidental storage as allowed in the relevant
clause.

Definition

The Insurance Act, 1938, Section 2 (13A) defines Marine Insurance business as
“the business of effecting contracts 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”.

Marine Insurance Act, 1963

This Act provides the legal framework for transaction of marine insurance – both
cargo and hull. The Act deals with basic principles, basis of valuation under the
policies, basis of settlement of losses and various other aspects. This is the only
written Statue governing operation of an insurance of a particular nature.

Marine Insurance Practice:

Various documents used in cargo insurance are:

 Cover Note

A cover note is a document granted provisionally pending issue of a regular policy.

It happens at times that all details required for the purpose of issuing a policy are
not instantly available. For instance, the name of the steamer, the number and
date of railway receipt, B/L, the number of packages involved in transit, etc.,
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may not be known at the time of effecting insurance. In such cases a cover note
is issued evidencing the contract.

 The Marine Policy Form

A contract of marine insurance is evidenced by the policy and the clauses

attached to it. The policy form contains only details such as name of the insured,
details of shipment or consignment, sum insured, etc. It is the clauses which
specify the risk covered, risks excluded and other terms and conditions of
insurance. In terms of Section 24 of the Marine Insurance Act, 1963 a contract of
marine insurance is not admissible in evidence unless it is embodied in a marine
policy. The cover note therefore must be followed by a policy.

The policy form contains following particulars:

 Name of insured,

 Policy number,

 Sum insured,

 Premium,

 Stamp duty,

 Steamer or other conveyance,

 Voyage or journey,

 Number and date of bill of lading,

 Rail or lorry or registered post or air freight receipt (as the case may be),

 Interest to be insured,

 Clauses to which the insurance is subject,

 Name and address of settling agents to whom notice of loss, if any, is to be

given,

 Place where claims are payable,

 Place of issue of policy and date,

 Signature of the authorised person signing on behalf of the insurers.

Every marine policy must be stamped in accordance with the provisions of the
Indian Stamp Act.
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 The Clauses:

For export / import policies, the Institute Cargo Clauses (I.C.C.) are used. These
clauses are drafted by the Institute of London Underwriters (ILU) and are used by
insurance companies in a majority of countries including India. For Inland Transit
risk, Indian insurers use the clauses drafted earlier by Tariff Advisory Committee.
Some of these clauses have been modified recently.

 Slip:

Apart from the clauses, some insurers use a sort of notice in a slip printed in red
and marked “Important” (known as ‘red slip’) is also attached. The slip draws the
attention of consignees to certain procedures to be followed by them to preserve
rights of recovery against carriers etc.

2. Marine Cargo Insurance

Marine Cargo insurance plays an important role in domestic as well as in

international trade. Most contracts of sale require that the goods must be insured,
either by the seller or the buyer, against loss or damage. This depends on the
terms of sale used in the sale contract. For the purpose of uniformity the
International Chamber of Commerce (ICC) has framed certain terms called ‘INCO
Terms ‘to be used by merchants in international trade. They lay down the basic
norms to be followed by the seller and the buyer and their responsibilities and
duties. They mainly deal with the transfer of risk from the seller to the buyer.
These terms help the trade to understand them in the same sense in order to
avoid differences and confusion.

Marine Cargo insurance concerns the following:

 export and import shipments by ocean-going vessels of all types,

 coastal shipments by steamers, sailing vessels, mechanised boats, etc.,

 shipments by inland vessels or country craft, and

 Consignments by rail, road, or air and articles sent by post.

Who effects the Insurance

A contract of sale involves mainly a seller and a buyer, apart from other
associated parties like carriers, banks, clearing agents, etc. The question as to
who is responsible for effecting insurance on the goods, which are the subject
matter of sale, depends on the terms of the sale contract. The principal types of
sale contracts, in so far as marine insurance is directly concerned, are as follows:

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 Type of contract Responsibility for Insurance
Free on Board The seller is responsible till the goods are placed on board
the steamer. The buyer is responsible thereafter. He can get
(F.O.B.) the insurance done wherever he likes.
Free Carrier The provisions are the same as in (a) above. This is mainly
(FCA) relevant to air and internal transactions.
Cost & Freight Here also, the buyer’s responsibility normally attaches once
the goods are placed on board. He has to take care of the
(CFR ) insurance from that point onwards.
Cost, Insurance In this case, the seller is responsible for arranging the
& Freight insurance. He includes the premium charge as part of the
(C.I.F.) cost of goods in the invoice.

The above are some of the ‘INCO Terms‘. The latest version thereof is ‘Incoterms
2010 ‘and contains 11 such terms. The ICC publishes the text of these terms (rules)
and the latest book published is on 01st January, 2011. The students / readers are
advised to study these terms in order to understand who has insurable interest at
what time as the claimant under a marine policy has to have insurable interest at
the time of loss.

The normal practice in export / import trade is that the exporter asks the
importer to open a letter of credit with a bank, in his favour. As and when the
exporter is ready for shipment of the goods, he hands over the documents of title
to the bank and gets the bill of exchange drawn by him on the importer,
discounted with the bank. In this process, the goods which are the subject of the
sale are considered by the bank as physical security against the monies advanced
by it to the exporter. A further security by way of an insurance policy is also
required by the bank to protect its interests in the event of the goods suffering
loss or damage in transit, in which case the importer may not make the payment.
The terms and conditions of insurance are specified in the letter of credit.

Institute Cargo Clauses:

Insurers can use their own clauses. Different countries have different standards.
However the institute of London underwrites have drafted standard clauses called
institute cargo clauses which are used by many countries and insurers which
afford a standard cover. Indian market has also adopted these wordings for
overseas insurance, while Inland transit clauses are adopted for Indigenous transit.

Three types of covers are available for export / import shipments by sea, under
different Clauses, as under:

Institute Cargo Clauses (C)

This covers the following risks / contingencies:

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 fire or explosion

 vessel or craft being stranded, grounded, sunk or capsized

 overturning or derailment of land conveyance

 collision or contact of vessel, craft or conveyance with any external object

other than water

 discharge of cargo at a port of distress

 general average sacrifice

 jettison

Institute Cargo Clauses (B)

In addition to the cover under I.C.C. (C), this covers following additional risks:

 Earthquake, Volcanic eruption or lightning

 Washing overboard
 Entry of sea, lake or river water into vessel, craft, hold, conveyance,
container, liftvan or place of storage
 Total loss of any package lost overboard or dropped whilst loading on to, or
unloading from vessel or craft.

Apart from the risks covered under these clauses, cargo is also subject to many
other risks which are known as ‘extraneous risks’. These risks, which can be added
to I.C.C. (C) & (B) on payment of extra premium are:

 Theft, pilferage and / or non-delivery.

 Fresh water and rainwater damage.

 Hook and / or oil damage.

 Heating and sweating.

 Damage by mud, acid and other extraneous substances.

 Breakage.

 Leakage.

 Country damage.

 Bursting / tearing of bags.

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Institute Cargo Clauses (A)

These clauses provide cover for all risks of loss or damage, to the subject matter
insured, excluding those enumerated in the clauses themselves. The term ‘all
risks’ means losses which are caused by accidental circumstances only. Under
I.C.C. (C) and (B), the risks covered are specified; Under ‘A’ clauses the risks
covered are not specified and ‘all-risks’ are covered.

Exclusions

All three sets of clauses contain general exclusions. The more important
exclusions are:

a. Loss caused by willful misconduct of the insured.

b. Ordinary leakage, ordinary loss in weight or volume or ordinary wear and

tear.

c. These are normal ‘trade’ losses which are inevitable and not accidental in
nature.

d. Loss caused by inherent vice or nature of the subject matter. For example,
perishable commodities like fruits, vegetables, etc. may deteriorate
without any accidental cause. (This is known as ‘inherent vice’)

e. Loss caused by delay, even though the delay be caused by an insured risk.

f. Deliberate damage by the wrongful act of any person. This is called

‘malicious damage’ and can be covered, at extra premium, under (B) and
(C) clauses. Under ‘A’ clauses, the risk is automatically covered.

g. Loss arising from insolvency or financial default of owners, operators, etc.

of the vessel. Many ship-owners, especially tramp vessel owners, fail to
perform the voyage due to financial troubles with consequent loss or
damage to cargo. This is not an accidental loss. The insured has to be
cautious in selecting the vessel for shipment.

h. Loss or damage due to inadequate packing

i. War and kindred perils.

j. Strikes, riots, lock-out, civil commotions and terrorism.

(Note: The risks under (i) & (j) can be covered on payment of extra premium.
The Institute War and Strikes clauses are attached to the policy).

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Duration of Cover

As against “time policies” issued in other classes of insurance which cover the
subject matter for a specified period, usually one year, cargo policies are issued
for specified voyage or transit whatever be the time taken for completion of the
particular voyage / transit but subject to reasonableness. It is necessary to be
clear as to when exactly risk commences and terminates under a voyage policy.

The duration of cover is defined in the Transit Clause (popularly known as

Warehouse to Warehouse Clause) of the ICC.

The cover commences from the time the goods leave the warehouse or place of
storage at the place named in the policy, continues during the ordinary course of
transit and terminates either, in the case of shipment by sea,

- On delivery to the consignees’ or other final warehouse at the

destination named
- On delivery to any intermediate warehouse used by the insured for
purposes of storage or distribution or
- On the expiry of 60 days after discharge from the vessel at the final port
of discharge whichever shall first occur.

(Note: The time limit of 60 days is prescribed to ensure early clearance of goods
by the consignee. Insurers extend the time limit, at extra premium, in genuine
circumstances causing delay in clearance. Such extensions should be agreed to
prior to expiry of the time limit)

The duration of cover for war risks is restricted to the time when the goods are
water borne and not on land. War risk on land is not covered under insurance
policies.

Institute Cargo Clauses (Air) (Excluding sendings by Post)

The risks covered are all risks of loss or damages and the exclusions are more or
less the same as under ICC (A) Clauses.

The duration of cover is the same as under ICC (A) except that the period of cover
after unloading of cargo from the aircraft at the final place of discharge is limited
to 30 days (as against 60 days for shipments by sea under ICC (A)). War and SRCC
risks can be covered at extra premium.

It is an unanswered question as to whether loading of the cargo on land vehicle

stands covered or not. In terms of the interpretation of the clause in Indian /
London market it is not covered. Indian insurers therefore include loading /
unloading specifically either at additional premium or without it

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3. Inland Transit (Rail / Road) Clauses

a) Inland Transit (Rail / Road) Clause ‘C’

Risks Covered – Fire risks only

Risks of physical loss/damage to the subject matter, caused by:

a) Fire

b) Lightning

Duration of Cover

Insurance attaches with the loading of each bale/package into the wagon / truck
for commencement of transit and remains in force when on truck or wagon cover
is suspended or ceases when off loaded at transshipment point/final destination
immediately on unloading of each bale/package –

 at destination railway station for rail transits

 at destination named in the policy in respect of road transits.

b) Inland Transit (Rail / Road) Clause ‘B’

Risks Covered - Physical loss or damage to the insured goods by

 Fire

 Lightning

 Breakage of bridges

 Collision with or by the carrying vehicle

 Overturning of the carrying vehicle

 Derailment or accidents of like nature to the carrying railway wagon /

vehicle.

Extraneous risks like theft, pilferage, non-delivery etc. can be added to the cover
at extra premium. SRCC risks can also be added.

c) Inland Transit (Rail / Road) Clause ‘A’

Risks Covered - All risks of loss or damage to the insured goods.

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 Exclusions

All three sets of clauses have the same exclusions as are found in ICC Clauses.

 Duration of Cover

Under these clauses the risk attaches from the time the goods leave the
warehouse and / or the place of storage at the place named in the policy for the
commencement of transit and continues, during the ordinary course of transit,
including customary transshipment, if any,

i. until delivery to the final warehouse at the destination named in the

policy, or
ii. in respect of transits by Rail only or Rail and Road, until expiry of 7 days
after arrival of the railway wagon at the final destination railway station,
or
iii. in respect of transits by Road only, until expiry of 7 days after arrival of
the vehicle at the destination town named in the policy, whichever shall
first occur.

 Registered Postal Sendings

There is no standard set of clauses. ICC or Inland Transit Clauses may be used.
The cover attaches from the time of issue of the registered post receipt and
terminates on delivery of parcel to the addressee (consignee). For interests which
are valuable, it is warranted that the parcel is insured with the postal authorities.

4. Types of marine policies

 Specific Policy

A policy covering a single shipment or consignment is known as specific policy. It

is valid for a particular voyage or transit.

 Open Policy

An open policy is also known as ‘floating policy’. It is described in the Marine

Insurance Act as floating policy. It is worded in general terms and is issued to take
care of all shipments coming within its scope. It is issued for expected annual
turnover to cover shipments or sendings during the particular period of policy.
Declarations are made under the open policy and these go to reduce the sum
insured.

Open policies are normally issued for a year. If they are fully declared before that
time, a fresh policy may be issued, or an endorsement placed on the original
policy for the additional amount. On the other hand, if the policy has run its

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normal period and is cancelled, a proportionate premium on the undeclared
balance is refunded to the insured if the full premium had been collected earlier.

Open policies are generally issued to cover inland transits. However some insurers
also issue an open policy, instead of open cover, to include overseas shipments.
On declaration of a particular shipment separate certificates for overseas
shipments is issued but not for inland transits.

There are certain advantages of an open policy compared to specific policies.

These are:

 Automatic and continuous insurance protection.

 Administrative work is considerably reduced.

 Some saving in stamp duty. This may be substantial, particularly in the

case of inland sendings.

 Open Cover

An open cover is particularly useful for large export and import firms making
numerous regular shipments who would find it inconvenient to obtain insurance
cover separately for each and every shipment. It is also possible that through an
oversight on the part of the insured a particular shipment may remain uncovered
and should a loss arise in respect of such shipment, it would fall on the insured
himself. In order to overcome such a disadvantage, a form of insurance protection
by means of an open cover is taken by big firms having regular shipments. There
is no limit to the total number or value of shipments that can be declared under
the open cover. However, limits like Per Bottom, location are prescribed.

An open cover describes the cargo, voyage and cover in general terms and takes
care automatically of all shipments which fall within its scope. It is usually issued
for a period of 12 months and is renewable annually. It is subject to cancellation
by either insurers or the insured, by giving due notice.

The following are important features of an open policy / open cover:

(a) Limit per bottom or per conveyance:

As a sum insured is not mentioned the insurers like to restrict their liability
to a particular value or shipment made on a particular vessel, aircraft or
conveyance. It means even if the value of that shipment is higher than this
limit the insurer would be liable only up to that limit.

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(b) Basis of Valuation:

As cargo policies are normally on insured value basis, (valued policies) in

order to avoid disputes regarding valuation the basis of valuation is laid down
in the open cover. Normally it is CIF + 10 %. It means the value should consist
of the cost, insurance and freight + 10 %. The 10 % relates to incidental
charges and a nominal profit of the buyer. In specific cases depending on the
facts the insurers may agree to a higher percentage than 10.

(c) Location Clause:

The location clause limits the liability of insurers at any place before
shipment, and or at any intermediate place before completion of the transit.
Generally, this is two to three times of the per bottom limit. This takes care
of the situation where there is accumulation mostly at the port when two to
three shipments arrive simultaneously.

(d) Rate:

A schedule of agreed rates is attached to each open cover. If different

commodities are covered different rates may apply.

(e) Terms:

There may be different terms applying to different commodities covered

under the open cover, and they are clearly stipulated.

(f) Declaration Clause:

The insured is made responsible to declare each and every shipment coming
within the scope of the open cover. An unscrupulous insured may omit a few
declarations, to save premium, specially when he knows that shipment has
arrived safely. Normally it specifies a period for declaration say weekly,
monthly or quarterly. It means within that period one declaration can be
made listing all the shipments during that period. Of late, the practice is to
declare the total value of such shipments without giving all other details but
in the event of loss the insurer reserves his right to verify the books of
account of the insured.
(g) Cancellation Clause:

This clause provides for cancellation of the contract with a certain period of
notice. In case of War & S.R.C.C. risks, the period of notice is much shorter.

Since no stamps are affixed to the open cover, specific policies or certificates of
insurance are issued against declaration & are required to be stamped according
to the Indian Stamp Act

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 Difference between open policy & open cover:

a) The open policy is a stamped document and is, therefore, legally enforceable
in itself, whereas an open cover is unstamped and is not enforceable. Hence a
policy / certificate of insurance duly stamped has to be issued. As mentioned
earlier the marine insurance contract is not admitted in evidence unless there
is a policy of insurance issued in accordance with Marine Insurance Act.

b) An open policy is issued for a fixed sum insured, whereas there is no such limit
of amount under an open cover. As and when shipments are made under the
open policy, they have to be declared to the insurers and the sum insured under
the open policy reduces by the amount of such declarations. When the total of
the declarations amounts to the sum insured under the open policy, the open
policy stands exhausted and has to be replaced by a fresh one.

 Certificate of Insurance

A certificate of insurance is issued to satisfy the requirements of the insured or

the banks in respect of each declaration made under an open cover and / or open
policy. The certificate is a simple document containing particulars of the
shipment or sending. The number of open cover under which it is issued, is
mentioned, and occasionally, terms and conditions of the original cover are also
mentioned or indicated by reference to the open cover. Certificates need not be
stamped when the original policy has been duly stamped.

 Some Special types of marine insurance policy

The erstwhile cargo insurance tariff had some specified policies like Special
Declaration Policy, Special Storage Risk Policy, Annual Policy. However after de-
tariffing these types are more or less not in vogue. Instead, insurers have
developed policies like sales turnover / annual turnover. The policy is issued on
the basis of estimated sales during the proposed policy period for exports and
domestic sales. Premium is charged on that basis but all inward transits i.e.
imports and domestic purchases stand covered so also the inter-depot transits as
per the requirements of the insured. However these have to be specifically
mentioned in the policy.

 “Duty” Insurance

Cargo imported into India is subject to payment of Customs Duty, which can be
included in insured value under a Marine Cargo Policy, or a separate policy can
be issued in which case the Duty Insurance Clause is incorporated. It is warranted
that the claim under Duty Policy would be payable only if the claim under cargo
policy is payable. The insured has therefore to produce proof of the Cargo claim
having been settled or liability admitted by the cargo Insurers. But this provision
is not applied where CIF insurance is arranged by the exporter as required by the
contract of sale. This insurance shall not be valid if effected after the arrival of
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the vessel at the destination port. However if there is open policy or open cover
including custom Duty this condition would not apply. The Duty insurance is not
on agreed value basis.

 “Increased Value” Insurance

Insurance may be arranged to cover increased value of the cargo, if the Market
Value of the goods at destination port on the date of landing is higher than the
CIF and Duty value of the cargo. This insurance is also not on agreed value basis.

(Note: Duty & Increased Value policies are issued only on imports)

5. Claims

The marine perils discussed earlier give rise to different types of losses. The
liability under the policy depends on the loss being caused directly or proximately
by an insured peril.

 Total Loss

Goods may be totally lost by the operation of the marine peril. The measure of
indemnity in the event of total loss of the goods is the full insured value. The
insurers are entitled to take over the salvage, if any.

An actual total loss takes place where the subject matter is entirely destroyed or
damaged to such an extent that it is no longer a thing of the kind insured or it is
lost irretrievably.

As against actual total loss, a constructive total loss, which is a commercial total
loss, takes place where the subject matter insured is abandoned on account of
the actual total loss being inevitable, or where the expenditure to be incurred
for repairs or recovery and forwarding to destination would exceed the value of
the subject-matter after the repairs or recovery.

 Particular Average

In insurance parlance ‘average ‘means loss. The partial loss means a loss which is
not for total loss. They occur when there is a total loss of part of the goods
covered, e.g., a consignment may consist of 100 packages of which 5 packages
may be lost completely. Another way in which particular average loss occurs is
when there is damage to the goods. Where whole or any part of the goods insured
is delivered damaged at destination, the percentage of depreciation is
ascertained by a surveyor appointed for the purpose, by comparing on the one
hand the gross sound market value and, on the other, the gross damaged market
value on arrival of the goods at destination. The depreciation is expressed as a
percentage of the insured value under the policy.

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 General Average

General Average is a loss caused by a general average act. An act is referred to

as general average act when an extraordinary sacrifice or expenditure is made in
order to save the whole adventure. Such an act should be voluntary, and the
expenditure reasonable. It should be undertaken with the sole idea of preserving
the property imperilled in an adventure. It is shared proportionately by all the
interests at risk at the time of the general average act, i.e. ship, cargo and freight
on the basis of value of the property saved which is called ‘ contributary value ‘.
The following are examples of a general average loss:

 Cargo jettisoned in an effort to refloat the vessel.

 Tugs employed to tow the vessel to safety.

The adjustment of general average is done by specialists known as G.A. Adjusters,

who are specifically qualified to do the job. The adjustment is done under York-
Antwerp Rules which are internationally accepted.

 Salvage Loss (partial loss)

When the goods insured are damaged during transit, and the nature of the goods
is such that they would deteriorate further and would be worthless by the time
the vessel arrives at destination, it would be a prudent and sensible to dispose
off the same at an intermediate port for the best price obtained. The term
‘salvage loss’ refers to the amount payable which is the difference between the
insured value and the net proceeds of the sale.

 Sue and Labour Charges

Insurers expect that the insured should at all times act as if he was uninsured and
take such steps as a prudent person would normally take to preserve the property.
In view of this, if there be any expenses incurred by the insured or his agents to
minimize the loss or damage payable under the policy, the same are reimbursed
by insurers. Examples of such charges, known as Sue and Labour charges, are
landing, warehousing, re-conditioning, re-forwarding and similar charges. They
are in practice called loss minimization expenses and so referred to in the IC
Clauses.

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 Extra Charges

They are the charges incurred by the assured as a consequence of loss or damage
and are recoverable only if the claim is admissible under the policy and paid along
with the claim amount. The examples are sale charges, cost of handling damaged
goods and or preserving them, survey fees, etc.

 Claims Documents

Claims under marine policies have to be supported by certain documents which

vary according to the type and nature of loss as also the circumstances of the
claim and the mode of carriage. The documents required for particular average
claims are as under:

Sea voyage

 Original Policy / certificate of insurance duly endorsed

 Original Bill of Lading, or Multimode / Combined Transport Document

 Invoice,

 Survey report,

 Debit Note / claim bill

 Copy of Protest,

 Non delivery / short delivery certificate / short landing certificate /

custom certificate as may be applicable

 Letter of Subrogation,

Some of the other documents required in support of particular average claims are
Ship survey report, lost over-board certificate.

The other important documents are bill of entry issued by the customs authorities,
account sales showing the proceeds of the sale of the goods if they have been
disposed of; repairs or replacements bills in case of damages or breakage; and
copies of correspondence exchanged between the carriers and the claimants for
compensation in case of liability resting on the carriers. Depending on
circumstances and nature of the loss additional documents may be required.

It is also necessary to hold carrier / third party liable due to whose fault the loss
occurred. A claim has to be lodged within prescribed time (the limits are different
for different modes). Copy of claim notice issued to them is also to be forwarded
to the insurer.
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For making a claim for compensation under an insurance policy it is necessary for
the claimants to establish the loss.

Inland Transit Claims (Rail / Road)

In regard to claims relating to inland transit, the documents required to be

submitted to the insurers in support of the claim are:

 Original policy or certificate of insurance duly endorsed.

 Survey report

 Invoice, in original, or copy thereof.

 Certificate of loss or damage (original) issued by carriers.

 If
goods are totally lost or not delivered, the original railway receipt and
/ or non-delivery certificate / consignment note.

 Copy of the claim lodged against the railways / road carriers.

 Letter of Subrogation, duly stamped.

 Special Power of Attorney duly stamped. (Railway Claims).

 Letter of Authority addressed to the railway authorities

 Letterof Undertaking from the claimant in case of non-delivery of

consignment.

 Recovery from Carriers

In many marine claims, there are possibilities of recovery from the carriers, i.e.,
road carriers, railways, steamer companies, etc. After payment of claim, the
insurers are subrogated to the rights and remedies available to the insured against
the carriers or third parties responsible for the loss. The insured is expected to
behave at all times as though he was uninsured. He should not, therefore,
prejudice the rights of insurers in regard to recovery, and must take all steps to
preserve such rights.

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6. Understand the cover provided under Marine Hull Policy
[Learning Outcome f]

Marine Hull Insurance covers only the loss or damage caused to the vessel and her
machinery. It does not cover loss or damage to the cargo carried by it

Example

A ship-owner transports goods from one location to another. An explosion

aboard the vessel severely damages the vessel and the cargo loaded thereon.
Under the Marine Hull Insurance policy the ship-owner will be entitled to
compensation for the damage caused to the vessel and her machinery only but
not the cargo.

Marine Hull insurance comprises the insurance of ocean going ships and other
vessels such as fishing vessels, sailing vessels, inland vessels, etc. which are
known as “Sundry Vessels”.

Hull insurance is generally granted on two basis viz. Time and Voyage – the former
allows a cover for the respective interests on a time basis – maximum being twelve
months and the latter covers designated / specific voyage(s).

Under a Marine Hull policy cover is provided by attachment of Institute Time

Clauses (Hulls) or Institute Voyage Clauses. These policies are ‘named perils
policies i.e. the perils are enumerated in the policy document

The Institute Time Clauses – Hulls (1.10.83) (ITC – Hulls)

These form the basis for most policies used for insurance of vessels and their
machinery. There are variations to these clauses for specific purposes, but, in
general all policies find their basis in the conditions set out in ITC – Hulls. These
clauses are also framed by the Institute of London Underwrites (ILU) and accepted
in many countries.

Coverage: The ITC Time Clauses – Hulls provide cover for loss or damage caused
by:

(a) Perils of the seas, rivers, lakes or other navigable waters.

(b) Fire, explosion

(c) Violent theft by persons from outside the vessel.

(d) Jettison
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 (e) Piracy

(f) contact with land conveyance, dock or harbour equipment or installation

(g) Earthquake, volcanic eruption or lightning.

(h) Accidents in loading, discharging or shifting cargo or fuel.

(i) Bursting of boilers, breakage of shafts or any latent defect in the machinery
of hull

(j) Negligence of master officers, crew or pilots.

(k) Negligence of repairers or charterers provided such repairer and charterers

are not assured under the policy.

(l) Contact with aircraft, helicopter or similar objects falling therefrom.

Collision Liability: Legal liability the assured may incur by way of damages to the
owners of any other vessel and cargo thereon, owing to a collision caused by the
negligence of the insured vessel. The insurers agree to provide a supplementary
cover to the assured over and above the insurance on the vessel itself, to extent
of three-fourths of such liability (which can be covered at an additional premium)

Deductible: A specified deductible amount is applicable to claim(s) arising from

each separate accident or occurrence, other than total loss or constructive total
loss of the vessel.

Institute Time Clauses exclude war, strikes, malicious acts and nuclear risks.

The ship owner has insurable interest not only in the ship, but also in the freight
to be earned during the period of insurance. Freight has been defined by the
Marine Insurance Act, 1963 as follows:

“Freight includes the profit derivable by the Ship-owner from the employment of
his ship to carry his own goods or other movables, as well as freight payable by a
third party, but does not include passage money”. (Section 2(b)).

If freight is payable on arrival of goods at destination the ship owner has insurable
interest in the freight. If the ship or goods, in whole or part, are damaged by a
peril insured against, the ship owner may suffer loss in respect of freight. Freight
may be insured by the ship owner voyage by voyage, or, for a period of time
concurrently with the hull policy. Cover is provided by the Institute Time Clauses
(Freight) and Institute Voyage Clauses (Freight).

In addition to freight the ship owner has insurable interest in the amount spent by
him in fitting out the vessel, including provisions and stores. These expenses are

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termed disbursements and are insured concurrently with the hull policy for a
period of time.

Hull policies are also issued to cover vessels in course of construction. These
policies are taken by the shipbuilder. The vessels are insured from the laying of
the keel. The cover is provided for all risks and the Institute Clauses for Builders
Risks are used. The cover continues until completion of trials leading to delivery
of the ship to the ship-owners. Therefore, the policies are not on a fixed time basis.
This type of policy is called ‘builder’s risk policy ‘and would be for the contract
period.

Example

Total Loss: while at sea, a ship faces heavy weather and sinks or fire destroys it
totally.

Partial Loss: a ship catches fire and part of it is burnt.

 War and Strike Risks:

War and Strike risks in respect of hull and machinery and subsidiary interests i.e.
freight, disbursements, etc. are covered under the Government of India War Risks
Scheme which came into force from 1st July, 1976. It is a voluntary scheme so
that it is left to each shipowner to opt for the scheme. The scheme is applicable
to ships registered under the Indian Merchant Shipping Act, 1958.

Marine Hull Insurance also includes insurance of the following under separate sets
of clauses formulated earlier by Tariff Advisory Committee:

a) Fishing Vessels / trawlers (mechanised or non-mechanised) engaged in fishing

operations only.

b) Sailing Vessel may be mechanised or non-mechanised,

c) Inland Vessels of all types such as Barges, Pontoons, Flats, Floating Cranes,
Launches, Passenger Vessels, Tugs and Port Crafts employed in Inland Waters.

d) A Dredger is a craft used to bring up sand, mud, gravel, etc. from the sea,
river and canal bottoms in order to open and deepen channels and make them
navigable. These crafts are fitted with the machinery and appliances for
dredging work.

e) Jetties, Pontoons, Wharves, etc. in river, canal or sea waters.

f) Ship Builder’s Risks Insurance, Ship breaking covers

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 Specialised Policies

Ship Repairers Liability policy covers their legal liability for loss / damage to the
vessel which is being repaired and loss / damage to machinery or equipment
removed from the vessel for purpose of repairs.

Charterers’ Liability policy covers the damage sustained by the vessel during the
period of Charter for which the Charterers are held legally liable. Charterers are
those who hire the entire vessel or part thereof and allow the cargo to be carried
again charging freight to the cargo owners and also issue bills of lading in their
own name.

 Off-Shore Oil / Gas Units Policy

Specialised insurance policies are designed to cover units which are employed in
connection with either exploration or for commercial production of oil / gas. Such
policies cover drilling and production platforms, operations at site and also the
transport of plant and equipment to the drilling sites.

Test Yourself 2

Which of the following expenses are incurred by the insured to minimise or avert
a loss covered by the policy?

A. Sue and Labour Charges

B. Salvage Charges
C. Miscellaneous Charges
D. None of the Above

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Summary

 A standard fire and special perils policy provides protection against loss due
to fire and specified perils.

 A standard fire and special perils policy can be modified and customised to
suit a customer’s requirement.

 Marine insurance policies are of 2 types: marine hull insurance and marine
cargo insurance

 There are 4 types of losses under Marine Insurance: total loss, partial loss, sue
and labour charges and salvage charges

 Marine policies based on the type of cover chosen, can be classified into 5
types: specific policy, open cover, open policy, annual policy / sales turnover
policy, duty and increased value policy.

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Answers to Test Yourself

Answer to TY 1

The correct answer is B.

Replacement cost is paid for the property by the insurer under Reinstatement
Value Policy.

Answer to TY 2

The correct answer is A.

Sue and labour charges are expenses that are incurred by the insured to minimise
or avert a loss covered by the policy.

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Self-Examination Questions

Question 1

Which type of fire policy covers stock at various locations under one sum insured?

A. Declaration policy
B. Floating policy
C. Long term policy
D. Consequential loss policy

Question 2

Which policy covers damage to actual structure of the vessel?

A. Marine cargo insurance

B. Marine hull insurance
C. Both of the above
D. None of the above

Question 3

Which policy provides cover for loss of gross profit due to stoppage of production?

A. Consequential loss policy

B. Long term policy
C. Reinstatement value policy
D. Declaration policy

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Answer to Self-Examination Questions

Answer to SEQ 1

The correct option is B

Floating policy covers stock at various locations under one sum insured.

Answer to SEQ 2

The correct answer is B.

Marine hull insurance covers damage to actual structure of the vessel.

Answer to SEQ 3

The correct answer is A

Consequential loss policy provides cover for loss of gross profit due to stoppage
of production.

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 CHAPTER 4
GENERAL INSURANCE PRODUCTS – PART 2

(MOTOR, LIABILITY, HEALTH, PERSONAL ACCIDENT

AND SPECIALTY INSURANCE)
An Introductory Overview

Liability insurance is a fast growing sector being driven by:

 General awareness of rights

 Globalisation
 international contracts
 increasing salaries
 improved legal services
 Consumer activism and changing jurisprudence & legislations

Personal Accident and Health insurance covers cater to the needs of individuals
whereas the specialty covers are for special situations demanding non-standard
insurance product.

a) Understand the cover provided under motor insurance policies,

b) Understand the basic underwriting and rating features
c) Understand the motor claims and procedures
d) Understand the cover provided under liability insurance policies
e) Understand the cover provided under personal accident, health and specialty
policies

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1. Understand the cover provided under motor insurance policies
[Learning Outcome a]

1. Classification of vehicles:

For the purpose of insurance, motor vehicles are classified into three broad
categories.

(a) Private cars

(b) Motor cycles and motor scooters

(c) Commercial vehicles, which are further classified into

 Goods carrying vehicles.

 Passenger carrying vehicles e.g. Motorised rickshaws, Taxis, Buses.

 Miscellaneous Vehicles, e.g. Hearses, Ambulances, Cinema Film

Recording & Publicity vans,

Mobile dispensaries etc.

Types of losses:

Two types of losses arise in respect of motor vehicles of all categories. They are:

 Loss of or damage to the vehicle (Own Damage or OD) and

 Third Party Liability (TPL) i.e. the legal liability for property damage and /or
personal injury to third parties, arising out of use of the motor vehicle.

2. Compulsory insurance as per Motor Vehicles Act, 1988

The Motor Vehicles Act prescribes rules and regulations for licensing, use and
insurance of all types of vehicles. It makes it compulsory for an owner of the
motor vehicle to insure it against third party risks. It is, therefore, necessary to
have some knowledge of Motor Vehicles Act (MV Act) which was originally passed
in 1939 and re-enacted in 1988.

In old days, many pedestrians who were knocked down or hit by motor vehicles
and who were killed or injured did not get any compensation because the
motorists did not have the resources to pay the compensation and were also not
insured.

In order to safeguard the interests of pedestrians, therefore, the Motor Vehicles

Act, 1939, introduced compulsory insurance against such injuries to third persons.

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The insurance of motor vehicles against own damage (i.e. damage to the vehicle
itself) is not made compulsory, but the insurance of third party liability arising
out of the use of motor vehicles in public places is made compulsory. As per this
provision of the MV Act no motor vehicle can ply on road or in a public place
without such insurance. Motor insurance policy for such compulsory insurance is
called “Liability Only” policy. Motor Insurance Act was comprehensively amended
in 2019. The liabilities are defines as below

Section 164 (1) provides a minimum of Rs 5 lakhs for death and Rs 2.5 Lakhs for
grievance injury.

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3. Motor insurance important documents

Certificate of Insurance

In motor insurance, in addition to the policy a certificate of insurance is required

by the Motor Vehicles Act., Chapter XI. This certificate provides evidence of
insurance to all concerned. It contains the essential features of the cover,
including the terms and conditions. It essentially certifies that the vehicle is
insured in accordance with the provisions of the MV Act and meets the
requirements thereof.

The Motor Vehicles Act and Central Motor Vehicle Rules, 1989 provides, that the
policy of insurance shall be of no effect unless and until a certificate of insurance
in the form prescribed under the Rules of the Act, is issued. Certificate of
insurance issued by the insurers is the only evidence of existence of a valid
insurance as required by the Motor Vehicles Act & acceptable to all concerned.
The points covered under a certificate of insurance differ according to the type
of vehicle insured. The items of information included in a certificate of insurance
are as under:

(1) Registration mark and number, description of the Vehicles insured like Cubic
capacity, carrying, capacity Make, Year of manufacture, Engine No., Chassis
No.

(2) Name and Address of the Insured.

(3) Effective date and time of commencement of insurance for the purpose of
the Act. Time……, Date……

(4) Date of expiry of insurance.

(5) Persons or classes of persons entitled to drive.

(6) Limitations as to use.

(7) Additional risks, if any

(8) Special conditions

The form of the certificate is prescribed by the Motor Insurance Rules.

Cover Notes:

A cover note is a document issued in advance of the policy. It is issued when the
policy cannot for some reason or the other, be issued immediately.

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Cover notes are issued when full particulars are not available and pending
preparation of the policy. The cover note is issued as evidence of insurance for a
temporary period of time and to prove that insurance is in force. The cover note
is temporary and gets superseded by the policy when issued. Sometimes, insurers
issue a letter confirming the cover instead of cover note. However this would not
meet the requirements of MV Act. The form of cover note is prescribed by the MV
Rules and it has to be for a period of 60 days as prescribed in the Act.

Although the cover note is not stamped, it nevertheless represents the same
insurance as that provided by the policy. In fact, the wording of the cover note
makes it clear that it is subject to the usual terms and conditions of the insurers’
policy for the class of insurance concerned. The operative clause of a motor cover
note reads as follows:

“The Insured described in form 2 referred to below, having proposed for insurance
in respect of the Motor Vehicle(s) described therein and having paid the sum of
Rs….as premium the risk is hereby held covered under the terms of the company’s
usual form of……Policy applicable thereto (subject to any Special Conditions
mentioned below) unless the cover be terminated by the Company by notice in
writing in which case the insurance thereupon will cease and a proportionate part
of the premium otherwise payable for such insurance will be charged for the time
the company had been on risk.”

The Motor Cover Note and certificate incorporate a certification to the effect
that it is issued in accordance with the provisions of Chapters XI of the Motor
Vehicles Act, 1988 as amended in 2019 and Central Motor Vehicle Rules, 1989.

Renewal Notice

Although there is no legal obligation on the part of insurers to advise the insured
that his policy is due to expire on a particular date or to invite its renewal yet,
as a matter of courtesy and healthy business practice, insurers issue a Renewal
Notice one month in advance of the date of expiry, inviting renewal of the policy.

It is the practice to include in the renewal notice, a note advising the insured
that he should intimate any material alterations in the risk. In Motor renewal
notice, for example, the insured’s attention is drawn to revise the sum insured in
the light of current market value. The insured’s attention is also invited to the
statutory provision that no risk can be assumed unless the premium is paid in
advance.

3. Types of policies

In Indian market, following Motor Policies are now available in lieu of Supreme
Court Directions to reduce uninsured vehicles. The sections explained here might
undergo changes, when insurers redraft the policies with the new directions.

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 1. Long Term 5 year Motor Third Party ( Compulsory Policies ) for all new two
wheelers
2. Long Term 3 years Motor Third Party Insurance (Compulsory) for all new
cars.
3. One year Package policy for old vehicles as before and commercial
vehicles.
4. One Year Own Damage Insurance (separate & optional). The OD Policy can
be issued only if the insured has a basic TP Policy which can be from any
other insurer.
5. One Year OD policy covering only Fire & theft
6. Compulsory Personal Accident (CPA) Insurance for Owner & Driver for
Rs. 15,00,000 along with Third Party Policy has to be issued. If the insured
already has a Personal Accident Cover covering Death & PTD at least for
Rs. 15 lakhs CPA need not be issued.
7. The Regulator stopped issuance of Long term OD policy with effect from
1st September 2020.

Liability Only Policy: This covers exactly the liability as required under MV Act –
nothing more nothing less.

OD Insurance: It covers accidental damage to the vehicle (Own damage) issued

separately, along with an Act liability Policy and also certain additional benefits
at additional premium as per the scheme of individual insurance.

There are specified forms for the above two types of policy. The Act only policy
form is common for all types of vehicles. Whereas the OD policy form is different
for three categories of vehicles viz private care, motor cycle or scooter and
commercial vehicles and have certain variations.

A. Third Party Policy

This policy covers Liability to Third Parties exactly as required by the MV Act and
provides:

1) In the event of an accident caused by or arising out of the use of the insured
vehicle against all sums which the insured shall become legally liable to pay in
respect of

i) Death of or bodily injury to any person so far as it is necessary to meet the

requirements of the Motor Vehicles Act.

ii) Damage to property other than property belonging to the insured or held
in trust or in the custody or control of the insured upto the limit specified
in the schedule. The limit is Rs. 1 lakhs for two wheelers and 7.5 lakhs for
other vehicles at the current premium rates.

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 Provided always that the insurer shall not be liable in respect of death,
injury or damage caused or arising beyond the limits of any carriage way
or thorough fare in connection with the bringing of the load to the vehicle
for loading thereon or the taking away of the load from the vehicle after
unloading there from.

2) The insurer will pay all costs and expenses incurred with its written consent.

3) In terms of and subject to the limitations of the indemnity granted by this

section to the insured, the insurer will indemnify any driver who is driving the
vehicle on the insured's order or with insured’s permission provided that such
driver shall as though he/she was the insured observe fulfill and be subject to
the terms exceptions and conditions of this Policy in so far as they apply.

4) In the event of the death of any person entitled to indemnity under this Policy
the insurer will in respect of the liability incurred by such person indemnify
his/her personal representative in terms of and subject to the limitations of
this Policy provided that such personal representative shall as though such
representative was the insured observe fulfill and be subject to the terms
exceptions and conditions of this Policy in so far as they apply.

5) The insurer may at its own option

a) Arrange for representation at any Inquest or Fatal Inquiry in respect of

any death which may be the subject of indemnity under this Policy and

b) Undertake the defense of proceedings in any Court of Law in respect of

any act or alleged offence causing or relating to any event which may be
the subject of indemnity under this Policy.

Important Exceptions

The insurer shall not be liable in respect of:

1) Any accidental loss damage and/or liability caused sustained or incurred

outside the Geographical Area.

2) Any claim arising out of any contractual liability.

3) Any consequential loss

4) a) any liability of whatsoever nature directly or indirectly caused by or

contributed to by or arising from ionising radiations or contamination by
radioactivity from any nuclear fuel or from any nuclear waste from the
combustion of nuclear fuel. For the purposes of this exception combustion
shall include any self-sustaining process of nuclear fission.

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 b) any accidental loss or damage or liability directly or indirectly caused by
or contributed to by or arising from nuclear weapons material

5) Any accidental loss damage and/or liability directly or indirectly or proximately

or remotely occasioned by or contributed to by or traceable to or arising out
of or in connection with war, invasion, the act of foreign enemies, hostilities
or warlike operations (whether before or after declaration of war), civil war,
mutiny rebellion, military or usurped power or by any direct or indirect
consequences of any of the said occurrences and in the event of any claim
hereunder the Insured shall prove that the accidental loss damage and/or
liability arose independently of and was in no way connected with or
occasioned by or contributed to by or traceable to any of the said occurrences
or any consequences thereof and in default of such proof the insurer shall not
be liable to make any payment in respect of such a claim.

(Note: Perils listed in item 4 are called nuclear perils and those in item 5 are
called war & kindered perils)

Important Conditions

Any word or expression to which a specific meaning has been attached in any part
of this Policy shall bear the same meaning wherever it may appear.

1) Notice shall be given in writing by the insured to the insurer immediately

upon occurrence of any accident or loss or damage and thereafter the
insured shall give all such information and assistance as the insurer shall
require.

Every letter, claim, writ, summons and/or process or copy thereof shall
be forwarded to the insurer immediately on receipt by the insured.

Notice shall also be given in writing to the insurer immediately the insured
shall have knowledge of any impending prosecution, inquest or fatal injury
in respect of any occurrence which may give rise to a claim under this
Policy.

2) No admission offer promise payment or indemnity shall be made or given

by or on behalf of the Insured without the written consent of the insurer
which shall be entitled if it so desires to take over and conduct in the
name of the Insured the defence or settlement of any claim or to
prosecute in the name of the Insured for its own benefit any claim for
indemnity or damages or otherwise and shall have full discretion in the
conduct of any proceedings or in the settlement of any claim and the
Insured shall give all such information and assistance as the insurer may
require.

OD Insurance (some insurers have their own nomenclature)

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This policy provides a package cover and the structure of the policy form is the
same for all vehicles, (with some differences which are pointed out, wherever
applicable).

Section I – Loss or Damage (or ‘Own Damage’)

The risks covered are:

a) Fire, explosion, self-ignition or lightning.

b) Burglary, house breaking or theft.

c) Riot and strike.

d) Earthquake (fire and shock damage)

e) Flood, typhoon, hurricane, storm, tempest, inundation, cyclone, hailstorm,

frost.

f) Accidental external means.

g) Malicious act.

h) Terrorist activity.

i) Transit by road, rail, inland waterway, lift, elevator or air.

j) Landslide / rockslide.

Exclusions

(i) Consequential loss;

(ii) Depreciation;

(iii) Wear and tear; and

(iv) Mechanical or electrical breakdowns, failures or breakages.

(v) Damage to tyres unless the vehicle is damaged at the same time. (Then, 50%
of cost of replacement payable). For commercial vehicles, see Compulsory
Excess Clause dealt with later.

(vi) Loss when the vehicle is driven under the influence of intoxicating liquour or
drugs.

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Notes:

1. In the motor cycle and commercial vehicle policy there is an additional

exclusion:

- Loss of or damage to accessories by burglary, housebreaking or theft

unless the vehicle is stolen at the same time.

2. In commercial vehicle policy, there is a further exclusion :

- Damage caused by overloading or strain of the vehicle and Damage to tyres,

tubes, lamps, mudguard, bonnet side parts, bumpers and paint work of
damaged portions except in the case of a total loss of the vehicle.

Towing Charges

If the motor car is disabled as a result of damage covered by the policy, the
insurers bear a reasonable cost of protecting the car and removing it to the
nearest repairers, as also the reasonable cost of re-delivery to the insured. The
amount so borne by the insurers is limited to Rs.2,500/- in respect of any one
accident.

(Note: Towing charges can vary for policies issued by various insurers. Also they
may vary based on type of vehicle.)

Repairs

Ordinarily repairs arising out of damage covered by the policy can be carried out
only after they are authorised by the insurers. However, the insured is allowed
to carry out the repairs without such authorisation, provided:

(a) The estimated cost of such repair does not exceed Rs.500/- (Rs.150/-
for motor cycles).

(b) The insurers are furnished forthwith with a detailed estimate of the
cost; and

(c) The insured gives the insurers every assistance to see that such repair
is necessary and that the charge is reasonable.

Compulsory Excess

This applies only to Own Damage losses for all vehicles. The insured has to bear
Rs.500/- to Rs 2500/- in respect of each accident (as per category of vehicle).

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Section II – Liability to Third Parties (In Stand alone OD cover Section II might
refer to Compulsory PA cover. Students may check the individual policies of
insurers)

The insurers indemnify the insured against all sums which he may become legally
liable to any person including occupants carried in the motor car (provided that
they are not carried for hire or reward) by reason of death or bodily injuries
caused to such third parties or by reason of damage to the property of third
parties caused by or arising out of the use of the motor car. Private car package
policy includes in this section the occupants of the vehicles if they are not carried
for hire or reward. But insureds own employees carried in the vehicle are not
covered under this section.

The legal costs and expenses incurred by the insured are also reimbursed provided
that they were incurred with the insurer’s written consent.

The insurers are liable for the death of or bodily injury arising out of and in the
course of employment, but only to the extent necessary to meet the requirements
of the Motor Vehicles Act. The damage to property is not paid for, if the damaged
property belonged to the insured or was held in trust by him or was in the custody
or control of the insured.

(Note: This section is, more or less, the same for all vehicles, subject to some
variations for motor cycles and commercial vehicles)

New amendments to Motor vehicles Act has provided for a cashless treatment
during Golden Hour (Within the first hour after the accident). The Act envisages
creation of Motor Vehicles Accident Fund where Insurers also have to be
contribute.

Section III

(This appears in commercial vehicle policies only.

This section provides cover while the vehicle is towing one disabled mechanically
– propelled vehicle. It provides that whilst the insured vehicle is being used for
the purpose of towing any one disabled, mechanically propelled vehicle

(a) The cover provided by the policy remains operative, and

(b) Under Section II of the policy, indemnity will also be provided for the
liability in connection with such towed vehicle. This however is subject to
the following two provisos:

(i) The towed vehicle should not be towed for hire or reward and

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 (ii) No cover is available under the policy for the damage to the towed
vehicle or the property conveyed thereby.

General Exclusions (applicable to all sections)

These provide that the insurer shall not be liable in respect of:

(a) Any accident outside the geographical area specified in the policy,
that is, India.
(b) Contractual liability.
(c) Any accident when the vehicle is used not in accordance with the
Limitations as to Use clause.
(d) Any accident when the vehicle is driven without an effective driving
license (Driver’s Clause).
(e) If the driver is under influence of liquor / drugs
(f) War and nuclear risks.

Conditions:

Apart from the usual conditions such as notice of loss, cancellation of policy,
arbitration, etc. there are two conditions which are specific to motor policies.

- The insured is required to safeguard the vehicle from loss or damage and
maintain it in efficient condition. In the event of an accident, the insured
shall take precautions to prevent further damage. If the vehicle is driven
before repairs any further damage is at insured’s risk.

- The insurer has the option to repair or replace the vehicle or parts or pay in
cash the amount of damage or loss. The insurer’s liability cannot exceed the
Insured’s Declared Value (IDV) as specified in the policy. That value is to be
treated as the market value of the vehicle for the policy period.

Test Yourself 1

Question 1

Under motor insurance ambulances will be classified under which class?

A. Goods carrying vehicles

B. Passenger carrying vehicles
C. Miscellaneous vehicles
D. Private vehicles

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2. Understand the basic underwriting and rating features
[Learning Outcome b]

Rating

The proposal form elicits most of the information necessary for rating and
underwriting. Some examples of rating are given:
Private Cars
Rates for Own Damage are based upon

i) The cubic capacity (CC) as specified by manufacturers,

ii) Insured’s declared Value (IDV) and

iii) The Zone or area of operation.

The cubic capacity of the car indicates power of the engine. Separate rates apply
for CC below 1500 and CC over 1500.

‘Act’ Policy Premium: This premium is again dependent upon the cubic capacity
of the vehicle and is not a rate but lump sum amount. Higher the CC, higher the
rate.

Motor Cycle & Scooters

The rates depend upon C.C. and Insured’s declared Value (IDV).

Buses
The rates depend upon C.C., IDV and capacity by number of passengers (Foe ‘Act’
cover premium is normally expressed per passenger.

Goods Carrying Vehicles

The rates are based on Gross Vehicle Weight (GVW) which means the total weight
of the vehicle including load certified by the registering authority as permissible
for that vehicle and IDV.

Extra Benefits
Some examples of benefits available at extra premium are:
All Vehicles:

Wider legal liability to persons e.g. paid drivers etc. employed in operation and
/ or maintenance of the vehicle i.e. under W.C. Act and at common law.

Private Cars:

(a) Extra fittings like radios, tape-recorders, air conditioners etc. (Also
applicable to commercial vehicles)

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(b) Reliability Trials and Rallies in India (Also applicable to motor cycles).

Discounts (some examples):

(a) Voluntary excess under Own Damage Section – (Applicable to all vehicles).

(b) Membership of recognised Automobile Association (Private cars & motor

cycles).

(c) Deletion of Riot, Strike, etc., Earthquake, Flood. (All vehicles).

The new generation Motor Insurers have introduced numerous add on covers such
as Cover for Tyres, Personal belongings, Return to Invoice Value, Keys, Zero
Depreciation, Daily allowance, No Claim Bonus protection, Engine protection
cover, loss of license, consumables, reliability trials and rallies and so on. Now
these covers are available with almost all insurers.

Bonus / Malus:

A discount in the premium is allowed at renewal if there is no claim during the

expiring policy year or a loading on the premium is charged if there is a claim.
Separate scales are provided for private cars and taxis and other vehicles.
The discount for good claims experience of the insurers is termed as ‘Bonus’ and
the loading for adverse claims ratio is called “Malus”. ‘Practice varies from
company to company.

The details of the accidents to the vehicle for past 3 years

Underwriting:

There are several factors which are important for underwriting such as
(a) Type of vehicle e.g. imported cars, sports cars,

(b) use of the vehicle,

(c) Geographical area etc.

(d) Age of the vehicle, which is the most important factor.

Generally, the approach of insurers is to restrict covers for aged vehicles

depending on their own experience as well as the vehicle’s history.

Some important rules:

Although the tariffs have been removed in 2007 for pricing the regulations and
the policy wordings have remained the same which contain inter-alia the
following rules.

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 (a) ‘Agreed Value’ policies are not allowed except for vintage cars.

(b) Policies have to be issued in the name of the registered owner only. In
the case of hire purchase agreements, policies must be issued in the
name of the hirer and the owner’s interest protected by attaching to
the policy the prescribed endorsement.

(c) The prescribed cover note should be used when full details e.g. vehicle
registration number etc. are not available. The cover note incorporates
a certificate of insurance. The cover note is valid for 15 days and can
be extended up to a maximum period of two months.

(d) Prescribed procedure for issue of a duplicate certificate when the

original is lost, torn, defaced, etc.

(e) Concessions e.g. return of premium, restricted cover, etc. when the
vehicle is laid up in garage and not in use for a period of two consecutive
months or more.

(f) Insurers also offer “pay as you use” Motor Insurance, which uses
telematic devices to track the usage of cars and then charge premium
for the distance run.

Test Yourself 2

In private motor insurance separate rates apply for vehicles below and above
_________

A. 2000 CC
B. 1800 CC
C. 1500 CC
D. 1200 CC

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3. Understand motor claims and procedures
[Learning Outcome c]

1. Own Damage Claims

On receipt of notice of loss, the policy records are checked to see that the policy
is in force on the date of loss and that it covers the vehicle involved. The loss is
entered in the Claims Register and a claim form is issued to the insured for
completion and return.

The insured is required to submit a detailed estimate of repairs from any repairer
of his choice. These days many insurers have tie up with certain garages of
standing and if the vehicle is repaired at that garage the insurers pay the repair
charges directly to that garage which is called a ‘ cash less service ‘. If the garage
from whom the repair estimate is obtained is found to be a garage not of its
standard and or a road side garage, the insurers request the insured to take the
vehicle to a standard garage. Many insurers facilitate upload of photographs for
quick processing.

2. Assessment

Independent automobile surveyors are assigned the task of assessing the cause
and extent of loss. They are supplied with a copy of the policy, the claim form
and the repairer’s estimate. They inspect the damaged vehicle, discuss the cost
of repair or replacement with the repairer and submit their survey report,
quantifying the loss. Unless the surveyor sees the vehicle and quantifies the repair
charges the repair work should not commence.

In respect of minor damage claims, independent surveyors are not always

appointed. The insurer’s own officials or their own automobile engineers inspect
the vehicle and submit a report.

Section 64-UM (2) provides that a claim amounting to Rs. 20000/- and above
cannot be settled unless a report from licensed surveyor is obtained. Many
insurers have their in- house surveyors for claims less than Rs. 20000/-. The
insurance laws amendment act 2015 has amended the section to give the IRDAI
the authority to decide on the limits for licensed surveyors. The new limit
prescribed by IRDAI is now 50000/-

3. Settlement

The survey report is examined and settlement is effected in accordance with the
recommendations contained therein. The usual practice is to authorise the
repairs directly with the repairer to whom a letter is issued to that effect.

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In this letter the repairers are also instructed to collect direct from the insured
the amount of the Excess, if applicable to the claim, before delivering the
repaired vehicle to him. The repairers are also instructed to keep aside the
salvage of damaged parts, if there are any, for being collected by the salvage
buyer nominated by the Insurers.

Or else, if the repairers are willing to retain the salvage, its value, as indicated
by the surveyor, is deducted from the claim bill.

On receipt of their final bill of repairs after completion of repairs and a

satisfaction note or voucher from the insured that the vehicle has been repaired
to his satisfaction, the payment to the repairer is affected.

Sometimes, the repairer is paid directly by the insured in which case the latter is
reimbursed on submission of a receipted bill from the repairers.

In either case, discharge voucher or receipt is obtained.

The Claims Register and the policy and renewal records are marked that the claim
is paid indicating the amount of claim and the amount of salvage, if any.

4. Total Loss Claims

Whenever a surveyor finds that a vehicle is either beyond repairs or the repairs
are not an economic proposition, he negotiates with the insured to assess the loss
on a Total Loss basis – with regard to the IDV of the vehicle.

The policy form provides for a constructive total loss (CTL) where the aggregate
cost of repairs exceeds 75% of IDV.

However, before the actual payment is made to the Insured, the Insurers will
collect from him the Registration and Taxation books, ignition keys and blank TO
and T.T.O. forms duly signed by the insured, so that the salvage can be
transferred in the name of the salvage buyer.

If the vehicle is beyond repairs and has to be scrapped the R.C. Book and the keys
will have to be returned to the Registering Authority for cancellation.

5. Theft Claims

Total loss can also arise due to the theft of the vehicle and its remaining untraced
by the police authorities till the end. These losses will have to be supported by a
copy of the First Information Report lodged with the Police authorities
immediately after the theft has been detected. The information is also to be
conveyed to the National Stolen Vehicles Bureau.

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The police authorities register the complaint allotting it a number of the entry
made in the Station Diary. This number which is usually known as SDE Number.
(Station Diary Entry) or C.R. Number. (Crime Register) has to be quoted by the
Insured in the claim intimation to the Insurers and produce a copy thereof.

The police keep the investigations going until the vehicle is traced and delivered
to its owner. However, if they do not succeed in recovering the vehicle after a
period of, say 3-4 months, they file away the case certifying that the case is
classified as true but undetected. This certificate is essential before a total loss
following theft is settled by the insurers. Generally it is called as “A” certificate.

If the R.C. Book and Taxation Certificate are also stolen along with the vehicle,
it will be necessary for the insured to obtain duplicate ones from the Registering
Authority and thereafter deposit them with the Insurers.

The only additional documents will be letter addressed by the Insured to the
R.T.O. informing about the loss of the vehicle due to theft and filing a Non User
Form so that he is not made liable to pay the taxes.

Some insurers also obtain from the insured a special type of a Discharge on a
stamped paper whereby the Insured undertakes to refund the claim amount if the
vehicle is subsequently traced and delivered to him by the police. He also
undertakes in the Discharge Form to pay any taxes which may be outstanding
against the stolen vehicle. The ignition keys, R.C. Books etc. are preserved by the
Insurer in their custody so that these are made readily available if the vehicle is
traced at a later date.

It is always prudent to inform the concerned Registering Authority by a Registered

A/D letter that a total loss claim is being processed for payment in respect of the
stolen vehicle and to request them not to transfer the ownership of the vehicle
to anyone. This will prevent the thief from disposing of the stolen vehicle.

6. Claim Documents

Apart from claim form and Survey report the other documents required for
processing the claim are:

(1) Driving Licence of the person driving at the time of accident if the claim is
for accidental damage.

(2) Registration Certificate Book

(3) Fitness Certificate (Commercial Vehicles)

(4) Permit (Commercial Vehicles)

(5) Police Report

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(6) Final Bill from repairers

(7) Satisfaction Note from the insured

(8) Receipted bill from the repairer, if paid by insured.

7. Market trends

What has been described above are the basic processes. Today the digital
intervention and availability of online submission of documents have done away
with physical submission of many of the above documents. Repairers, surveyors,
claim handlers are all digitally connected through technology like Block chain and
claims are settled rapidly. Some insurers settle limited amount claims, just by
seeing the photographs uploaded by claimant. AI & ML processes allow them to
assess the loss digitally.

Students are expected to know the full traditional processes so that they can
understand & appreciate the deviations and technology brought in by modern day
insurers.

8. Third Party Claims

Chapter XI (as amended) of the Motor Vehicles Act 1988, empowers the State
Governments to set up Motor Accident Claims Tribunals for adjudicating upon
third party claims. When a tribunal has been set up for an area, no civil court has
any jurisdiction to entertain any claim falling under the tribunal’s jurisdiction.

The Claim has to be the aggrieved party has to move the tribunal.

While making the award, the tribunal has to specify the amount payable by the
insurer. The Tribunal called MACT has to award a ‘just ‘compensation depending
on the facts of the claim.

The procedure for third party claims is briefly described below:

On receipt of notice of claim from the insured, or the third party or from the
MACT, the matter is entrusted to an advocate. Generally the defense is made
jointly with the owner of the vehicle. But if the insurer suspects that there is
collusion between the insured and the claimant he puts the insured on notice to
defend himself independently.

Full information relating to the accident is obtained from the insured. The various
documents are collected and these include

- Driving license of a person driving at the time of accident

- Police report
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 - Details of driver’s prosecution, if any

- Death certificate, coroner’s report, if any (fatal claims).

- Medical certificate (bodily injury claims), medical bills

- Details of age, income and number of dependents etc.

The Act now, in Section 149, directs the Insurer to make an offer to the claimant
through the Tribunal for the compensation, within 30 days of being informed
about the accident. The case would be taken up by MACT only if the offer is
rejected by the claimant. If accepted it shall be a consent award and then closed.

Insurer are given only few defenses against any liability as per Section 150 (2).
they include non-receipt of Premium ( Section 64 VB violation), usage for hire or
reward when that is not covered, used for rallies and racing, driver not having
license, War, riot, civil war, and driving under the influence of alcohol .

The amount is deposited with the MACT who disburses it to the entitled claimants.

8. Section 164 B, of Chapter of Amended MV Act provides to create a Motor vehicle

Accident Fund to provide cashless treatment to victims of Hit & run cases and
also for Golden Hour treatment . National Health Authority who runs PM Jana
Arogya Bima Yojana has been entrusted with providing cashless treatment to such
victims during Golden hour.

9. Compromise Settlements

Where there is clear liability under the policy, claims are negotiated with the
third party to accept a compromise settlement, which if accepted by the claimant,
is registered with the MACT and its consent obtained. The cheque is deposited
with MACT for disbursement to the rightful beneficiaries. Under the new
dispensation, if the claimant accepts the initial offer of insurers, that also would
be deemed to be a compromise / consent awards.

10. Lok Adalats

Pending cases with the MACT where the liability under the policy is not in doubt
are placed before the Lok Adalat or Lok Nyayalaya, for a voluntary and amicable
settlement between the parties. A copy of decision in the prescribed memo and
the cheques is deposited with MACT. Lok Adalat sessions are organised
periodically in liasion with the Legal Aid Board of each State and MACT to effect
amicable settlement of third party claims. Such settlements are more encouraged
by MACTs.

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11. No Fault Liability

The amended provision states as follows,

164. (1) Notwithstanding anything contained in this Act or in any other law for
the time being in force or instrument having the force of law, the owner of the
motor vehicle or the authorised insurer shall be liable to pay in the case of death
or grievous hurt due to any accident arising out of the use of motor vehicle, a
compensation, of a sum of five lakh rupees in case of death or of two and a half
lakh rupees in case of grievous hurt to the legal heirs or the victim, as the case
may be.

(2) In any claim for compensation under sub-section (1), the claimant shall not
be required to plead or establish that the death or grievous hurt in respect of
which the claim has been made was due to any wrongful act or neglect or default
of the owner of the vehicle or of the vehicle concerned or of any other person.

Market Practice

MV makes it compulsory for all vehicles being used in: Public places (except Govt.
owned and those owned by State Transport corporations) to have an Insurance
Policy covering the liabilities mentioned in the Act. To use the vehicle without
the Moto Insurance, in the prescribed form of certificate is a punishable offence.
Today the data of insured vehicles is available with IIB which is passed on to Vahan
/ Sarathy data base of Central Govt. Road Transport Departments. Thus, the
Police have the full access to know whether a particular vehicle is insured or not
and the Policy details if insured. At the time of an accident, because of these
data sources, they can quickly identify the insurer.

Soon Police authorities would be able to identify uninsured vehicles by checking

the Registration numbers. And fix penalty on the vehicle owners quickly and
efficiently.

Question 3

To process a motor insurance claim which of the below document/s are required?

A. Registration Certificate
B. Police Report
C. Driving License
D. All of the above

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4. Understand the cover provided under liability insurance policies
[Learning Outcome d]

1. LIABILITY INSURANCES

The word ‘Liability’ for the purpose of insurance, relates to legal liability. There
are four major legal liability policies:

 Public liability,

 Products liability,

 Professional indemnities and

 Employer’s liability.

The subject matter of these policies is potential legal liability towards third
parties or employees, as the case may be. If legal liability is incurred, there will
be financial losses in the form of damages or compensation.

Liability generally arises out of:

1. Tort i.e. wrong doing

2. Statute - specified in specific statutes
3. Contracts

2. Compulsory Public Liability Policy

The Public Liability Insurance Act, 1991 requires that any undertaking which
handles hazardous substances, has to compulsorily insure liability for an amount
not less than the amount of the paid up capital of the undertaking. If it is not a
company, paid up capital means the market value of all assets and stocks of the
undertaking on the date of contract of insurance. The Act imposes no fault
liability (i.e. irrespective of any wrongful act, neglect or default) on the owner
to pay relief in the event of

(a) Death of or injury to any person (other than a workman within the meaning of
Employee’s Compensation Act); or

(b) Damage to property of any person arising out of an accident while handling
any hazardous substance.

No fault liability means the claimant is not required to prove that the death,
injury or damage was due to any wrongful act neglect or default of any person.

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The Act prescribes under Section 3 the amount of relief payable as per the
following schedule:

i. Fatal Accident - Rs.25,000/- per person

ii. Permanent Total disability -Rs.25,000/- per person
iii. Permanent Partial disability: The amount of relief is based on the
percentage of disablement certified by an authorised physician i.e., a
registered medical practitioner.
iv. Temporary partial disablement which reduces the earning capacity of the
victim. Fixed relief not exceeding Rs.1,000/- per month upto a maximum of
3 months (provided the victim has been hospitalised for a period exceeding
3 days and is above 16 years of age).
v. Actual Medical Expenses: Upto a maximum of Rs.12,500 in each case under
(i) to (iv) above.
vi. Actual damage to property upto Rs.6,000/-.

The following definitions of the Act are important:

“Handling” in relation to any hazardous substance means the manufacture,

processing, treatment, packaging, storage, transportation by vehicle, use,
collection, destruction, conversion, offering for sale, transfer or the like of such
hazardous substance.

“Hazardous Substances and Group” means the items listed and grouped under
Public Liability Insurance Act 1991 and the Rules framed thereunder.

“Turnover” shall mean –

(i) Manufacturing units – Entire Annual Gross Sales Turnover including all
levies and taxes of manufacturing units handling hazardous substances
as defined in the Public Liability Act, 1991.
For the purpose of this insurance, the term “Units” shall mean all
operations being carried out in the manufacturing complex in one
location.
(ii) Godowns and Warehouse owners – Total Annual Rental Receipts of
premises handling hazardous substances as defined in the Public
Liability Insurance Act, 1991.
(iii) Transport operators – Total Annual Freight receipts.
(iv) Other – Total Annual gross receipts.

The policy provides for indemnity to the insured owner against the statutory
liability under the Act arising out of accidents occurring during the currency of
the policy due to handling hazardous substances as provided for in the Act.

The rates of premium are based on limit of indemnity (any one accident) and the
turnover.

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(Note: An amount, equal to the premium has also to be paid to the insurers, as
contribution to the Environment Relief Fund, set up by the government. This fund
pays relief when it exceeds the amount payable under the policy).

Application for claim for relief must be made by the affected party, within 5 years
of occurrence of the accident, to the Collector who shall hold an enquiry and
make an award. The insurer is required to deposit the awarded amount with the
Collector within 30 days of announcement of the award.

Section 146 of MV Act 1988 as amended provides that for vehicles carrying
dangerous or hazardous goods, there should be a Public Liability Insurance Policy
also available over and above the third party liability Policy.

3. Public liability policy (industrial / non-industrial risks)

Industrial Risks are manufacturing premises including godowns, warehouses etc.,

forming part thereof.

Non-Industrial Risks are:

(i) Hotels, Motels, Club houses, Restaurants, Boarding and Lodging houses,
Flight kitchens.

(ii) Cinema Halls, Auditoriums, Theatres, Public Halls, Pandals, Open air
theatres.

(iii) Residential premises.

(iv) Office / Administrative premises, Medical establishments, Airport

premises (other than aviation liabilities), Research Institutes and
laboratories.

(v) Schools, Educational Institutions, Public libraries.

(vi) Exhibitions, fairs and fetes, stadia.

(vii) Permanent amusements parks.

(viii) Film studios – indoor and outdoor, Circus, Zoos.

(ix) Depots, Warehouses, Godowns, Shops, Tank farms and

(x) Similar other non-industrial risks. Ike media houses, performers

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Cover

The policy indemnifies the insured

- Against their legal liability for death / bodily injury and third party property
damage.
- Other than liability under the Public Liability Insurance Act, 1991, or any other
statute that may come into force after the issue of the Policy.
- To pay compensation including claimant’s costs, fees and expenses.
- On the insured premises in accordance with Indian Law

The indemnity applies to claims

(a) arising out of accidents during the period of insurance and

(b) First made in writing against the insured during the policy period.

‘Policy Period’ means the period shown in the Policy Schedule a (for example,
the period may commence at 00 hrs. on 1.1.2011 and expire at midnight on
31.12.2011)

‘Period of Insurance’ means the period commencing from the retroactive date
and terminating on the expiry date as shown in the Policy Schedule. For example-
if the policy period is from 1-1-2010 to 31-12-2010 and the policy renewed from
1-1-2011 to 31-12-2011 then under the renewed policy the retroactive date will
be 1-1-2010 which date will continue in further renewals

The indemnity clause excludes liability in respect of:

(a) Products (This can be covered under a separate policy explained later)

(b) Pollution (Can be covered on payment of extra premium)

3 a) Many insurers now issue a combined cover generally called Commercial

General Liability or Comprehensive General Liability (CGL) combining the Public
Liability, Product Liability, Employees Liability, etc. Each insurer will have their
own product.

The other important exclusions are:

(a) transportation of hazardous substances (can be covered on at extra premium)

(b) injuries to employees (this can be covered under a separate Employee’s

compensation policy)

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Limits of Indemnity

The insured has to select limits of indemnity

a. any one accident (A.O.A.) and

b. any one year (A.O.Y.) (policy period)

in the ratio of 1:1, 1:2, 1:3 or 1:4.

Example; A.O.A. Rs.10 lacs,

A.O.Y. Rs.10 lacs or Rs.20 lacs or Rs.30 lacs or Rs.40 lacs

Excess

The policies will have an excess clause depending on various factors such as
nature of activity, limit of indemnity selected, business environment, etc.

Premium

The rates of premium, for industrial risks depend upon

(a) Risk group

(b) The limit of indemnity, A.O.A.

(c) The ratio of A.O.A. limit to A.O.Y. limit.

(d) Turnover.

Risks are categorised into 4 groups depending upon the hazard factors involved.
Some examples are:

Group I: Biscuit factories, Coir factories, Glass & Ceramic factories, Silk factories
etc.

Group II: Breweries, Cigarette factories, Shoe factories, Sugar factories etc.

Group III: Distilleries, Manmade yarn / fiber manufacturing, paper and cardboard
mills.

Group IV: Celluloid goods manufacturing, Fertilizer manufacturing, Match

factories, etc.

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(Note: The rates are the lowest for Group I risks and go on increasing for the
other groups)

This rating structure and classification was a market agreement between PSU
Insurers. Now the new insurers follow their own classifications and rating
structure, driven by Reinsurance and brokers.

4. Product liability policy

The demand for products liability insurance has arisen because of the wide variety
of products (e.g. canned food stuff, medicines & injections, electrical appliances,
mechanical equipment, acids & chemicals, etc.), automobiles, automotive parts,
and aircraft components manufactured and sold to public in the modern industrial
society. If defective, these products may cause death, bodily injury or illness or
even damage to property.

An increasing consciousness on the part of the public, of their legal rights and
remedies and the emergence of consumer protection movement in the country
have further contributed to the demand for this class of insurance.

The indemnity applies to claims for and / or arising out of injury, Damage or
Pollution claims during the period of insurance and first made in writing against
the insured during the policy period arising out of any defects in the products
specified in the schedule. The policy does not cover liability for claims.

i. For costs incurred in the repair, reconditioning, modification or

replacement of any part of any product which is or is alleged to be
defective.

ii. Arising out of any product guarantee.

iii. Arising out of failure of the goods or products to fulfill the purpose for
which they were intended.

iv. For costs arising out of the recall of any product or part thereof.

v. Export & sales of products. For many countries this is mandatory.

This policy also will have excess clause and it would depend on various factors.

Premium

The rates of premium depend upon

(a) Class of risk (Products are classified into different groups)

(b) Turnover
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(c) Limit of indemnity

(d) Ratio of limit of indemnity A.O.A. to A.O.Y.

Exports

Exports can be covered as an extension of the policy covering domestic sales or a

separate policy can be issued only for exports.

5. Lift (Third Party) Insurance

The policy provides indemnity to owners of buildings or operators of the lift

in respect of liabilities arising out of the use and operation of lifts. The legal
liabilities covered are in respect of:

a) Death / bodily injury of any person (excluding employees of the insured).

b) Damage to property (excluding insured’s own or employee’s property)

The premium rates depend upon the limit of indemnity, any one person, any one
accident and any one year.

Professional Indemnities

Professional indemnities are designed to provide insurance protection to

professionals against their legal liability to pay damages arising out of negligence
in performance of their professional duties.

Such professionals can be:

(a) doctors / medical practitioners;

(b) medical establishments;

(c) engineers, architects and interior decorators;

(d) chartered accountants, financial consultants, management consultants, and

(e) Lawyers, advocates, solicitors and counsel.

The policies provide for limits of indemnity any one year and any one claim.

Compulsory / Voluntary excess provisions also apply as may be deemed necessary

by the particular insurer depending on their experience in this branch of insurance.

The overall structure of these policies is the same as under Industrial Risks Public
Liability insurance policy, with many clauses, exclusions, conditions being in
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common. However, there are additional exclusions which are specific to each
type of profession for example, Doctors policy exclude liability relating to Aids,
Cosmetic surgery etc.

The rates of premium are charged on A.O.Y. limit.

6. Directors' and Officers' Liability Policy

This is a highly specialised type of insurance. Directors and Officers of a company

hold positions of trust and responsibility. They may become liable to pay damages
to shareholders, employees, creditors, etc. of the company, for wrongful acts
committed by them in the supervision and management of the affairs of the
company. The policy is designed to provide protection to Directors and Officers
against their personal civil liability.

7. Employers Liability Insurance

This is also known as Employee’s Compensation Insurance.

The policy protects the employers against their legal liability for payment of
compensation for death or disablement of the employees by accident or disease
arising out of and in the course of employment. This liability may arise under
Employee’s Compensation Act, Fatal Accidents Act or Common Law.

Table ‘A’ cover: provides indemnity against legal liability under the Employee’s
Compensation Act, Fatal Accidents Act and Common Law. This may be issued for
only those employees who come within the definition of ‘workmen’ under the
Employee’s Compensation Act.

Table ‘B’ cover: provides indemnity against legal liability under the Fatal
Accidents Act and Common Law. This may be issued to cover only those
employees who are not ‘workmen’ within the meaning of that term under the
Employee’s Compensation Act.

The policy does not specify any sum insured because the amounts of
compensation stipulated in the Act/s determine the limits of liability of the
insurers. The specified courts (Commissioner for Employee’s Compensation /
Labour Court) award compensation in accordance with the provisions of the Act.

Different rates of premium are applied for different groups of trades.

Extensions

The policy can be extended, at extra premium to include

(a) certain diseases mentioned in the Act

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(b) medical expenses

(c) Liability for contractor’s Employees.

7 a) Employees State Insurance

The passing of the Employees State Insurance Act in 1948 introduced social
insurance in India. The objects of the Act are “to provide certain benefits to
employees in cases of sickness, maternity, employment injury and to make
provision for certain other matters in relation thereof”. The Act provides for
Employees State Insurance Corporation (ESIC), a statutory Corporation set up
under the provision of the Act.

The scheme is applicable to industrial employees as defined in the Act. The Act
operates in certain industrial areas as notified by the government from time to
time.

Under the scheme a fund is maintained consisting of contributions from the

employees, employers and the Government. From this fund the following
expenses are met:

(1) Sickness benefit, maternity benefit, disablement benefit, dependence

benefit (death) and medical treatment.

(2) Establishment and maintenance of hospitals, dispensaries, etc. for the

benefit of the insured persons and their families.

(3) Administration of the Scheme.

8. Environmental Impairment Liability (E.I.L.)

Legal Liability for damages to environment arising from pollution.

Test Yourself 4

The Employees State Insurance Act was enacted in which year?

A. 1942
B. 1947
C. 1948
D. 1950

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5. Understand the cover provided under personal accident, health and
specialty policies
[Learning Outcome f]

1. Personal Accident Insurance

The purpose of personal accident insurance is to pay fixed compensation for death
or disablement resulting from accidental bodily injury caused by external visible
means.

The policy provides that, if at any time during the currency of this policy, the
insured shall sustain any bodily injury resulting solely and directly from accident
caused by external violent and visible means, then the company shall pay to the
insured or his legal personal representative(s), as the case may be, the sum or
sums set forth in the policy, if resulting in specified contingencies such as death,
permanent disablement etc.

The following is a specimen table of benefits on the basis of sum insured of Rs.1
lac selected for the purpose of illustration only of the general approach.

Contingency
Amount of compensation payable

(a) Death Rs.1,00,000 (i.e. 100% of capital sum

insured)

(b) Loss of two limbs or both Rs.1,00,000 (i.e. 100% of capital sum
eyes or one limb and one eye. insured)

(c) Loss of one limb or one eye Rs.50,000 (i.e. 50% of capital sum insured)

(d) Permanent total disablement 100% of capital sum insured

other than the above (e.g.
paralysis due to an accident)

(e) Permanent partial Percentage as shown in the table in the

disablement policy

(f) Temporary Total Weekly payment of Rs.1000/- (i.e. One

disablement percent of the capital sum insured)
subject to a maximum of 100 weeks.

The amount of weekly payment is restricted to a maximum specified sum

whatever be the capital sum insured. This limit applies to all policies held by the
insured.

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Additional Benefits

(a) Expenses incurred for carriage of dead body of insured (death due to accident
only) to place of residence are reimbursed subject to limits.

(b) In the event of death or permanent total disablement of the insured person,
the policy provides for Education Fund for the dependent children, in addition
to Capital Sum Insured.

(c) Compensation payable for death, loss of limb(s) or sight and Permanent Total
Disablement is increased by 5% at each renewal of policy upto a maximum of
50% of sum insured.

Each insurer has his own scale of benefits. The particular policy would have to be
studied.

Extensions
i. A personal accident policy can be extended by endorsement, on payment of
extra premium to cover medical expenses incurred by the insured in
connection with the accidental bodily injury, subject to specified limits.

ii. War risk cover can be granted to Indian personnel / experts working in foreign
countries on civilian duties at additional premium.

Exclusions (Some examples)

(a) Suicide
(b) Influence of liquor or drugs.
(c) Service in armed forces
(d) Engaging in aviation except as passenger in licensed standard type of aircraft.

2. Group Personal Accident Policy (Group P A)

Group policies are issued where there is some common relationship among the
persons to be insured and a central point for the administration of the insurance
scheme. Accordingly, these policies can be granted only to groups clearly
following under any one of the following categories:
(a) Employer – Employee relationship including dependants of the employee.
(b) Members of a registered co-operative society.
(c) Members of Registered Service Clubs etc.

Student should be familiar with The Standard Personal Accident Insurance Policy
brought out by Regulator, “Saral Suraksha Bima” where the name of the policy,
wordings, conditions and exclusions are made common for al insurers.

3. Health Insurance

Section 6 C of Insurance Act; Amended in 2015 defines “health insurance

business” means the effecting of contracts which provide for sickness benefits
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or medical, surgical or hospital expense benefits, whether in-patient or out-
patient travel cover and personal accident cover;]

Life Insurers are not allowed to issue indemnity policies (i.e. reimbursement
/ cashless settlement of actual expenses) while they can issue benefit policies.
Payment of lumpsum amount as specified.

Section 40 D of Indian Income Tax Act, provides certain relaxations in Tax

when a Health Insurance is taken.

In India the Health Insurance is very closely regulated by IRDAI. The wordings
Policy format, the exclusions, the wellness offerings, the claim settlement,
standardized terms and definitions, approval of products etc are subject to
Regulations. Students, while understanding the lesson should also keep track
of IRDAI’s guidelines, to understand the practice better.

1. This provides reimbursement for hospitalization due to accidents/sickness or

diseases or benefits for the period of hospitalization.

The policy provides for reimbursement of hospitalisation expenses for illness

suffered or accident sustained during the policy period. The policy is available to
individuals and family members. The policy is also available to group, association,
or corporate body with a central administration point. ‘Group’ is defined by IRDAI
and only those groups can obtain such policy for their official members.

Exclusions (Some examples)

(a) Pre-existing diseases.

(b) Disease contracted during first 30 days of commencement of policy.

(c) Specified diseases (e.g. cataract, hernia, etc.) during first year of policy.

(d) Cost of spectacles, contact lenses, hearing aids.

(e) Venereal diseases, Aids.

(f) Pregnancy, Childbirth.

Some of them can be included particularly under a group policy.

2. Critical Illness Benefit Insurance

This is a survivors, insurance policy. The policy provides for the lumpsum Sum
Insured to be paid if the Insured person is diagnosed with the specified critical
Illness during the term of the policy. The common specified illnesses are: CABG,
Stroke, Aortic Disorders, Joint Replacement, Renal failure, Cancer, Multiple
Sclerosis. There is a minimum waiting period of 90 days and survival post diagnosis
of 30 days for the claim to trigger.
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3. Overseas medical policy

provides for payment of medical expenses for illness / accident during overseas
travel for business, official, holiday purposes or studies.

In a major change from merely being an Industry Regulator, IRDAI brought

Standardized policy in Health like Corona Kavach, Corona Rakshak, Arogya
Sanjeevani Policy and Standard Personal Accident Insurance (Saral Suraksha
Bima), in Health Insurance segment. The Terms, conditions, covers and
exclusions are common for all insurers while the premium can be individually
fixed.

These days, Insurers are offering wellness and allied facilities to Health
Insurance. Facilities like Tele Medicine, express consulting, health advices, gym
memberships etc. are in the market provided by competing players. Data
collected from wearable devices like Fitbits, Apple watches and others are fast
finding its way into Insurers and resulting in discounts and bonuses.

4. Specialty Covers

Product Brief Description

Credit and Political Covers This covers a client’s bad debts and also the
contingencies that might arise from actions of
political nature. Only a few general insurers have
this cover.
Cyber Risks This is a collection of new covers ranging from
denial of service through virus spread to loss
following hacking – and a number of other covers
as well
Entertainment / Films This is a package of covers ranging from film
financing risks, through injury / death of key
artistes to the property losses – and a number of
other covers as well
Event Cancellation This is a package of covers ranging from
cancellation of event, prize indemnity, loss of
reputation of key presenter / attender – and a
number of other covers as well
Title Covers defective land title – can be from a
number of reasons including defective rights of
way, restrictive covenants and unclear title. This
is rarely available in India.
Rural including crop covers A number of covers including Personal Accident
to the farmers, livestock cover, crop insurance
(usually weather related)
Weather Derivatives Sophisticated covers where traders such as ice-
cream manufacturers may wish to take insurance

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 against a cold summer or umbrella
manufacturers against a dry monsoon
Carbon credits Normally a derivation of Political / Credit covers
where, say, a Government decision may impact
a project and reduce the opportunity of the
insured to benefit from Carbon Credit sales
Body parts e.g. Legs, Insurance taken by specialist entertainers,
Hands, Nose, etc. sportspersons, etc. where loss of / damage to a
particular body part (legs of footballer, dancer)
or voice of a singer will significantly impact their
earning ability significantly
Spoilage, leakage / Relates to trades such as spirit or wine trade
contamination of stocks where contamination of the product will severely
hit profits
Blood stock & Pet Insurance
Carrier’s legal liability Taken by Transporters especially when
cover mandated by Cargo movers like oil companies.

Test Yourself 5

Under Personal Accident Insurance, in case of loss of one limb or one eye, how
much compensation will be payable?

A. 50% of capital sum insured

B. 75% of capital sum insured
C. 100% of capital sum insured
D. 25% of capital sum insured

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Summary

 For the purpose of insurance, motor vehicles are classified into three broad
categories: (a) private cars, (b) motor cycles and motor scooters and (c)
commercial vehicles.

 The Motor Vehicles Act (1988) & Central Motor Vehicle Rules (1989) prescribes
rules and regulations for licensing, use and insurance of all types of vehicles.

 Important documents in motor insurance include: certificate of insurance,

cover notes, policy of insurance.

 Act only policy form covers exactly the liability as required to be covered
under the MV Act.

 Insurers can issue one year package cover or One year OD Standalone covers.
Third Party Policies are issued for 3 years / 5 years and 1 years as applicable.
Different insurers have different add on covers and rates of premium for OD
portion.

 In 2007 detariffication was introduced and the old tariff rating system was
disbanded in respect of Motor Own Damage. De-tariffing was for pricing
(premium rates) only. The policy form and rules continue to be as per the
erstwhile tariff.

 Under liability insurance there are four major legal liability policies: (a) public
liability, (b) product liability, (c) professional indemnity and (d) employer’s
liability.

 The purpose of personal accident insurance is to pay fixed compensation for

death or disablement resulting from accidental bodily injury. It is not a strict
indemnity policy but a benefit cover.

 Health insurance provides for cashless settlement or reimbursement of

hospitalisation expenses for illness suffered or accident sustained during the
policy period.

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Answers to Test Yourself

Answer to TY 1

The correct option is C

Under motor insurance ambulances will be classified under miscellaneous vehicles

Answer to TY 2

The correct option is C

In private motor insurance separate rates apply for vehicles below and above 1500
CC

Answer to TY 3

The correct option is D

To process a motor insurance claim all the 3 mentioned document/s are required:
Registration Certificate, Police Report, Driving License

Answer to TY 4

The correct option is C

The Employees State Insurance Act was enacted in 1948

Answer to TY 5

The correct answer is A.

Under Personal Accident Insurance, in case of loss of one limb or one eye, 50% of
the capital sum insured will be payable as compensation

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Self-Examination Questions

Question 1

The first Motor Vehicles Act was enacted in which year?

A. 1939
B. 1940
C. 1941
D. 1942

Question 2

Section 164 of the Motor Vehicles Act 1988, provides for liability of the owner of
the Motor Vehicle to pay compensation in certain cases, on the principle of no
fault. How much is the compensation payable for death in such cases?

A. Rs. 2,00,000
B. Rs. 50,000
C. Rs. 5,00,000
D. Rs. 6,00,000

Question 3

In case of motor insurance which document is considered as the only evidence of

existence of a valid insurance by police authorities and R.T.O?

A. Policy document
B. Certificate of insurance
C. Cover note
D. Insurance notice document

Question 4

In Motor Insurance, Act Only Policy Form covers __________.

A. Act Liability
B. Own Damage Losses
C. Act Liability and Own Damage Losses
D. Only Third Party Losses

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Answer to Self-Examination Questions

Answer to SEQ 1

The correct option is A

The first Motor Vehicles Act was enacted in 1939

Answer to SEQ 2

The correct answer is C.

Under Section 164 of the Motor Vehicles Act 1988, the liability payable for death
is Rs. 5,00,000 on the principle of no fault

Answer to SEQ 3

The correct answer is B and C

In case of motor insurance, the certificate of insurance or cover note is

considered as the evidence of existence of a valid insurance by police authorities
and R.T.O.

Answer to SEQ 4

The correct answer is A.

In Motor Insurance, Act only Policy Form covers Act Liability.

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 CHAPTER 5
GENERAL INSURANCE PRODUCTS – PART 3
(ENGINEERING & OTHER INSURANCES)
Introduction

In the previous chapters, we had a look at the major classes of insurance covers
like Fire, Marine, Motor, PA, Health. In this section we will deal with

a) Various classes of policies under Engineering Insurance, which is expanding

rapidly and almost all non-life insurers have now a separate department
to handle this portfolio,

b) Various other classes of insurance which take care of sectors like banks,
jewellers, individuals etc. These are small policies in nature and hence,
each company may use its own nomenclature as policy titles, terms and
conditions.

a) Understand the cover under engineering insurance policies

b) Understand other insurance covers available under various categories

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1. Understand the cover under engineering insurance policies
[Learning Outcome a]

Engineering Insurance
This class of insurance provides different policies for insurance needs during
construction and operational phase of a project. Brief details of major classes are
given below for reference:

1. Contractors’ All Risks (C.A.R.) Policy

This policy is designed to protect the interests of contractors and principals in

respect of civil engineering projects, like buildings, bridges, tunnels, etc.

The policy provides an “All Risk” cover. Every risk is covered which is not
specifically excluded. This means that almost any sudden and unforeseen loss or
damage occurring during the period of insurance to the property insured on the
construction site is indemnified. The more important causes of losses
indemnifiable under CAR Insurance are:
- Fire, lightning, explosion

- Flood Inundation

- Windstorm of any kind

- Earthquake, Landslide, Subsidence, etc.

- Theft & Burglary

- Accidental damage, bad workmanship, lack of skill, negligence, malicious Acts

or human error.

- Collapse, impact etc.

- Act of terrorism ( to be covered specifically at additional premium )

The policy can be extended to cover third party liability and other exposures as
a result of execution of the project.

Sum insured is required by the policy to be equal to the estimated completely

erected value of the contract works inclusive of materials, wages, construction
costs, freight, customs duties and items supplied by the principal. If, in the event
of a loss it is found that the sum insured is less than the amount required to be
insured (which is likely to occur as a result of increase in the cost of materials
and wages) the insurers will apply average to the extent of under insurance.

Cover shall commence from the commencement of work or after unloading of the
property insured at the site, whichever is earlier. The cover expires when the
work is completed or on the date specified in the policy whichever is earlier,
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unless extended. Any part of the work which is completed and either handed over
to the insured or put to use goes out of the cover.

2. Erection All Risks (EAR) Insurance Policy

Contractors All Risk Policy is concerned with contracts involving civil engineering
works such as construction of buildings, bridges etc., the Erection All Risks Policy
(EAR) also known as Storage-cum-Erection (SCE) policy is concerned with
erection/installation of plant, machinery and equipment and structures involving
civil engineering work as may be required.

The coverage is the same as under C.A.R. Policy except that testing &
commissioning of machinery is covered in this policy. Third party liability cover
may be added.

The sum insured shall be the completely erected value of the property inclusive
of freight etc., and the costs of erection. Average is applied if there is under
insurance and insured has to declare changes in the sum insured due to market
fluctuations in wages or prices with applicable additional premium.

The insurance shall commence, only from the time after unloading of the property
specified in the schedule from any conveyance at the site specified in the
schedule and shall continue until immediately after the first test operation or
test loading is concluded (whichever is earlier) but in no case beyond four weeks
from the day on which, after completion of erection a trial running is made and
/ or readiness for work is declared by the erectors / contractors, whichever is
earlier.

Test Yourself 1

Which insurance relates to the installation of plant or machinery?

A. Computer Insurance
B. Erection All Risks
C. Machinery Breakdown
D. Electronic Equipment Insurance

3. Marine-Cum-Erection (MCE) Policy

Cover under a standard EAR Policy commences with the delivery of the first
consignment of plant and machinery at the site of erection. In view of the same
the material either imported or indigenous coming to the site would have to be
covered under a separate marine / transit policy. However a composite Marine-
cum-Erection policy is available under which cover starts from the moment the
equipment/s leaves the manufacturers / supplier’s warehouse within the country
or overseas and continues during the ordinary course of transit, the voyage to the

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port of destination, unloading at the port of destination, inland transit to the site
of erection including incidental storage and thereafter during erection, testing
and commissioning.

The Marine cover is against all risks of physical loss or damage as provided by the
marine policy with the Institute Cargo Clauses “A” (All Risks). War, strikes, riot
and civil commotion are additional perils which can be covered. For inland
supplies it would be ITC (A) plus Riot and Strike.

4. Advance Loss of Profits (ALOP) Policy

This is also known as Delay in Startup Policy (D.S.U.). The policy covers financial
consequences of a project being delayed because of accidental damage to the
project materials. It follows in principle the characteristics of an annual
Consequential Loss Insurance (MLOP) policy, but is issued in advance of the actual
commencement of business. The subject matter of insurance can be profits if any,
standing charges, debt service charges, etc.

The object of an ALOP Insurance is to indemnify the principal or the project owner
for the actual loss sustained due to delay in commencement of commercial
operations of a new project under installation / construction. This delay must be
caused by direct physical loss or damage admissible under the Material Damage
section of CAR / EAR insurance covering the contract works.

This is a highly specialised type of policy which is drafted specifically in each case.

5. Machinery Breakdown (Also known as Machinery Insurance) Policy

Insurable properties under the policy are boilers, electrical, mechanical

machinery and equipment. The policy covers unforeseen and sudden physical
damage by any cause (subject to excepted risks) to the insured property, in short
mechanical and electrical breakdowns, under following situation:

- While it is at work or at rest.

- While being dismantled for cleaning or overhauling.

- During cleaning or overhauling operations.

- When being shifted within the premises.

- During subsequent erection.

Sum insured is the current replacement value and condition of average applies.

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6. Contractors Plant & Machinery (CPM) Policy

Contractor’s plant and machinery can be insured under CAR / EAR policy as an
additional item, if the sum insured under these items is relatively small as
compared to the total sum insured of CAR / EAR project. If the sum insured
exceeds this figure, an annual policy is to be granted to a contractor. Generally
if the value is below 25 lakhs a cover under CAR is granted but if it is more a
separate policy is issued. If the P & M is to be used at different projects during
the course of the year the cover can be obtained on floater basis.

The Standard Contractor’s Plant and Machinery policy covers unforeseen and
sudden external physical loss or damage from any cause including:

(a) Burglary, theft, riot and strike and malicious damage and terrorism.

(b) Fire and lightning, external explosion, earthquake, flood, inundation,

subsidence, landslide and rockslide.

(c) Storm, tempest, hurricane, typhoon and tornado.

(d) Accidental damage while at work due to faulty man handling, dropping
or falling, collapse, collision and impact.

The cover is operative whilst the equipment is at work or at rest or being

dismantled for cleaning or overhauling or re-assembling thereafter. The cover
also applies while the same are lying at contractors own premises. The various
locations have to be mentioned in the policy. The transit between 2 project sites
or insured’s places is not covered under this policy but a separate motor or marine
policy as may be applicable has to be obtained.

7. Boiler and Pressure Plant Insurance Policy

The policy covers boilers and pressure vessels, against:

(a) damage, other than by fire, to the boilers and / or other pressure plant
and to surrounding property of the insured, as specified in the schedule of
the policy, and

(b) legal liability of the insured on account of bodily injury, fatal and / or
non-fatal, to the person, or damage to the property, of third parties,

caused by explosion or collapse of any boiler and / or pressure plant occurring in

the course of ordinary working. The sum insured should be the current
replacement value

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8. Machinery Loss of Profits (MLOP) Insurance Policy

Whereas the Machinery Insurance or the Boiler and Pressure Plant Insurance
Policies indemnify an insured against material damage resulting from breakdown
and / or explosion / collapse respectively, such damage may also result in
business interruption at the Insured’s premises.

In the event of breakdown of or accident to a vital part of manufacturing plant

the actual damage to the machinery could be small but the loss sustained through
inability to manufacture might be heavy. Not only would the manufacturer 1) be
unable to make the profit which he had hitherto been making, but 2) there would
also be several continuing expenses to meet although the business was no longer
earning the money to pay them. Such continuing expenses are referred to as
“Standing Charges”. In addition, an effort to reduce the degree of interruption
of the business the manufacturer may adopt alternative measures, but at
increased costs.

These losses are covered under Machinery Loss of Profits Policy (MLOP). It is a
condition of the MLOP policy that there must be a valid claim under the
concurrent material damage policy (i.e. Machinery and / or boiler policy) before
a claim becomes admissible under the Machinery LOP policy.

9. Deterioration of Stock (DOS) Insurance Policy

The policy known as Deterioration of Stock Insurance or Stock spoilage insurance

is a form of consequential loss cover granted in the Engineering Department for
stocks contained in large cold stores. The cover is against the risk of deterioration
/ putrefaction and contamination following breakdown of the refrigeration plant
and machinery, a claim for which is admissible in terms of the concurrent
Machinery Breakdown Policy.

It is customary to have two different forms of policy, - one in respect of stocks of

fish, prawns, frog legs and other types of sea foods, fruits, cheese, provisions and
other Dairy products, etc., the other form of policy is exclusively meant for the
contents of Potato Cold Storage. Although basic cover is the same in both cases
two different forms of insurance protection are provided.

10. Electronic Equipment Insurance (EEI) Policy

Electronic equipment, in particular, computer installations with all the

peripherals often involve a large number of high valued equipment contained in
a relatively small area. An accident such as impact from falling object, leakage
of water or steam into the equipment or damage from other extraneous causes
may result in very expensive losses.

Some examples of electronic equipment are:

- Electronic data processing (EDP) equipments.

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- Electro-medical equipment.

- Telecommunication and navigational equipment.

- Signal and transmitting units etc.

The policy is available to the owner, lessor or hirer, depending upon the
responsibility or liability in each case. The policy is divided into 3 sections

Equipment (Section 1)
The cover applies to any unforeseen and sudden physical loss or damage from any
causes, (other than those specifically excluded), in a manner necessitating repair
or replacement.

The cover available under the material damage Section 1 is virtually on ‘all-risks’
basis i.e., loss or damage from any accidental cause whilst located at the
specified premises. The cover includes electrical and mechanical breakdown of
the insured items (except loss or damage for which makers are responsible under
their contract), impact, damage caused by water, malicious damage and also
carelessness, theft and burglary. In addition the policy covers fire and other allied
perils like lightning, riot and strike, storm, tempest, flood, subsidence, landslide,
earthquake, etc.

Sum insured should represent the current new replacement value of the insured
equipment, including all installation costs, and customs dues. Condition of
average applies.

A maintenance contract with the computer makers is warranted in the policy.

External Data Media (Section 2)

The coverage applies if the external data media specified in the schedule (type
and quantity) inclusive of the information stored, which can be directly processed
in EDP systems, suffers material damage by a peril covered under Section 1 of the
policy. The coverage applies while the insured data media are kept on the insured
premises.

The sum insured shall be the amount required for replacing lost or damaged data
media by new material and for reproducing lost information.

Increased Cost of Working (Section 3)

This section indemnifies the insured for all additional costs incurred to ensure
continued data processing on substitute equipment if such costs are incurred as
an unavoidable consequence of loss or damage indemnifiable under material
damage section of the policy. The indemnity period commences with the putting
into use of the substitute equipments may be up to 12 weeks, 26, 40 or 52 weeks.

The ‘excess’ is specified in terms of days as agreed e.g. 4 days (96 hours), 7 days
(168 hours).
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Test Yourself 2

Erection All Risks (EAR) Policy also known as _____________

A. Storage-cum-Erection Policy
B. P.R. costs involved in “disaster management"
C. Cover for “Failure to Perform”
D. Transportation of the defective products

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2. Understand other insurance covers available under various categories
[Learning Outcome b]

This portion of the text explains the fundamental, basic covers for each segment
of the specified policies. However it may be noted that, in market, many
variations and packages of these covers are available, brought out by the
competing insurers and approved by Authority. Students can go to the site of
IRDAI which lists products offered by General Insurers over many years.

Today parametric insurance is also slowly gaining ground. This refers to payment
of the sum insured on occurring of an event, like a fixed amount to be paid when
your flight is cancelled, in a travel insurance. Claims are paid on the fact of event
itself.

Once you have understood the basics as given in this lesson, you will be able to
appreciate & understand those policies better.

1. Burglary Insurance

Burglary insurance is a major business in the miscellaneous class of insurance.

The policy is available to commercial establishments, factories, godowns, shops
etc. Property in any form, including cash, in the business premises can be covered.
The risks covered are:

a) Theft of property after actual forcible and violent entry into the premises or
theft before actual, forcible and violent exit from the premises.

b) Damage to insured property or premises by burglars

Cash cover operates only when the cash is secured in a safe and is granted only if
the safe is burglar proof and is of an approved make and design. The cover is
granted subject to the following two clauses:-

(i) The loss of cash abstracted from the safe following the use of the key
to the said safe or any duplicate thereof belonging to the insured is not
covered unless such key has been obtained by violence or threats of
violence or through means of force. This is generally known as “key
clause”
(ii) A complete list of the amounts of cash in safe should be kept secure in
some place other than the safe, and the liability of the insurer is limited
to the amount actually shown by such records.
Some important exclusions under the policy are:

a) Theft by persons lawfully on the premises (larceny or ordinary theft is

not covered).

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 b) Loss insurable under fire or plate glass policy.

The policy can be extended to cover riot, strikes and terrorism risks at extra
premium.

Burglary policy can be issued on First loss basis. Depending on the number of
location and fluctuation in values, Burglary policies can be issued on a declaration
basis or floating basis, as per practice similar to Fire insurance.

Rates of premium depend upon the nature of insured property, construction and
location of premises, safety measures (e.g. watchmen, burglar alarm) etc. Apart
from the proposal form, a security survey is arranged, especially where valuable
property with high values is involved.

2. All Risks Insurance Policy

The policy is suitable for covering jewelry, valuables, curios, antiques and other
works of art, paintings, watches, cameras, and other similar articles.

Although these policies are known as all risks insurance policies, there are several
exclusions like, loss arising from wear and tear, repairing, breakage of glass of
watches, breakage of lens in cameras etc.

The main problem generally met with in granting all risks cover in respect of
works of art, paintings, pictures, curios and antiques is the fixing of insurable
value. The insurable value in these cases is decided on agreed value basis after
obtaining, if required, reports of professional valuers.

Moral hazard is an important consideration and policies are issued to known

clients only.

3. Baggage Insurance

The policy is intended to cover accompanied baggage (not dealer’s stock or

traveler’s samples) during specified journey, which includes air, sea, rail or road
travel undertaken by the insured. The risks covered are burglary, theft or damage
by accidental means

The route of the journey is specified in the policy, and the cover is operative only
when the insured is travelling by an accepted mode of travel on the specified
route. The cover is also operative whilst the insured temporarily resides in any
hotel or rest house during the specified journey.

Proposal form should be fully completed as regards description, contents and

value of each package. Further, if jewelry, valuables and items listed in the

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exclusions clause are to be covered, then full description and individual values
should be specified.

In view of the high moral hazard, these covers are sparingly granted by the
insurers and that too, only to known clients.

4. Money Insurance

The property covered under this policy is:

(a) Wages in direct transit from the bank to the insured premises.

(b) Money other than under (a) above, in transit to and from insured premises
/ bank / post office / any other specified premises.

(c) Money other than under (a) and (b) above, collected by the insured’s
employees and in transit to the premises or bank.

(d) Any other transit as may be specified.

The risks covered are theft, robbery and accident. On payment of additional
premium the policy may be extended to cover dishonesty of persons carrying the
cash, riot, strike and terrorism risks, disbursement risk, that is loss during
payment of wages to employees, etc.

Claims are processed on the basis of the police report and survey report.

5. Fidelity Guarantees Insurance

Briefly fidelity guarantee insurance indemnifies the employers against the

financial loss suffered by them due to the specified dishonest acts of their
employees.

The risks covered are variously specified by insurers. Sample wordings are as
follows:

“If the insured shall sustain direct pecuniary loss caused by act of FRAUD
or DISHONESTY committed by the employee at any time during the period
of insurance stated herein… the insurer will indemnify the insured in
respect of such loss but not exceeding the sum specified in the policy,
provided that such loss shall have occurred in connection with employees’
occupation and duties…. during the uninterrupted continuance of
employment.”

It should be noted that –

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 (i) the cover granted is against a direct pecuniary loss and not a
consequential one;

(ii) the loss should be in respect of moneys or goods of the insured;

(iii) the act should be committed in the course of the duties specified;

(iv) if the employee guaranteed under the policy had left the services of
the employer and was re-engaged by him, no liability attaches to the
policy, unless the consent of the insurers was obtained;

Period of discovery

Fidelity guarantee policies stipulate time limit for discovery of loss. This is so
because the loss can occur over a long period without discovery. Investigation of
such losses would be troublesome and recoveries may become legally and
practically difficult. The customary time limit provided is that the act or acts
insured against should be discovered not later than 12 months after the
resignation, dismissal, retirement or death of the employee, or not later than 12
months after the termination of the policy, whichever be the earlier.

Types of Policy

(a) Individual policy: This type of policy is used where only one individual is
to be guaranteed.

(b) Collective policy: Where the entire staff or a number of selected

individuals are to be covered, a collective policy is issued.

(c) Floating policy or floater: This is an extension of the collective form of

contract in which the names and duties of the individuals to be covered
are inserted in a schedule, but instead of individual amounts of guarantee,
a specified sum of guarantee is “floated” over the whole group.

(d) Positions policy: This is similar to a collective policy with the difference
that instead of using names, the "position is guaranteed for a specified
amount, so that a change in the person holding the position does not affect
the cover.

(e) Blanket policy: This policy covers the entire staff without showing names
or positions. This policy is granted only to large firms of repute.

The rate of premium depends upon the type of occupation, status of the
employee, the system of check and supervision.

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6. Television Insurance

The policy covers television apparatus and antenna against loss of or damage by:

(a) Accidental external means;

(b) Fire, lightning;

(c) Short-circuiting;

(d) Flood and storm;

(e) Bursting and overflowing of water tanks;

(f) Theft;

(g) Riot and strikes; and

(h) Earthquake fire and shock.

The policy indemnifies the insured:

(a) Against loss of or damage to the television apparatus;

(b) Against all sums which he may become legally liable to pay for accidents
caused by or through the television apparatus. (third party liability)

(c) Against loss of or damage to the property belonging to or in the custody of

the insured, by breakage or collapse of the aerial fittings or mast of the
apparatus (so far as such property is not otherwise insured).

The important exclusions are (i) damage to cathode ray tubes, (ii) burning out of
valves or coils, and (iii) theft of parts, unless the apparatus is also stolen at the
same time.

7. Pedal Cycle Insurance

This policy covers loss of or damage to the cycle by fire, lightning, explosion,
burglary, housebreaking, theft and accidental external means. It also covers the
insured’s legal liability for bodily injury to third parties and for the loss of or
damage to the property of third parties. The policy may be extended to cover
personal accident insurance benefits on payment of additional premium.

Loss of or damage to rubber tyres, lamps, tools and accessories is covered only if
they are lost or damaged in the same accident in which the insured pedal cycle
is also damaged. Theft of these parts is covered only if the cycle is also stolen at
the same time. Wear and tear, mechanical breakdown, war, riot, strikes,

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earthquake, overloading and use of the cycle for business, profession, racing,
pace-making, speed tests, etc. are excluded. Usually, a small excess is imposed
in the ‘loss or damage’ section of the policy.

8. Plate Glass Insurance

This policy provides cover against the actual breakage of plain glass of ordinary
glazing quality completely and securely fixed, by any reason whatsoever except
those that are specifically excluded. Normally breakage due to fire, explosion,
gas, heat, earthquake, flood, war, riot and strikes, is excluded. Breakage due to
some of these may be covered on payment of additional premium.

The rate of premium depends on the type of glass, situation, and neighborhood
and past claims experience.

The following points may be noted:

(a) Only actual breakage is covered. For this purpose, there has to be a fracture
of the glass through its entire thickness. Superficial damage like scratching
or disfiguration is not covered.

(b) Only plain glass of ordinary glazing quality is covered. If embossed, silvered
or ornamental glass is to be covered, additional premium is required to be
paid.

9. Neon Sign Insurance

This insurance provides cover in respect of loss of or damage to the neon sign
installation by (a) accidental external means or (b) fire, lightning, external
explosion or theft.

Some exclusion are:

(a) The fusing or burning out of any bulbs and / or tubes arising from short-
circuiting or arcing or any other mechanical or electrical defect or breakdown;

(b) Repair, cleaning, removal or erections, wear and tear, depreciation or

deterioration;

(c) Damage to tubes unless the glass is fractured;

(d) Over-running, over-heating or strain;

(e) Atmospheric conditions;

(f) Strikes, riot, civil commotion. (Riot and strikes may be covered on payment
of additional premium);
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(g) Natural calamities;

(Note: Hoardings may also be covered, more or less, along the same lines as Neon
Sign Policy).

10. Householders Insurance

This is a package insurance scheme designed to meet the requirements of a

householder by combining under a single policy a number of contingencies which
are otherwise covered under separate policies. The policy comprises 10 sections.

Section (1): Loss of or damage to the building and contents (excluding money and
valuables) whilst contained in the insured premises by Fire and specified perils.

Section (2): Loss of or damage to contents (excluding money and valuables) whilst
contained in the insured premises by Burglary / House breaking.

Section (3): Loss of or damage to Jewellery and valuables caused by accident or

misfortune whilst anywhere in India.

Section (4): Loss of or damage to fixed plate glass by accidental means.

Section (5): Unforeseen and sudden physical damage caused by mechanical or

electrical breakdowns of domestic electrical, electronic or mechanical appliances
specified in the policy and whilst contained in the insured premises.

Section (6): Loss of or damage to Television apparatus including VCR/VCP whilst

in insured premises.

Section (7): Loss of or damage to Pedal Cycle(s) and legal liability to third parties.

Section (8): Loss of or damage to personal baggage due to accident or misfortune

whilst travelling anywhere in India.

Section (9): Personal Accident Insurance for insured, his spouse and children as
per Personal Accident Insurance practice.

Section (10) (A) Legal liability of the insured in respect of accidental death or
bodily injury to third party through fault or negligence of insured / family
members.

(B) Legal liability as per E.C. Act / Common law towards employees.

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11. Shopkeeper’s Insurance

The policy is designed for small shopkeepers, that is, whose property is valued at
less than Rs.10 lacs. The policy is comprised of 11 sections.

Section 1: Loss or damage to (A) building / (B) contents (excluding money and
valuables) whilst contained in insured premises by Fire and allied perils,

Section 2: Loss of or damage to contents (excluding money and valuables) whilst

contained in the premises by burglary and housebreaking. (No theft risk is covered)

Section 3: a) Loss of money in transit due to accident/misfortune.

b) Loss of or damage to money/valuables by Burglary/house breading whilst

contained in a burglar proof safe.

c) Loss of money whilst lying in cashier’s till and or counters in insured’s premises
by Burglary, house-breaking or following assault/violence on insured or his
employees.

Section 4: Loss of or damage to pedal cycle (s) and legal liability to third parties.

Section 5: Loss of or damage to fixed plate glass in the insured premises.

Section 6: Loss of or damage to Neon Sign/glow sign by

Section 7: Loss of or damage to Personal Baggage of insured or baggage in

connection with trade, anywhere in India.

Section 8: Personal Accident cover for insured/his employees as per P.A. practice.

Section 9: Direct pecuniary loss suffered by the insured due to fraud or dishonesty
committed by any salaried employees.

Section 10: A) Legal liability in respect of accidental death or bodily injury to a

third party or accidental damage to their property during performance of any act
in connection with the insured’s business.

B) Liability to employees under the W.C. Act/common law.

Section 11: Business interruption due to operation of perils covered under Section
1 and subject to claim payable thereunder.

Common Features of Householders and Shopkeepers insurances

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Under both the above policies, cover under fire section is compulsory. The insured
can choose any of the remaining covers.

The premium depends upon the sum insured, the type and number of sections
covered. The coverage, exceptions, etc. of various policies when taken separately,
apply to the corresponding sections of these policies.

12. Banker’s indemnity insurance

Bankers’ Indemnity Insurance is a combination of several specific covers, such as

fire, burglary, money-in-transit, fidelity guarantee and even Marine (inland
transit). The policy provides indemnity for direct loss of money and / or securities
sustained by the insured and discovered during the period specified in the policy.

The term ‘money’ is deemed to mean bank notes (signed and unsigned), coins,
jewellery, ornaments pledged with the insured, etc. The term ‘securities’ is
deemed to mean, air consignment notes, bank money orders, bills of exchange,
bills of lading, certificates of deposit, certificates of shares / stocks, etc.

Some important exclusions are:

- Trading losses, whether or not within the knowledge of the insured

notwithstanding any act or omission on the part of the employee whether
within the scope of authority or not.

- Losses attributable to faulty computer programming or fraudulent use of

computer programme or any other EDP System.

- Losses caused by negligent act or omission of the insured employees. It may

however be noted that under Section B – Transit cover, losses due to
negligence of employees is covered.

(Note: An ‘excess’ applies to each loss except that caused by fire, riot & burglary)

The proposer has to select the sum insured which is the limit of liability of the
insurer for any one loss. The premium is based on the following:

(a) The limit of indemnity i.e. Basic Sum Insured.

(b) The total number of persons employed by the Bank

Claims assessment is generally entrusted to surveyor with Chartered Accountancy

qualifications.

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13. Jeweller’s Block Policies

In recent years India has become a leading centre in the world trade of jewellery
and is a major exporter of processed gold jewellery and precious stones.
Jewellers Block Policy is a package scheme covering several types of losses.
Jewellery, gold and silver ornaments or plate, pearls and precious stones, cash
and currency notes and / or merchandise and materials usual to the conduct of
the insured’s business, are covered.

The cover provided under the policy is divided into four sections. It is not
necessary for the proposer to cover the risk under all the 4 sections. If a proposer
desires he can cover the risk under Sections I & IV only. However coverage under
Section I is compulsory.

Section I - Loss of or damage to property whilst on the insured premises,

by fire, explosion, lightning, burglary, house-breaking, theft,
hold-up, robbery, riot, strikes and malicious damage and
terrorism.

Section II - All Risks cover whilst the property insured is in the custody of
the insured, his / her partners, his employees, directors,
sorters of diamonds OR

Whilst such property (excluding cash or currency notes) is in

the custody of persons not in regular employment of the
insured such as brokers, agents, cutters and goldsmiths.

Section III - All Risks cover whilst such property is in transit by Registered
Parcel Post, Air Freight and through Angadia.

Section IV - Cover for trade and office furniture and fittings in the
premises against the risks specified in Section I.

For rating purposes the risks are divided into three categories

Class I - Watchman employed on 24 hours basis (round the clock) specifically by

the insured for all the premises.

Class II - Common Watchman for the premises or night watchman for the premises.

Class III - All types of other risks.

Claims assessment is usually handled by Chartered Accountant Surveyors.

14. Office Protection Shield (General Office)

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The policy offers combination of different covers as follows:

- Building (if owned) – fire and allied perils

- Contents – fire and allied perils, burglary

- Tenant’s liability

- Money on premises and in transit

- Fixed glass

- Fidelity guarantee

- Electronic equipment and portable computer

- Rent for alternative accommodation

- Breakdown of office appliances

- Baggage

- Personal accident

- Mediclaim

- Public and Employer’s liability

15. Crime Insurance

Crime insurance is a relatively new type for the Indian market. It is not a big
portfolio but the larger Indian corporates are beginning to understand the
importance of Commercial Crime covers.

Subject Matter: Crime cover, being new, tends to be a package-style of cover

picking up the more traditional covers of:

a) Employee Theft Coverage: Loss of money, securities or other property by theft

or forgery by an employee of the insured. This cover was traditionally known
as Fidelity Guarantee.

b) Premises Coverage: Loss of money or securities from the insured’s premises

by third parties including computer theft of money. Traditionally this risk was
covered under Money Insurance.

c) Transit Coverage: Loss of money or securities from outside the insured’s

premises by a third party, while being transported by the insured, an armored

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 motor vehicle company or a person authorised by the insured. Traditionally
this risk was covered under Money Insurance

d) Depositors’ Forgery Coverage: Losses from instruments, such as cheques

fraudulently drawn on the insured’s accounts, by a third party.

e) Computer Fraud Coverage: An extension to cover losses sustained by the

insured due to computer fraud by a third party, including cover for expenses
incurred by the insured due to a computer violation.

Classification and Rating: The principal coverage relates to the Employee Theft
covers, with the result that the insurer decides rates on the employee wage roll,
primarily with an adjustment to the rate, dependent on the extent of the Limit
of Liability.

Underwriting: There are certain trades which have a heavy Crime Insurance risk
– these would be companies in areas such as the Financial Services Industry, parts
of the entertainment industry e.g. Casinos, Jewellery industry, etc. The
Underwriter will also be keen to encourage the insured to carry a deductible

16. Aviation Insurance

Aviation Sector Insurance Product was first launched in the early years of 20th
century and its policies were laid down in the year 1911 by Lloyd's of London.

Following the increased popularity of air travel, the Warsaw convention was
signed in 1929 and this has been followed by various other conventions and
protocols, such as the Montreal Convention, keeping in mind the concerns of the
people flying by air.

Considering the fact that there should be a specialist insurance sector, an aviation
committee was formed by the International Union of Marine Insurance (IUMI) in
the year 1933. By the following year, International Union of Aviation Insurers (IUAI)
was established with eight European aviation insurance organizations resolving to
figure out the concept of aviation insurance. Today, there are a number of
insurance markets depending on the aviation activity, providing aviation
insurance. The largest market is in London with the US also having a major share
in the world's general aviation fleet and is an established market in this sector.

Thanks to the many facets of the subject, a number of specific insurances such
as the following have evolved over the years:

 Aircraft hull policy - covering loss of aircraft or damage to aircraft, including

its machinery

 Aircraft liability policy

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 Liability of aircraft owner / operator in respect of accidental bodily injury or
property damage

 Liability towards passengers both in respect of accidental bodily injury and

also towards loss or damage to baggage and personal belongings of passengers

 Aviation war and allied perils

 Aviation product's liability

 Airport operator's liability

 Aviation service provider's liability

 Aircraft owners / operators

We will look into the details of some of the popular products in this area.

(a) Aviation Hull

The insurance of the aircraft itself is referred to as “Aviation Hull” insurance and
covers the aircraft itself against loss or accidental damage. The policy is normally
called an "All Risks" policy, although as we have seen earlier, this is a misnomer
to a certain extent, as there are a number of exceptions and exclusions restricting
the cover. Examples of these exceptions would include:

 Any kind of consequential loss, or loss of use and delay.

 Wear and tear of the aircraft

 Ingestion damage caused by stones, grit, dust, sand, ice, etc.

 War damages. War here means any kind of civil war, strikes, riots,
disturbances, confiscations, hijacking or any kind of political or terrorist
attacks.

These policies are also subject to a standard level of deductible, applicable in

case of partial loss. This deductible usually relates to the size and type of aircraft.
For example, a small plane such as a Twin Otter may have a relatively low
deductible of around USD $ 50,000 increasing to USD $ 1 million for a civil airliner,
such as a Boeing 747.

Presently the bulk of airline hull "all risks" policies are formed on the basis of
agreement between the insurers and the insured; covering for a stated policy
period, the value of the aircraft and in any case of total loss, the agreed value
should be payable in full. There is no option for replacement under such an
agreement.

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(b) Aviation Hull War Risks Insurance

The ‘War Risks Insurance’ is excluded from the basic Aviation Hull cover. However,
a separate ‘War Risks’ cover is available with the major exclusions being:

 detonation of a nuclear weapon

 War between the “Great Powers” – defined as the U.S.A., the Russian
Federation, China, France and the U.K.

Other exclusions, that insurers may apply, can include the following:

 confiscation by the "state" of registration (may be insurable at additional cost)

 debt, failure to provide bond or security or any other financial cause under
court order or otherwise;

 repossession / attempted repossession of the aircraft

 delay and loss of use

The Aviation Hull "War and Allied Perils" policy is also on an "Agreed Value" basis
against physical loss or damage to the aircraft, although the deductibles are not
normally applied in respect of losses arising out of "War and Allied Perils".

(c) Aviation Hull Total Loss Only Insurance

‘Aviation Hull Total Loss Only’ cover has been devised to take care of total loss
of an aircraft. This cover is particularly formed for the old aircrafts, as such
aircrafts are generally in poor condition and are insured for low amounts and the
premium for which would also be very low. The proportion of partial losses to
total losses in case of such an aircraft is very inadequate.

(d) Aviation Liability Insurance

Liability has basically two dimensions – internal and external, although both are
normally being covered in a single liability policy:
 Internal - in regard to passengers, baggage, cargo and mail carried on the
aircraft. These liabilities result from the operations the airline is set up to
perform and are normally the subject of a contract of carriage, like a ticket
or airway bill, which may provide some possibility of limiting the airline's
liability.

 External – “Aircraft Third Party Liability” which is the legal liability for
property damage or injury or death to persons outside the aircraft.

The exceptions under liability insurance are:

 Damage to own property – loss or damage caused to the insured’s own
property
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 War and allied risks associated with it, although the cover can be picked up
through a write-back endorsement to the Aviation Liability coverage

 Noise and pollution, unless resulting from the air accident, fire or explosion
from within the airplane.

(e) Airline General Third Party Liability Insurance

This refers to the liabilities that might arise from other than the use of aircraft
i.e. from the premises, hangar keepers and products liability and are called
"Airline General Third Party Liability" and the risk must arise from what are
described as "aviation occurrences" i.e.

 involving aircraft

 arising at airport locations

 arising at other locations in connection with the airline's business

 transporting passengers / cargo

 sale of goods / services to those involved in the aviation industry

Many airlines cover their "Airline General Third Party Liability" within their main
liability programme and are placed on a Combined (Bodily Injury and Property
Damage both together) Single Limit Basis.
Exclusions from liability insurance may include items such as:

1. Damage to the Insured's own property

2. War and Allied Risks, although these can be "written back"

3. Radioactive Contamination

4. Noise and Pollution, unless caused by a crash, fire, explosion or "in flight"
emergency

17. Satellite Insurance

In 1965, the first satellite insurance was placed with Lloyd’s of London to cover
physical damages on pre-launch for the "Early Bird" satellite Intelsat I. Satellites
are very complex machines, which are manufactured and used by governments
and a few larger companies. The budget for a typical satellite project can be in
excess of billions of dollars and can run over 5–10 years, including the planning,
manufacturing, testing, and launch.

Satellite insurance, therefore, is a very specialised area of aviation insurance. At

the beginning of this century, there were around 20 insurers from all over the
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world, participating directly; while others participated through reinsurance
arrangements.

Satellite Insurance covers four principal risks

1. Pre-launch insurance: covering loss or damage to satellite or its parts etc.

from the time of leaving the manufacturer's premises, during the transit to
the launch site, through testing, fuelling and integration with the launcher,
up until the launcher's rocket engines are ignited for actual launch.

2. Launch insurance: covering the period from the intentional ignition of the
engines, until the satellite separates from the final stage of the launch vehicle
or until completion of the testing phase in orbit. Typical coverage usually runs
for a period of twelve months but is limited to 45–60 days in respect of testing
phase in orbit. Launch failure is the greatest probability of satellite loss and
approximately 7% of satellites have failed on launch.

3. Orbit insurance: covering physical loss, damage, or failure of the satellite

while in orbit or during orbit placement. Elements of risk attached to
satellites during orbit are damage caused by objects in the space environment,
extreme temperatures, and radiation. Since typically it is not possible to
repair a satellite, once it is physically placed in orbit, the coverage is basically
granted as a product guarantee.

4. Third party liability is the final section of the policy, and is a statutory
requirement of the Government of the country, where the launch will take
place, regardless of the nationality of the satellite owner. A special license
must be provided to the regulating authorities, before a launch can take place.
Coverage usually runs upto 90 days following the actual launch. Loss of
revenue coverage is also available but is rarely purchased.

Ground Risk Liability

As many ground stations are run by large government entities such as NASA,
failure on the part of the insured is rare. In cases where failure occurs due to
events which are beyond the control of the insured (such as an earthquake),
coverage provides for the cost of hiring premises, replacing computer systems,
software backup, and other items necessary to resume operations.

18. Oil and Energy Risks Insurance

Oil and Energy Risk insurance is also known as off-shore insurance. Off shore risks
are to be understood primarily as oil exploration and production units at sea,
including the associated pipeline, cables etc. Oil and Natural Gas Corporation
(ONGC) and some other companies are engaged in these operations.

A simple outline of offshore operations relating to exploration and production of

oil and gas is provided and insurance policies appropriate to each phase of
operations are briefly dealt with.
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The first step is a seismic survey by geo-technical experts who use specially
designed survey vessels for the purpose. The vessels are usually insured by the
owners, under a marine hull policy.

The second phase is exploratory drilling. This is done from a floating platform
known as MODU (Mobile Off-Shore Drilling Unit) The mobile rigs are of various
types, the latest being specially designed drill-ship.
The drilling units and the equipment require insurance for various perils the major
ones being:

 Damage / total loss due to blow-out which means an unintended flow from
the well of drilling fluid, oil, gas etc. which cannot be stopped.

 Fire

 Weather hazards, storm

 Collision

 War, Strikes etc.

The drill ship and rigs are covered under special clauses known as Standard All
Risks Drilling Barge form of Lloyds of London.

When oil and gas is detected by mobile rigs, and it is commercially feasible to
develop the oil field the next phase is to set up production facilities. To drill
development wells, an off-shore fixed platform is built and raised at a suitable
site in the waters. Platform can be of two types – well platforms which may have
a number of producing wells or process platforms where the process of separating
gas, water and sediments from the crude is undertaken.

This phase involves land fabrication of steel platform towing them to sea on
barges and installation by driving steel piles down into the seabed.

1. During construction phase, off-shore platforms are covered under the

Builders Risk clause applied to ships under construction. Towing from the
building to the installation site is insured under Institute Voyage Clause
offered in marine hull insurance (pipe laying risk can be covered either as
part of the overall construction policy or insured separately).

2. Once the contractors complete the installation of a full-fledged platform

the operating phase commences. The risk now to be considered, both for
well head and process platforms are contact damage by supply boats, fire,
heavy weather etc. The coverage is provided under the Standard Platform
All Risks Clauses.

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Apart from physical damage to the platforms, pipelines etc. there are other
hazards involved. As a result of well going out of control, the following expenses
are likely to be incurred by the operators.

a) Cost of controlling the blow out

b) Cost of cleaning up

c) Liability to third parties from pollution

d) Cost of re-drilling the well

e) Evacuation expenses

Cover for these costs are provided by the Energy Explosion and Development (EED)
clause.

All the policies in the different phases required by the oil company are nowadays
combined in a package policy. Insurance is also available on All Risk basis under
Oil and Gas well Drilling Floater Form (All Risks) clause to cover on shore oil and
gas well drilling equipment at locations and in transit on land within the limit as
agreed.

19. Cyber Liabilities

Quote: "If I want to steal money, a computer is a much better tool than a
handgun. It would take a long time to steal $10 million with a handgun. “ --
Daniel Geer, security expert

This is arguably the newest, sizeable, insurance portfolio launched in recent years
and has been born from companies becoming aware that they are increasingly at
risk from exposures, that originate from their use of technology.

Most forms of insurance either exclude or inadequately cover losses that arise
from use of the internet, e-mail or networked systems. As a result, companies
that are reliant on these technologies, frequently find that they have inadequate
protection, but only discover the deficiency when they need to make a claim.
This can come as an expensive shock.

However, at present, it is not well understood with underwriters and reinsurers

still looking to build sufficient books of business and information databases to
accurately underwrite the differing covers.

The Portfolio: is a combination of covers, some traditional and others new, which
an insured may or may not require

It also looks to address:

1. First Party losses including Consequential Losses; and

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 2. Third Party losses

Examples of these covers can include the following:

(a) Third Party Liabilities

 Allegations that arise from a breach of confidentiality / data protection

legislation

 Allegations of libel and slander; for example; due to e-mail, web site or
employment advertising content

 Claims that arise from damage to a Third Party’s computer systems, such as
through an insured forwarding a virus, DOS attack or an employee hacking or
committing fraud

 Claims arising from third party consequential loss, through an insured not
being able to access their computer systems / website

(b) Professional Indemnity

 Claims arising from negligence, error, breach of contract, breach of privacy

(data protection) arising when working with a third party

 Claims arising from perceived failure to conform to a written specification or

failing to meet implied statutory terms concerning quality.

 Claims arising from dishonesty of employees or contractors.

(c) Employee Claims

 Claims of an inappropriate workplace, such as sexual or racial harassment

charges from an employee due to disturbing e-mail content being circulated

 Claims for breaches of confidentiality due to misuse of sensitive employee

information

(d) First Party Losses

 Systems damage – reimbursement for any costs, incurred as a result of attack

by a virus, hacker or electronic fraud of an employee

 Business interruption – reimbursement for lost business, if systems are unable

to operate due to attack by a virus, hacker or electronic fraud of an employee

 E-theft – reimbursement, if funds are misappropriated electronically

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 E-extortion – reimbursement for ransom monies payable as a result of a threat
to introduce a virus, hack / damage systems or disseminate information that
has been taken from a database

 Intellectual property ‘attack’ – payment of legal costs in pursuit of defending

third party infringements

 Brand protection – payment for PR to protect against any negative impact on

brand and reputation

Title Insurance

The Real Estate Regulation & Development Act, 2016 ('Rera'), therefore, made it
compulsory for developers/ promoters to obtain insurance against any defect in
the title of the land and buildings of their projects. Title insurance is developed
to meet this requirement and is an insurance of indemnity and unlike other
insurances, it has a retrospective effect. This means, the title insurance
indemnifies the insured against all the losses and claims that are suffered by the
insured as a result of defect in the title of a property (of which the insured was
not aware on the date of the policy) even before the date of the policy. Very few
insurers have developed this products.

Credit Insurance

Trade credit insurance protects businesses against the risk of non-payment for
goods and services by buyers. It usually covers a portfolio of buyers and
indemnifies an agreed percentage of an invoice or invoices that remain unpaid as
a result of protracted default, insolvency / bankruptcy. It covers

Commercial Risks: a. Insolvency or Protracted Default of (i) the buyer; (ii) bank/`s
responsible for payment in case of Letter of Credit transactions; (iii) stock holding
agent in case of consignment transactions; b. Rejection by (i) the buyer after
delivery subject to conditions of contract; (ii) the buyer before shipment, where
the goods are manufactured or being manufactured exclusively as per the
requirements of the buyer and cannot be sold elsewhere; c. Non-receipt of
payment on account of collecting Bank`s failure;

The Policy may also cover Political Risks but that is only for export credit. The
Policy conditions and exclusions are governed by Regulator.

Micro-Insurance

Micro Insurance – IRDAI (Micro Insurance) regulations 2005 inter alia state as under:

- A micro insurance product (MI Product) in general insurance would cover

Health Insurance, hut, livestock/tools or instruments of village workers, any
personal accident either on individual or group basis and crop insurance. Life
insurance products are available for a maximum period of 15 years.
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- The products are simple versions where the sum insured is limited. Micro
insurance agents and Point of Sales (POS) persons can only sell MI products,
while regular agents and intermediaries can sell all products including MI
products.

- The regulations also define a micro insurance product for life business.

- Minimum and maximum sum insured are prescribed in both products.

- A very important feature is that life insurers and the general insurance
companies are allowed to have a tie-up to sell each other’s products.

- The Non-Government organizations, self-help groups and micro finance,

institutions can be appointed by the insurers to sell micro insurance products,
as agreed. The normal distribution channels e.g. Agents, corporate agents and
brokers can also distribute these products. Micro Insurance agents can sell
only Micro Insurance policies while others can sell non-micro policies as well.
The Regulator has allowed Point of Sales Persons (POSPs) also to sell MI
products.

- All Insurers have to impart 25 hours of Training.

- All micro-insurance products have to be cleared by the Authority.

- These products are to be delivered in local language to the policy holders.

Test Yourself 3

Cyber Liabilities cannot insure which of the following?

A. Losses arising from hacking into the insured’s server

B. Liability for the insured spreading a virus to the third party
C. Deliberate malicious lies from the insured to Third Parties
D. Losses because Third Parties could not access the system

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Summary

 The Contractors All Risks (CAR) Policy protects the interests of contractors
and principals in respect of civil engineering projects, like buildings, bridges,
tunnels, etc.

 The Erection All Risks Policy (EAR) policy is concerned with

erection/installation of plant, machinery and equipment and structures
involving no or very little civil engineering work.

 The Advance Loss of Profits (ALOP) Policy covers financial consequences of a

project being delayed because of accidental damage to the project materials.

 The Machinery Breakdown Policy, Contractors Plant & Machinery Policy, Boiler
& Pressure Plant Insurance Policy, Electronic Equipment Insurance Policy are
the various policies available under Engineering Insurance

 Burglary Insurance protects the insured from theft of property and damage to
insured property by burglars.

 Money insurance protects banks, post offices and other specified premises
against theft of money in transit.

 Fidelity guarantee insurance indemnifies the employers against the financial

loss suffered by them due to the specified dishonest acts of their employees

 Householder’s Insurance and Shopkeeper’s Insurance protects the respective

insured by combining under a single policy a number of contingencies which
are otherwise covered under separate policies.

 Aviation insurance products range covers aviation hull, hull war risks
insurance, hull total loss only insurance, aviation liability insurance, aviation
general liability insurance.

 Satellite insurance covers pre-launch, launch, orbit insurance and third party
liability.

 Micro insurance covers life and general insurance products to cover low
income group people.

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Answers to Test Yourself

Answer to TY 1

The correct option is B

Erection All Risks relates to the installation of plant or machinery

Answer to TY 2

The correct option is A

The Erection All Risks (EAR) Policy is also known as Storage-cum-Erection Policy

Answer to TY 3

The correct option is C

Deliberate malicious lies from the insured would not be covered

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Self-Examination Questions

Question 1

Earlier employee theft cover used to be known as __________

A. Robbery
B. Embezzlement
C. Fidelity Guarantee
D. Hold Up

Question 2

The first Aviation policies were issued in which year?

A. 1911
B. 1921
C. 1931
D. 1941

Question 3

Satellite Insurance does not cover which of the following?

A. Pre-launch insurance
B. Personal Accident Cover for the Crew
C. Orbit insurance
D. Third party Liability

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Answer to Self-Examination Questions

Answer to SEQ 1

The correct option is C

Fidelity Guarantee was the old word for employee theft cover

Answer to SEQ 2

The correct answer is A

The first Aviation policies were issued in 1911 year by Lloyds

Answer to SEQ 3

The correct answer is B

There is no Personal Accident portfolio within Satellite insurance

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 CHAPTER 6
UNDERWRITING
Introduction

This chapter aims to make you understand how the insurer (underwriter) assesses
the risk on a proposal and accordingly, how he goes about pricing the risk (if the
risk is to be accepted). The chapter will take you through the entire underwriting
process step-by-step. The chapter also explains how the insurer can share his risk
with other insurers (co-insurance and reinsurance). You will also learn about risk
management and the steps involved in it.

a) Understand the concept of underwriting

b) Examine the underwriting process
c) Learn about risk sharing
d) Understand the meaning of risk management and the steps involved

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1. Understand the concept of underwriting
[Learning Outcome a]

Underwriting

An insurer has two main areas of income:

1. Underwriting (premium collected), and

2. Investment income

In India, the investment returns are much healthy. But with the exception of the
PSUs; the other insurers have insufficient critical mass to rely on such returns.
This is because Life Insurance Corporation of India (LIC) and the PSU general
insurers have been operating for last few decades and have built critical mass,
whereas the private insurers are just two decades old.

It is also to be noted that the Mean yield from Investments are coming done year
after year as the interest rates are getting lower.

This leaves underwriting as the main source of income/profit for an insurer. As

such, it should be regarded as a central activity and be subject to careful
management.

Definition

Underwriting: insurance underwriters evaluate the risk and exposures of potential

clients. They first decide whether to accept the risk or not. If the risk is to be
accepted, they decide how much coverage the client should receive and how
much they should pay for it. Underwriting involves measuring risk exposure and
determining the premium that needs to be charged to insure that risk. The
function of the underwriter is to acquire - or to "write"- business that will bring
money to the insurance company, and also to protect the company's book of
business, from risks that they reckon, will make a loss.

Each insurance company has its own set of underwriting guidelines to help the
individual underwriters determine whether or not the company should accept a
certain risk on offer. For example:

 in underwriting automobile risks, an individual's driving record and type of

vehicle are critical

 in underwriting health risks, medical history may be used to examine the

applicant's health status (other factors may be considered as well, such as age
and occupation).

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The underwriters may either decline the risk or may provide a quotation in which
the premiums have been suitably loaded or in which, various exclusions have been
stipulated, which restrict the circumstances under which a claim could become
payable. Depending on the type of insurance product (line of business), insurance
companies aim to use automated underwriting systems to encode these rules, and
reduce the amount of manual work in processing quotations and policy issuance.
This is especially the case for certain simpler life insurance products or personal
lines (auto, householders) insurance.

Underwriting is the process of assessing, accepting and pricing risks, applying

policy conditions and managing exposures. Although the actual practice and
terminology may vary between different classes, the principles are much the
same.

The title ‘underwriter’ is commonly applied to a wide range of people, from a

specialist carrying out bespoke liability underwriting for a large multinational, to
a junior operative, inputting data into a call centre computer programme for
motor insurance.

The underwriter’s maxim

1. Maintain a regular review of the existing portfolio rates and terms to ensure
that the insurer:
a. achieves maximum profitability
b. does not lose quality business
c. deals appropriately with poor quality business

2. Obtain quality new business at terms which are designed to contribute to

profit.

3. Develop new products / product extensions, which can be successfully sold to

existing customers, strengthening existing relationships and achieving
maximum premium growth from organic growth.

4. Obtain information / feedback from customers, intermediaries and the

market in general, to ensure that products, terms, development and
profitability are maintained at optimum levels.

5. Identify target segments of the market which will contribute to building of a

profitable, quality portfolio.

6. Maintain robust risk inspection / survey programmes for the existing portfolio:
a. Ensuring that the portfolio quality is maintained and policy terms are
related to the quality of the risk.

b. Providing risk improvement advice to customers, where applicable.

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7. Develop streamlined systems at minimum expense, to achieve the maximum
degree of account control and service to customers.

8. Maintain good control of expenses to ensure that optimum competitiveness

and profitability are achieved.

Market Practice

The strict product approval processes of IRDAI, requirement of detailed technical

reports and actuarial evaluations, stress on Underwriting Philosophy of insurers,
and actuarial examination of product results create demands on the sharp
intellect of an underwriter.

Every Insurer has to have a Board Approved Underwriting Policy which also
has to be filed with the Regulator. The directions from Authority (IRDAI)
clearly talks about underwriting philosophy of the Insurer which should be
captured in the Policy. Student is expected to understand the basic lessons
narrated in this part. And then understand the various Directions of IRDAI
under File & Use (and Use & File) provisions to correctly appreciate the
development process of policies and pricing practices in Indian Market.

Test Yourself 1

Underwriting process involves _____________

A. Decision on risk acceptance

B. Decision on staff recruitment
C. Decision on investment
D. Decision on employee benefits

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2. Examine the underwriting process
[Learning Outcome b]

Underwriting process
A standard underwriting process may have the following steps:

Diagram 1: Standard underwriting process

STEP ONE:
Receipt, Evaluation and
Acceptance of Risk

STEP TWO:
Consideration of Terms
and Conditions

STEP THREE:
Pricing the risk

STEP FOUR:
Managing Exposure
The Underwriting Process

1. Receipt of Risk

Risks may be presented to an underwriter in a variety of ways. Some of these

are described below:
a) a telephone call to operating office or call center

b) a written proposal form through post from an agent / broker

c) an online proposal through an e-channel (internet)

d) a formal presentation of a large commercial risk by a broker

e) email request from client or broker

The underwriter will acknowledge receipt and at the same time, identify any
basic missing information. If the risk is clearly one that the underwriter is
unwilling to cover, he will decline the risk at this stage e.g. Motor Insurance on a
young driver with a fast car etc.

2. Examine / Evaluate the risk

Once the underwriter gets the risk proposal, he will evaluate it.

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 Diagram 2: Risk proposal evaluation

Understand the Can it be If yes, what are the

risk accepted? Terms and Conditions?

The underwriter will have the risk proposal information in a standard format. It
will have the following details:
a) Details of the proposer

b) Business, trade and / or activity

c) Cover required

d) Location of the risk

e) Exposure (how big is risk – dependent on type of insurance, sum insured,

turnover, wages etc.)

f) Claims experience

Beyond this, there will be a considerable amount of information needed that is

specific to each class of business and particular risks. Broadly, this falls into three
categories relating to:
a. physical hazards
b. moral hazards
c. financial hazards
These hazards can influence the probability and severity of loss.

a. Physical Hazards

Physical hazards are the tangible factors that arise out of the nature of the
risk itself. They will come from the features of the property / risk itself, its
location, purpose / activity etc.

Example

Motor insurance: model of the car, annual mileage, type of use, driver details etc.
A wealthy client purchases an Audi car for his 18-year-old son on his birthday – In
this case, a powerful car and a young and inexperienced driver are a potentially
dangerous combination.

Products liability insurance: the proposer’s trade, details of goods sold, what
their purpose is, markets these are sold into, materials handled and condition of
premises are highly relevant. An engineering components manufacturer reveals
that some of its components may be used in aircraft engines. In that case, the
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catastrophe potential of the failure of these items would merit extremely high
premiums.

b. Moral Hazards

Moral hazards are the intangible human aspects of a risk that are much more
difficult to ascertain. They include potential to fraudulent claims,
carelessness and poor management. There is still an element of truth in the
old saying that “you insure people rather than things”.

Example

Property Insurance: Piles of waste left in buildings on a long term basis, dirty
factory, poorly maintained machinery, etc.

Burglary Insurance: known locally to have poor reputation for fair dealing and
casual approach on security aspect.

c. Financial Hazards

Financial hazards are relatively a new consideration with regard to

underwriting, although they have been in existence since businesses started
operating. Basically, they relate to the financial position of the company – is
it in a healthy state, are there cash flow problems, credit risks, etc.?

Where a company is in a perilous financial situation, it will eventually be

reflected in poor maintenance of machinery, low morale of workforce from
pay restraints, deterioration in management control, etc.

3. Collection of information

To assist in the assessment of the risk; the underwriter will need information
and this will come from a number of different avenues:

a. Proposal Form: The simplest risks (such as Private Motor car) may have all
the relevant information supplied on the proposal form itself.

b. Questionnaires: Certain trades identify specific risks within them that

require the use of secondary information. One example could be a Liability
Insurance Proposal for a construction company that shows that they are
involved in tunneling – it is not worthwhile including tunneling questions
on all Liability Proposals; so a supplementary questionnaire, relating
solely to tunneling, will be forwarded to the company for filling the
required information in such cases.

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 c. Risk inspection: The initial presentation of the risk may not provide
enough information for the underwriter to make an assessment. In a
significant proportion of commercial cases, the underwriter will ask for a
risk survey. This could be carried out by one of the insurer’s own engineers,
a broker’s surveyor or possibly by an independent specialist. The surveyor
will visit the proposer and risk site, discuss the risk in some detail and
write a report with recommendations to the underwriter. Inspection
reports play a major part in the larger and more complex cases in property,
business interruption, liability, etc.

d. Local Knowledge: It is likely that the client is known within the insurer’s
office and this can assist in a judgement. For example, if a particular
Group’s operations are recognised as highly ethical and professional – this
will influence the underwriter’s judgement positively.

e. Websites: Proposer company’s website can have useful information on the

client and the risks the company is prone to i.e. the website may have
details of the processes.

4. Acceptance of risk

Once the underwriter has assessed the risk and is convinced that it satisfies
the various criteria in the company’s underwriting policy; the risk can be
accepted. The criteria in the company’s underwriting policy may include:

 acceptable and non-acceptable types of risk

 geographical limitations

 accumulation hazard

 limits of indemnity

5. Policy Terms and Conditions

Most policies will have standard wordings including definitions, conditions

and exceptions and the underwriter will need to ensure that the standard
wording is satisfactory for the risk. If not, he will need to specify the changes
in wording to restrict or extend the cover and impact on future claims.

The policy wording is a legal document. Policy document is accepted in court of

law as a legal document in case of disputes. It is likely that in many areas there
will be standardised endorsement wordings that can simply be added to the policy
wording.

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6. Use of Technology

The huge accumulation of data by insurers and what is available in public domain
and the phenomenal increase in computing powers are fast changing the
traditional underwriting skills. Today, Data Scientist play a large role in assessing
risks and guiding the decision on acceptance. The collection of Know Your
Customer (KYC) information, analysis of proposal forms, geographical mapping of
risks, examination of medical records & property details etc. are done,
increasingly with the help of technology.

In the country there is a large level linkage between Mobile number, Aadhar
Number, Vehicle registration, ration cards, Bank accounts, PAN Numbers Central
KYC, land records and these are going to add to the importance for Digital
collection of data. During pandemic times, IRDAI allowed insurers to use E- Kyc
or Video KYC.

In segments like catastrophe risks, and crop & agriculture insurance, weather
data, satellite images and drone scans are used frequently. The range of
acceptance, robotic acceptance of risks, commoditized pre-underwritten
insurance covers, hyper personalized customer profiles, public domain
information like CRISIL rating, fraud analytics processors etc. are making inroads
into underwriting. But the skill of an underwriter continues to be in high demand
as humans would continue to make the final calls.

Example

The insurer may have received representation that no flammable liquids were
used in the processing, and on this assurance he has reduced the base rate
significantly but has added the following wording – “It is a condition of this policy
that there are no flammable liquids with a flashpoint below ___ degrees stored
or used on the premises defined in the schedule to this policy”

Other standard forms of policy terms and conditions are given below:

a. Deductible

This is also known as ‘excess’. The insured is made to bear the first part of any
claim, as may be stipulated.

The purpose is twofold:

1. to discourage small claims

2. to give the insured a financial interest in the management of the risk

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Example

Large deductibles are common in the professional indemnity insurances for the
Indian IT industry, to ensure that the policyholders have a major interest in taking
care, that the advice / service given to a client, does not expose the firm to
undue risk.

Large commercial insureds may elect to take substantial deductibles by way of

self-insurance, in order to reduce the premium.

b. Warranty

A warranty requires an insured to do, or not do, or guarantees existence or

non-existence of certain things and is often linked to a specific trade. A
breach would make the policy voidable. Warranties may arise out of the
survey report and intended to deal with a particular hazard e.g. daily removal
of waste products. Others may be a matter of common sense e.g. sprinklers
to be regularly tested.

c. Exclusion

Most policies carry standard exclusions e.g. War Risks, Nuclear Risks, etc.
Some, like the standard Fire policy also carry automatic exclusions
(earthquakes, spontaneous combustion, etc.) which can, if necessary, be
bought back as cover. In addition, the underwriter may wish to apply specific
exclusions e.g. the policy will not cover certain buildings owned by the insurer.

7. Pricing

Once the terms have been decided, the underwriter can define the
appropriate price for the risk. The initial stage in most classes of insurance
will be the “book rate” – a defined figure for a standard risk. This is likely to
be detailed in the underwriting manuals or, increasingly, maintained on-line
and often automatically raised on input of the classification code.

There is likely to be standardised discounts or loadings for aspects relative to

that particular cover e.g. above or below average construction (fire
insurance), driving restricted to named drivers (motor insurance), cover
restricted to accidents of occupation (personal accident insurance), etc. Also,
for the size of any voluntary deductible, long term agreement or size of risk.
On top of this, the underwriter may wish to add a further loading or subtract
a discount, specific to the client.

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8. Managing Exposure

The final part of the underwriting process is to manage the exposure from an
individual risk or from a group of individual risks that might build up into a
huge loss from a single contingency. For example, the underwriter should
avoid taking on too many risks in, say, the same flood-prone area (property
insurance).

To assist with this, many of the modern insurers, either have or are looking
to develop, pin-code based systems, to ensure that there is no large
accumulation of risks in a particular area. However, others still rely on paper
records and local knowledge.

Definition

Accumulation: this relates to the potential situation where there are large
number of individual risks grouped together in such a way that a single
contingency could affect all at the same time.

Example 1: A number of Personal Accident risks, flying in the same aircraft

Example 2: A number of shop units in a single mall, insured by the same insurer

If the insurer recognises a significant exposure of risks, that might impact the
bottom line through a single incident but wishes to insure the risk – perhaps
because of connectional reasons or does not wish to be seen declining an
otherwise acceptable risk – the solution could be reinsurance.

File and Use - Since liberalisation of the insurance market in 2000 – 2001, the
IRDAI has insisted on a procedure of File and Use for any insurance product – old
or new. Within this ruling, the insurer must obtain permission from the regulator
to sell any insurance product. From the date the proposed wording is passed to
the IRDA, the regulator has 30 days to respond.

The insurer must satisfy the IRDAI under a number of headings, including

1. General description of the product including product features

2. Target market

3. Distribution channels

4. General policy provisions

5. Reinsurance
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6. Pricing assumptions, premium table and results of financial projections

7. Proposal form, sales literature and insurance contract

Further, it must all be certified by an Appointed Actuary

The erstwhile tariff wordings of the policies have been retained and the covers
thereunder cannot be reduced except where specifically provided for.

For more information on the regulation itself see:

http://www.irdaindia.org/fileusegi.htm

Use and File: Commencing from 1st April 2016, the IRDAI has introduced the
concept of “use and File” in addition to the ”File and Use” product system in
General Insurance. All Insurers are required to follow these regulatory guidelines
in respect of all general insurance products existing in the market except for
products issued under specific guidelines Example: Micro insurance products.

All general insurance product will now be classified as either “Retail” or

“Commercial”. These classification are based on the principle of “who buys the
product”

Retail products:

These products are to be sold to individuals and their family members

They can also be sold to commercial customers if the insurer feels that it meets
the insurance needs of a segment of commercial customers

Where there is a joint insurable interest and one of them is an individual customer
then this will also be treated as a retail product

Commercial products:

These are sold to entities other than individuals and will include firms, companies,
trust etc. A product filed for commercial customers cannot be sold to individuals.

The product has to be designed by the Product Management Committee of the

insurer. The Underwriting Policy of the insurer must be adhered to at all times.
It must be approved by the Board. It should meet the solvency norms and be
reasonable with regard to affordability and appropriateness of the product. It
must also address the issues and guidelines of the Protection of policy holder
rights.

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Product Approvals:

All retail products will fall under the “File and Use” procedure. So will products
for commercial customers from the Micro Small and Medium Enterprises with a
Sum Insured up to 5 crores or as prescribed by the IRDAI.

In the case of “Use and File” for commercial products. They may be offered to
commercial customers soon after the UIN number is allotted. Such products
should adhere to the Underwriting policy of the insurer without exception.

Use and File

In October 2022, IRDAI permitted the general insurers to file all products under
Miscellaneous lines of business (including modifications of current products)
under Use and File procedure for both Retail and Commercial categories, by
strictly following the norms stipulated in IRDAI (Protection of Policyholders’
Interests) Regulations. Students are required to understand the tenets of File &
Use to understand the filing of products well.

Test Yourself 2

An excess is another word for _____________

A. Franchise
B. Warranty
C. Deductible
D. Exclusion

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3. Learn about risk sharing
[Learning Outcome c]

Introduction

The concept of insurance works on the sharing of risks. Whilst initially this relates
to the insured, the insurers themselves have only a finite source of funds from
policy premiums and from this amount, all valid claims need to be settled.
There will be times, therefore, when a risk (or portfolio of risks) is so substantial
that a catastrophic loss could wipe out a substantial amount of these premiums
and place the insurer in a possible closure position.

Reasons to share risk

There may be a number of individual reasons to reinsure an amount of the

portfolio. These reasons have a potential to damage the insurer’s financial
stability. An insurer must reinsure its risk portfolio:

 To protect the account against large claims

 To avoid undue fluctuations in underwriting results, ensuring a balanced set

of results each year without ‘peaks and troughs’ and comforting the
shareholders.

 To look to obtain an international spread of risks.

 To gain access to the intellectual capital of the (specialist) reinsurer.

 To gain access to alternative source of capital.

 To allow the insurer to write more business / access other markets, than its
own capital would be able to.

 When the customer retains some risks (through deductibles, excess,

exclusions) they would take more care of the property / risks, as they have
also a ‘skin in the game’

Risk Levels

At a basic level, the insurer has two particular levels to think about. Both the
levels need consideration from a “risk to insurer’s balance sheet” angle and both
require different solutions.

1. At the risk level, this could relate to very large limits being insured, involving
senior business people or celebrities. This is further accentuated when they
are in an accumulation situation i.e. all in the same location at the same time.
These may not be big enough to damage the insurer’s actual balance sheet
but could do serious damage to a particular portfolio or risk group.
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2. At the portfolio level, this will relate to all the risks in a particular group –
say Group Personal Accident or Hospitalisation covers. In these instances,
something like a major natural catastrophe (earthquake) or major pandemic
could result in enough claims to damage the insurer’s financial stability.

Risk Sharing Methods

These risks were realised by the insurers from a very early stage and when a risk
(or risks) was seen to be potentially very large, a share of it was passed to another
party in one of two ways – co-insurance or reinsurance – who would then receive
part of the overall premium.
This remains the situation and the original two methods still hold good today –
Coinsurance and Reinsurance

Coinsurance

Diagram 3: Coinsurance

Insured –
Large Plastics
Risk

Both Insurers have

Insurer 1 direct contractual Insurer 2
takes 60% relationship with the takes 40%
- is Lead insured. - is Follow
Insurer Insurer

Coinsurance is where a part of the risk is passed to another insurer, the co-insurer,
usually by way of a fixed percentage share of premiums and claims.

For example: X (the insurer) will connect with Y (the co-insurer) to say that they
have a large Personal Accident Risk involving the Board Members of ABC. The
insurer X would share 40% of the risk and the premiums with insurer Y – on
condition that they take responsibility for 40% of any claim as well, that may arise.
The insured also can distribute his risk between two or more insurers.

The company offering the risk is called the Lead company and will retain an
amount not less than the amount that the other company (or companies if
multiple sharing) takes. These other companies are called the Follow companies
and they:

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 will be expected to charge the same pricing across the policy

 may give the Lead company a small commission for passing the business to
them but generally this is not done

 will take full responsibility for handling their share of the risk and will have a
direct contractual relationship with the insured for their portion of the risk

Whilst all insurers have a legal contract DIRECTLY with the insured, for the sake
of simplicity, it is normal for the Lead Company to issue and service a Policy for
the 100% amount and note the Co-insurers’ shares by Endorsement.

Test Yourself 3

Which of the following statements is false?

A. Coinsurance is the sharing of risks between insurers

B. The insurer has a contractual relationship with the reinsurer
C. The re-insurer is the insurer of the insurer
D. The insured has a contractual relationship with the reinsurer

Reinsurance

Diagram 4: Reinsurance

Reinsurance is where an insurer X involves a specialised insurance company - a

Reinsurer – to assist in sharing the risk. The insurer (the Ceding Company or
Cedant) will decide on how much risk they can keep (the Retention) and will look
to a reinsurer to take the balance risk.
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Definition

Contractual Relationship

In coinsurance, both the Lead Company and the Follow Company (or companies)
have separate contractual relationships with the insured. In reinsurance, the
reinsurer acts as a new insurer, with the primary insurer effectively becoming the
policyholder – the contractual relationship is between the insurer and reinsurer.
The insured retains the original relationship with the insurer. The particular
significance here is that IF the reinsurer is justified in declining the reinsurance
responsibility in any claim, then the FULL amount falls on the insurer. The insured
does not have any direct relationship with the reinsurer.

Types of reinsurance

In the introduction of this topic we mentioned the two levels i.e. at a risk level
and at a portfolio level. Technically they convert to the two forms of reinsurance

(a) at a risk level – Facultative; and

(b) at a portfolio level – Treaty

(a) Facultative

Usually it is known by the abbreviation “Fac”. It is effectively a “one-off” cover.

Individual risks are offered to the reinsurer who quotes on his experience of that
particular type of risk. An example would be, an individual in India, travelling to
US for business purpose and wishing to insure his medical expenses for a limit well
above what his insurer would normally accept in the market. The limit is
substantial and so, is unlikely to be covered by the insurer’s Treaty. However,
the insurer wishes to accommodate this client and therefore, approaches a
reinsurer (probably through a reinsurance broker) to accept the portion of the
risk above their (the primary insurers) retention.

(b) Treaty Reinsurance

This method consists of an agreement between the original insurer and reinsurer
whereby the reinsurer automatically accepts a certain liability for all risks falling
within the scope of the agreement. This is an obligatory contract in which each
party foregoes certain rights –

• the reinsurer may not decline risks falling within the scope of the agreements,

• the insurer must allow all risks coming within the scope to be covered.

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Methods of reinsurance

Within the two reinsurance formats, Facultative and Treaty, there are two main
ways of handling a risk, depending on how the primary insurer and the reinsurers,
together with any brokers involved see the case – Proportional and Non-
Proportional (or Excess of Loss)Proportional

(I) Quota share

The quota share treaty is an automatic reinsurance whereby the ceding insurer is
bound to part with a fixed percentage of every risk written by it. The same
percentage is applied to every risk to determine cession in the class of insurance
as reinsured – no matter how large or small the sum insured and irrespective of
whether the risk is “good” or “bad”.

Definition

Lead Underwriter – Reinsurance

We have seen a definition of lead and follow companies relating to co-insurance.

There are similar terms that apply in reinsurance. When a broker takes a risk to
the market (details are on a note called a “broker slip”) he will approach an
acknowledged expert in the particular field (a Lead Underwriter). The Lead
Underwriter will examine the slip and detail the rate to be charged along with
the percentage of the risk he will underwrite. The other underwriters (Follow
Underwriters) will then place their respective percentages on the slip, subject to
being satisfied with the rate. The broker will move around the market until he
has 100% or more (over-subscribed) of the risk covered. Over-subscription is
frequently done as there may be an underwriter who later looks to reduce his
amount or even withdraw. In any case, 100% risk has to be placed for the
arrangement to be complete.

(II) Surplus

An insurer decides that on any given risk or class of risk, he will retain a certain
maximum amount, called retention. In reality, he may actually retain a lesser
than the said maximum amount, depending on the risk. He will reinsure the
surplus to one or more reinsurers. His retention is called one Line. So, he may
have an arrangement to reinsure 3 lines with one reinsurer. That will be called a
3 Line Surplus Treaty. If his liability on a certain risk exceeds the total of his
retention and the reinsured Lines, then the excess will have to be borne by him.
Alternatively, he can reinsure such excess by way of facultative reinsurance or by
way of a 2nd Surplus Treaty, having arranged the same in advance.

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An example: A ceding insurer’s maximum retention may be Rs. 2,000 on Fire
insurances covering Flour Mills. On such policies with sums insured of Rs. 2000
and Rs. 3000, the position will be as under:

Sums Insured Retention Reinsure

2,000 2,000 (100%) Nil

3,000 2,000 (67%) 1,000 (33%)

Non-Proportional Treaty

(I) Excess of Loss (XL)

Excess of Loss or Non-proportional treaties do not protect risk exposure but

protect loss as incurred by an insurer. The insurer does not cede risks but seeks
protection from a reinsurer against actual losses on each risk as and when they
may occur. The reinsurer agrees to pay an amount of the loss over and above (in
excess of) a certain amount (called the underlying).

(II) Stop loss

While standard Excess of Loss is related to single loss amounts, either per risk or
per event, stop-loss covers are related to the total amount of claims in a year
over and above a particular Limit or Loss Ratio.

For example, the insurer agrees to a 70% loss ratio limit and the reinsurer will
come in once the insurer’s loss ratio hits that figure (Loss ratio = Claims /
Premium X 100).

To protect the reinsurer, there will be an upper limit i.e. no further payments
from the reinsurer once the loss ratio hits 125%.

Key Distinctions

FAC TREATY
 One risk at a time  Block or class of business
FAC
 Reinsurer can accept or Vs  Usually automatic and
reject Treaty immediate
 Risk underwriting  Reinsurer not involved in
 Short run (usually a year) risk decisions
 Long term relationship

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Reinsurers – Other Services

Reinsurers can offer expertise and information on:

 Market statistics

 Pricing, underwriting and technical advice

 Policy wordings – in some markets the use of a major reinsurer’s wording and
pricing can bring instant credibility to an insurers product, but if the reinsurer
is supporting a number of other insurers with the same product, it will not
give a competitive advantage although still useful as a support to other
portfolios.

 IT solutions

 In-depth technical training (underwriting and claims)

 On-going case specific advice

 Market research and performance control

 Claims handling

Test Yourself 4

Excess of loss reinsurance is a type of __________Reinsurance.

A. Proportional
B. Non Proportional
C. Surplus
D. Quota Share

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4. Understand the meaning of risk management and the steps involved
[Learning Outcome d]

Introduction

Underwriting has a strong direct link with risk management

 Good quality risk management will identify areas where the insured can
improve the operation in a physical sense – improved construction, firewalls,
security etc. - and benefit from a reduced premium rate.

 It also reflects high quality of management within the operation and this itself
may attract a reduced rate.

 It should also reflect in an improved claims experience in the long term.

Besides this, the insured should benefit from improved working practices and
processes. Many of these may not have a direct insurance benefit but will make
for a healthier company e.g. improved management of attrition or forex issues.

Famous Last Words: “I have never been in any accident … nor was I ever in any
predicament that threatened to end in disaster of any sort.”

Said in 1907 by Capt. E. J. Smith (Captain of the Titanic)

Definition

Definitions of risk:

1. Risk is the doubt concerning the outcome of a situation.

2. Risk is unpredictability.

3. Risk is uncertainty as to the outcome of a loss.

4. Risk is the chance of a loss.

The management of risk has a number of straightforward steps, which, if followed

correctly, will take an enterprise from basic awareness through to completion of
a Business Continuity Plan (BCP).

First step is to identify – following this we can then move around the risk circle:

211
Diagram 5: Risk management

Identify

Manage Assess
Risk
Management
Evaluate

1. Risk Identification

Risk identification is all about identifying the business’ exposure to uncertainty.

This is best done by a team because each member will see the risk in a different
light e.g.

 Legal may see people risk in terms of legal suits

 HR may see people risk in terms of attrition

 Production may see people risk in terms of manual errors

 Finance may see people risk in terms of embezzlement

The risk team needs to examine the company intimately both in terms of external
and internal exposures, the market in which it operates, the legal, social,
political and cultural environment in which it exists and an in-depth knowledge
of how it operates.

Methodology

Risk identification should be done in a very methodical manner, using well

designed templates, to identify all the basic issues and bring out the more unusual.
For example, it may be that the headings of business activities and decisions can
be classified in a range of ways, examples of which could include:

212
 Strategic Operational Financial Knowledge Compliance
Management
Long-term Day-to-day Management Management  health &
strategic issues that and control and control of safety
objectives of the of the knowledge  environme
the organisation finances of resources ntal
organisation. is the  trade
confronted organisation External factors descriptio
 They can with, as it and the might include ns
be strives to effects of  consumer
affected by deliver its external  unauthorised protection
such areas strategic factors such use or abuse  data
as capital objectives as of protection
availability availability intellectual  employme
, sovereign  Machinery of property, nt
and maintenanc  area power practices
political e  credit failures  regulatory
risks  Fire risk  forex  competitive issues
 Logistics  interest technology
 legal &  Crime and rate
regulatory security movement Internal factors
changes  other might be
market system
 reputation exposures malfunction or
loss of key staff
 changes in
the
physical
environme
nt

Whilst many consultants offer their assistance, here in-house ‘ownership’ of the
risk management process is essential.

Test Yourself 5

The maximum amount that an insurer wishes to keep on any risk is known as what?

A. Acceptance
B. Retention
C. Maximum limit
D. Ceding amount

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Once the individual risk is identified, it is critical that a clear, concise and correct
description is laid down of the particular risk. This should include:

1. Name of risk e.g. storm

2. Scope of risk – what could happen e.g. ingress of water from floods

3. Result of risk – what’s the results e.g. destruction of stock, workers displaced,
no visitors

4. Severity of risk – what is its intensity (High, Medium, Low) and its probability
(High, Medium, Low)

5. Risk appetite – quantify the financial impact – how much can the organisation
take on itself

6. Risk treatment & control mechanisms e.g. insure, remove, accept

7. Potential action for improvement – actions to be taken and by whom e.g.

a. Flood plain management - Operations

b. Field drainage - Operations
c. Protect hi-tech equipment - Operations
d. Build drainage trenches - Operations
e. Liaise with local authority - Public relations

This will then form part of the risk register

Definition

Risk register: This is a centrally held in hard or soft form register of all the
identified risks accepted by the company. They will be a number of entries
against each risk under such headings as follows:

1. Title of risk (and where it fits: strategic, operational, people etc.)

2. What are potential effects of risk happening

3. Probability of risk happening

4. Severity of effect if risk happens

5. Who is responsible for risk / owner

6. Solution / counter measures

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2. Risk Evaluation

Before a risk can be managed effectively it must be examined carefully, identified

and measured in terms of the following factors, so that it may be assessed in
comparison with similar risks:

 Frequency of its likely occurrence

 Probability of loss or damage

 Severity of the effects of a loss

 Perception of the probability of loss and its effects

There is a relationship between frequency and severity which is important in

deciding what action should be taken to handle the risk.

 Frequent losses which are small and regular and which are almost inevitable.
These should be looked upon as a trade risk. However the annual aggregate
total of this type of loss can often be significant and they therefore should not
be ignored.

 Sporadic losses which are medium sized and irregular that may happen
sometime and may be able to be controlled to a significant extent.

 Catastrophes which are very large losses which may occur on rare occasions.
Such losses will probably have a devastating effect on any organisation that
they affect.

3. Risk Management

Basic components of a risk management process

Identification The recognition / anticipation of risks that

threaten the assets & earnings of a business
enterprise.
Evaluation / assessment Estimating the likely probability of a risk
occurrence & its likely severity
Prevention & control Measures to avoid occurrence of risk, limit its
severity & reduce its consequences.
Financing Determining what the cost of risk is likely to be
or might be & ensuring that adequate financial
resources are available.
Transfer Having examined the above factors the enterprise
can decide whether to retain or transfer the risk
to an external agency like insurer.

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Summary

 Underwriting income and investment income are the two main sources of
income for an insurer.

 Insurance underwriters evaluate the risk and exposures of potential clients.

 The underwriting process consists of receipt, evaluation, acceptance of risk,

determining policy terms and conditions, pricing and exposure management.

 The insurer cannot retain everything on his account and needs to examine risk
sharing options of coinsurance and reinsurance

 Reinsurance has two types – facultative (one off) and treaty (portfolio
management)

 Risk management involves 5 steps: identify, assess, evaluate, manage and

transfer.

Some important terms / definitions you have learnt in this chapter

a) File and use

b) Accumulation

c) Facultative and treaty

d) Risk transfer

e) Severity and probability

216
Answers to Test Yourself

Answer to TY 1

The correct option is A.

Underwriting process involves decision on risk acceptance.

Answer to TY 2

The correct answer is C.

An excess is another word for deductible

Answer to TY 3

The correct option is D

The insured has a direct relationship with the insurer and no relationship at all
with the re-insurer

Answer to TY 4

The correct option is B

Excess of loss covers are known as non-proportional type of reinsurance

Answer to TY 5

The correct option is B

Retention is the maximum amount an insurer will want to hold

217
Self-Examination Questions

Question 1

The 2 main sources of income for an insurance company are underwriting income
and ________ income.

A. Claims Salvage
B. Risk Management
C. Reinsurance Commission
D. Investment

Question 2

Which one of the following is not one of the prime hazards an underwriter looks
at?

A. Financial
B. Moral
C. Risk
D. Physical

Question 3

When looking for reinsurance, the underwriter works at two levels – one is at risk
level and the other is _______
A. Micro
B. Portfolio
C. Retention
D. Primary

Question 4

_______ Covers are related to the total amount of claims in a year over and above
a particular limit or loss ratio.

A. Proportionate
B. Stop Loss
C. Surplus
D. Treaty

218
Question 5

The two ways of measuring risk within a risk register are probability and
__________

A. Severity
B. Financial
C. Ownership
D. Transferability

219
Answer to Self-Examination Questions

Answer to SEQ 1

The correct option is D.

The 2 main sources of income for an insurance company are underwriting income
and investment income

Answer to SEQ 2

The correct answer is C

Financial, physical and moral are the three hazards – risk is the odd one out

Answer to SEQ 3

The correct answer is B

When looking for reinsurance, the underwriter works at two levels – one is at risk
level and the other is portfolio level

Answer to SEQ 4

The correct answer is B

Stop Loss covers are related to the total amount of claims in a year over and
above a particular limit or loss ratio.

Answer to SEQ 5

The correct answer is A.

The two ways of measuring risk within a risk register are probability and severity

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 CHAPTER 7
RATING AND PREMIUMS
Introduction

In the Indian insurance market, it often seems that price is not king but God and
this has been clearly demonstrated with the substantial fall in rates following the
withdrawal of the All India Tariffs.

Fortunately, the Indian market still benefits from reasonable income from its
investments, due to decent interest rates. However, it must be clarified that at
the moment the cushion of investment income applies only to the Public Sector
companies, who have been around for a long time. The private companies have
been around for about a couple of decade only and so, are in the process of
building reserves. Be that as it may, in the longer term, all insurers must ensure
that they generate underwriting profits.

The most important step towards achieving that should be the ability to charge
appropriate rates, particularly in a market where previously certain products
were highly subsidised e.g. Health, Liability, Accident, etc.

In this chapter, we will look at the basics around pricing and also look at soft and
hard insurance markets.

a) Understand the premium pricing mechanism

b) Understand the concept of soft market and hard market

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1. Understand the premium pricing mechanism
[Learning Outcome a]

Premiums In Claims Out

Insurance companies create a pool by collecting premiums from a group of people,

who are exposed to the same risk, and pay out claims from the same pool to those
who suffer from the risk.

Quotation: An English Act of Parliament in 1601 best sums it

up:
“The loss lighteth rather easily upon many than heavily upon
few.”

Pure premium plus expenses

This was the very basic rule that many of the village “co-operative” insurance
arrangements worked on – whether it was for livestock deaths or villagers’
funerals – everybody donated a small amount knowing that a large amount would
be available in the case of a particular contingency.

However, as the markets became more and more sophisticated, other factors
came into play. Some of these factors include:

1. Management expenses

These are the ongoing expenses that an insurer will have to incur as he runs the
business – they will include headings such as:

(a) Salaries

(b) Travel and Accommodation

(c) Office expenses e.g. rent telephones, etc.

These can range from relatively low levels in the mid-teens to figures close to
30%.

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2. Commissions

This is particularly relevant in the corporate insurance market which, globally,

tends to use professional, agents, brokers and other insurance intermediaries as
the main distribution method. Their products are not commoditised and
frequently need tailoring or customisation. Obtaining quotes from a single insurer
does not make business sense and the insured does not have the time or ability
to discuss with all potential markets. Commissions in India for the broking market
range upto 17.5% (maximum).

3. Claims expenses

In addition to paying out the cost of the claims, the claims department also has
some expenses in handling the claim – in particular, they could include the use of
expert witnesses, qualified surveyors, etc.

These three major expenses, together, constitute a major chunk of the insurer’s
total expenses. For every Rs. 100 collected, there is likely to be an outgo of upto
35% or so, coming from the above expenses – leaving only 65% for paying claims
and a small percentage towards profit.

Test Yourself 1

2000 factories require a Sum Insured of Rs.10 crores each. Statistically, we know
that 2 factories get destroyed by fire each year. However, we do not know which
two!

So, if the losses are to be paid for by all of the 2000 factory owners, what should
be the contribution by each factory owner by way of pure premium?

A. Rs. 75,000
B. Rs. 1,00,000
C. Rs. 2,00,000
D. Rs. 3,00,000

So, looking at the test above, we can calculate the “pure” premium, which will
then assists us in working out the BOOK Rate.

Definition

Pure premium rating method: This approach reflects the expected losses. It is a
calculation of the pure cost of, say, property or liability insurance protection.
This is without any loading for the insurance company's expenses, premium taxes,
contingencies and profit margins. The pure premium is calculated as follows:

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Pure Premium = Total Amount of Losses Incurred per Year
Number of Units of Exposure

Book Rate Theory

In theory, a book rate is built up as follows:

PROFIT

EXPENSES
Book
REINSURANCE Rate
COST

COMMISSION

PURE RISK

The pure risk premium is a quantitative assessment of the liability of the risk.

Technical pricing (the book rate)

This develops from the Pure Premium method mentioned above and goes back to
First Principles.

It relies on the insurer having quality statistical information, based on historical

loss details and exposure information, collated at market level or intra-company
e.g. national fire statistics, weather records, crime statistics etc.

The underwriter can then make comparisons with their experience with similar
risks and attempt to model the pattern of potential claims.

If there is likely to be a delay in recording or settling of claims, as there is in the

long-tail liability classes, this needs to be considered, along with the investment
income that will accrue in the reserves.

Any catastrophe potential will also need to be built in.

From a comparison of the loss experience over a certain period, compared to the
exposure at risk over the same period, a technical rate can be identified, which
can then be adjusted for expenses, commission, small level of profit, etc.

This will be converted to produce a rate per cent or per mile on sums insured,
wage roll or turnover etc. depending on the type of risk and type of policy as also
based on the level or rate required for the average risk. Such a rate is called the
“Book Rate”.

224
Perhaps the most difficult challenge is modeling future claim patterns, when the
business environment is changing.

There is no single right way or wrong way to produce a rate from first principles.
However, over the long term, the most successful underwriters have managed
consistently to combine good statistical modeling with a flair for anticipating
changes in the environment.

Definition

Exposure: in this definition, exposure is the measurement of how big a risk is. For
example:

Property Insurance: The Sum Insured on the Building or Contents.

Employer’s Liability or Workmen’s Compensation: The wage roll on a particular
trade classification.
Products Liability Insurance: Turnover on the relevant product line.

Note: The exposure and the benefits may not always be the same e.g. in
Products Liability the turnover may be the best form or exposure measurement
but the benefit will be based on the Limit of Liability.

Test Yourself 2

Which of the following does NOT form a part of “Book” price calculation?

A. Claims Costs
B. Management Expenses
C. Commission
D. Investment income

Trends
As mentioned above, the insurer needs to collate the historical information
relating to losses / claims and exposures. However, it is critical that notice is
taken of trends – past, present and future – that will affect the assumptions
coming from these statistics. This should be done in a structured format and there
are a number of areas that need to be considered by the portfolio underwriters.
Some of these indicators / trends can be:

1. Inflation: In certain classes, the claims costs and the exposures will not be
consistent as regards inflationary impact. For example, hotels may be rated
on the number of bedrooms as regards the Public Liability Risk – projected
claims experience should take into account inflationary changes.

225
2. Political: Changes in the political landscape can change a country or part of
a country from high hazard as regards, say, crime risks, to low hazard, over
a relatively short period of time (and vice versa). Also, issues such as
terrorism have increased significantly over the past 20 years or so.

3. Technology: Over the last 2 decades technology has vastly improved safety
standards in many industries, by removing much of the manual involvement.
For example, printing industry has changed significantly with computerized
presses and “just in time” raw materials strategy etc. removing some of the
safety hazards and improving the fire risk.

4. Legal Changes: in the local legal environment, litigation costs can change
significantly. India’s litigation costs are now increasing as the wealth of the
middle class and awareness of liabilities owed to them, grow steadily.

5. Attractiveness: Items such as mobile phones, laptops, etc. can be very

attractive for one year and then falling prices and greater availability move
them into commodity areas and relatively unattractive mode in comparison.

6. Others: may include climatic changes and global warming etc. for example
what is the likely effect of global warming on the flood risk?

Example

Piracy was until recently something that was at its peak; however; over the last
decade this has changed significantly.

Somali Piracy: International Maritime Bureau (IMB) reported on 14 January 2010

a significant increase in worldwide piracy attacks in 2009 compared to 2008 (from
293 to 406). Somalia accounted for half of the attacks in 2009. Somali pirate
attacks increased from a total of 111 in 2008 to 217 in 2009. The IMB also reported
that there had been a significant shift in 2009 in the location of the attacks, from
the Gulf of Aden to areas further away from the Somalia coast in the Indian
Ocean. There had been, however, a decrease in successful attacks. In 2009 there
were 47 hijackings off the coast of Somalia compared with 42 in 2008. At one
time, Somali pirates were holding more than ten vessels. To date, ransoms paid
to pirates operating off the coast of Somalia have been minimally estimated at
$30 to $50 million whereas other estimates are considerably higher.
(Courtesy Security Council report April 2010)

Classification

To assist in getting the best possible technical pricing, the insurer must have high
quality data collection. This will ensure that the best risks are called upon to pay
the cheapest premiums and the worst risks are charged the most.
For each class of business and sub-class within, appropriate management
information must be collected and maintained, including:
226
 Classification and coding of risks to a detailed level

 Factors which could influence claims frequency and / or severity

 Premium data

 Claims data

 Exposure measurement

During the nationalisation period, with the same market agreements and tariffs
used across the market, there was limited / no computerization, resulting in
collection of statistics being by manual reporting which was inadequate in many
instances. It also meant the coding was unsophisticated and outdated.

However, the Indian insurers appreciate the value in building information

databases and the modern software programmes as available; mean the
collection of such information is much easier.

Many are looking to introduce coding systems, similar to those provided by the
International Labour Organisation (ILO) which have developed a consistency
globally – India’s National Industrial Classification is very similar to the US
Standard Industrial Classification (SIC) and the UK SIC and Australia / New
Zealand’s ANZSIC

SIC codes
This system classifies the Trade Codes in a 5 digit number. An example using
manufacturing at its highest, and getting down to a single occupation, may
demonstrate this best:

Section ‘D’ Manufacturing

Division 17 Manufacture of textiles
Group 171 Spinning, weaving and finishing of textiles
Class 1711 Preparation and spinning of textile fibres
Sub-Class 17111 Preparation and spinning of cotton fibre including blended
cotton

Refinements

Once the Trade Classification has been collected, it is important that the insurer
collects the sub-data around the particular item and, where possible, assigns
codes.

Where possible, these should be codified, although there will be times when a
risk attracts a loading or discount, that is unclassified.

227
Example

Property (Fire) – Construction (above / below norm), Fire Extinguishment,

Deductible
Property (Burglary) – Occupancy (someone permanently on premises), Deductible
Motor –Restriction in Drivers, Deductible

All of these can be collected and used to refine rates as tightly as possible.

Some International Motor Insurance Companies boast that they can obtain and
interpret Management Information (MI) so fast that they can change rates on a
daily basis if need be.

Test Yourself 3

When we look at claims trends, we look at a number of factors. Some of these

are listed below. Which factor is not to be considered from this list?

A. Inflation
B. Technology
C. Legal Changes
D. Exposures

Burning Cost

This method is much easier than going back to first principles.

Basically, the underwriter:

 identifies, say, the last five years’ claims experience

 divides that by 5, to get the average
 adjusts it for any special circumstances e.g. inflation
 identifies the total exposure for the equivalent
 divides by 5, to get the average
 divide the average claims by the average exposure

Adjustments should be made:

1. In turnover and / or wage figures and the loss experience for acquisitions or
disposals, that are or are no longer a feature of the risk going forward.

2. Changes in Limit of Liability if it impacted on Claims

3. Claims that may have been excluded in certain years (underwriting decision
by endorsement) but paid in others
228
This ‘burning cost’ is then translated into a rate by adding allowances for
expenses, commission, claims inflation, profit, etc.
This is essentially retrospective rating and considerable care is needed if it is to
be used as a guide for future performance (it has been compared to steering a
ship by looking at the wave).

It is, however, an acceptable pricing mechanism for some types of reinsurance,

where the previous year is being priced in arrears. Less reliable is its use for rating
in individual cases, particularly in liability.

This approach clearly works against the law of large numbers, so any results need
to be checked against other methods.

The example given relates to Liability Insurance but it can be used in other classes
as well and, in larger cases, used as a marker to check whether the technical rate
is providing the correct risk premium.

When to use the burning cost method

There are circumstances where the technical guide rate may not be appropriate
as the sole method of premium calculation. For example, where:

 the risk is a diversified industrial or conglomerate one

 where the claims experience produces an inconsistent result over a minimum

of 5 years (excluding current year)

Information necessary to complete a burning cost calculation

The information necessary to complete a burning cost rating calculation is:

 Claims experience split between claims paid and claims outstanding

 Turnover or wages

 Previous insurer(s) for each of the past five years,

Adjustments

Adjustments should be made in turnover and / or wage figures and the loss
experience for acquisitions or disposals that are or are no longer a feature of the
risk going forward.

Reasons for a rapidly improving or deteriorating loss experience

These need to be identified and reflected in the rating decision. For example, it
may be that the insured has instituted a risk improvement programme, which is
producing results that can be sustained and relied upon (see below).
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Large Losses

Although the claims experience is an accurate reflection of how a risk has

performed, there may be circumstances where a claim is disproportionately high,
compared with the general claims experience, the inclusion of which would
distort the overall burning cost picture.

Claims of this type need to be judged on their own merits, to decide whether
they are truly exceptional events and are therefore, to be discounted from the
calculation, or to be retained and smoothened at a certain level, in order to
reflect more accurately the future loss potential.

In either case, there needs to be a supporting rationale, clearly indicated in the

workings on file. Before any claim is discounted, careful attention should be paid
to the catastrophe potential of the risk i.e. the likelihood of such losses recurring.
Where there is no history of such losses, the potential needs to be assessed and
taken into consideration as necessary.

Other Claims Issues – Accuracy and reliability of outstanding claims reserves

At any time, the greater part of the loss experience is likely to be in the form of
unpaid claims. For new enquiries, it is useful to take note of the information
submitted at the previous renewal. As well as providing an indication of the
previous insurer’s reserving procedure, it also gives a more accurate picture of
claims development and changes in the number & size of claim, bearing in mind
the standard estimates and changes in the notification procedure. Improving /
deteriorating claims experience may be due to changes in the type of work
undertaken.

Risk Improvement

a) Date and details of any Liability surveys, including those (or their equivalent)
by other insurers.
b) Any subsequent change in claims frequency.

Changes in Cover
Where the insured wishes to take out additional coverage, this increases the
potential exposure and unless accounted for specifically in the past experience,
will not be reflected in the burning cost calculation.
For example, addition of financial loss cover
Increases to the limit of indemnity also require specific underwriting and an
additional premium loading may be applied.

Inflation

a) accuracy of estimates for wage roll / turnover

230
b) Where there have been large fluctuations - increases or decreases in
wages/turnovers, the burning cost rate may be unreliable and where
appropriate, these variations can be smoothed.

c) Whether additional turnover has been caused by:

i. increased output

ii. fluctuations in the price of raw materials, without a comparable increase

in output

iii. mergers or takeovers

iv. Turnover figures for financial services or commodity companies getting

influenced by market conditions i.e. large increases/decreases in trading
prices may not necessarily be linked to exposure.

Legislation

Has the trade concerned been affected by legislation during the period under
review e.g. relaxation in products safety law may increase the likelihood of
claims; changes in environmental law may have an impact on the premises risk.

Rate on Line

This rating method should be used to reflect the price per million, in local
currency unit, applied to the limit of indemnity, or to reflect premium needed
for a period of years to cover the cost of the limit(s) provided. It is primarily used
for accounts, which reveal characteristics of high severity / low frequency
potential and risks with high limits of indemnity.

It is inappropriate for smaller risks, as it takes no account of exposure.

Market Practice

IRDAI has directed the burning cost in a particular line of business and segment
of risk for the industry as a whole as published by Insurance Information Bureau
(IIB- iib.gov.in) from time to time is to be considered. The Industry wide loss
(Burning) cost must be taken into consideration by all insurers while pricing the
product. (b) The burning cost of a particular risk on the Insurer`s own past
acceptances, can be considered for all available periods. (c) Insurers can choose
lower of the (a, b) above. (d) Since the burning cost for property risks as published
by IIB are, for perils other than Nat cat (Natural Catastrophe) perils like STFI
( Storm, tempest, Flood & Inundation), Terrorism and Earthquake, insurers need
to consider adequate pricing for said risks, if offered.

231
Example

A percentage, derived by dividing the premium by the limit

For example, a Rs. 100 crores catastrophe cover with a premium of Rs. 2 crores
would have a rate on line of 2%.

Test Yourself 4

If the total premium is Rs. 50,000 and the Limit of Liability is Rs. 20,000,000;
what is the rate on line?

A. 2.5%
B. 0.25%
C. 4%
D. 0.4%

232
2. Understand the concept of soft market and hard market
[Learning Outcome b]

Hard and soft markets are a part of the “insurance market cycle”. They are a
function of supply and demand as well as history of losses.

Soft Market

In a “soft market”, insurance companies (the underwriters) are eager to write

new business and to hold onto existing business; and are likely to offer coverage
improvements and / or reduced premiums.

A soft market starts when

 Capacity is available

 Insurers’ results have improved

 Insurers have achieved their profit goals

The insurers know that if they can

1. write more volume; and

2. maintain their expenses at more or less constant levels; and

3. anticipate cost increases (inflation, actual cost of claims and claims

adjustment costs);

They should be able to make a higher return, if they can “simply” add more
written premium to the equation.

In theory, the change from hard to soft markets happens in a controlled fashion
and some insurers can be extremely successful at the outset.

However, every time a “soft market” begins, all the insurers believe that they
will not make the same mistakes or make bad decisions as they did in the past.

Problems: They occur when this phenomenon takes its own direction and more
and more insurers feel the same pressure at the same time to increase volumes.

This is because there is one constant out there – even with an expanding economy,
the amount of risks and the number of prospects is generally finite and so also
the amount of written premium to be tapped is finite.

What happens then is that the pricing gets lower and companies do not make
enough net income, thereby increasing the combined ratios to an unacceptable
level.
233
Some insurers start to get concerned that if they do not cut prices even more,
they will lose market share. The spiral continues until there is no more room to
cut prices and the “hard market” starts.

There is usually a severe catastrophe connected with the end of this market,
acting as a catalyst or “the last straw” to make the change.

Hard Market

In a “hard market”, insurance companies will often increase premiums and take
back some of the coverage enhancements, they provided during the soft market.

Once the underwriter has realised that “enough is enough”, the hard market
usually intensifies immediately. There may be a very short period of testing the
impact of rate increase, before most insurers implement a philosophy of pricing
risks at “what the market will bear.”

Hard markets tend to come mainly due to two reasons:

1. A capacity issue

Results can be so bad that companies have to shed accounts, because they do not
have the Policyholders’ Surplus to support the writing of any more business. This
can be a really bad situation for certain insured’s, especially those with poor
exposures, since these are the accounts that are cancelled first. An example is
the Fire premium in India going up in 2020-21. GIC Re tightened their underwriting
and the direct insurers had to pass on the cost to the customers. Consequently,
the Fire Insurance market became hard

2. An underwriting issue

There is a significant portfolio review and accounts that do not have good loss
ratios are cancelled or have significant price increases, while profitable accounts
receive “healthy” price increases. There is likely to be no surplus problem, so
that carriers can write as much business as they want but are extremely selective
in what they write. The theory here is that the hard market will make the insurers
profitable again. It then continues into a desire to write more premiums when
insurers are profitable, before shifting to a “soft market” and the cycle continues.

Catastrophe

One element that is rarely included and needs special mention relating to all the
above pricing methods is to include an amount for Catastrophe Funding. This is
always difficult as it is unlikely to have appeared in any of the claims experience
figures (and if it has, it is too large to build into the rating itself). However it is
a fact of life that sooner or later there is going to be a significant catastrophe
and the portfolios should reserve for such an event. Terrorism pool in India have

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large capacity and much less claims, creating a soft market for Terrorism covers
in India.

Commercial Pricing

All the above notes relate to some form of getting the right price for the risk.
However, despite getting the right price for the risk, there will be times when an
argument is put forward for reducing the premium below the technical, burning
cost or book rate.

For example, it might happen to gain an entry into a serious block of business and
the insurer needs to have a “loss leader” or it might be to retain a large piece of
business, where, otherwise, the loss of it would have implications on critical mass
of the portfolio and / or the insurer’s reputation.

In these instances, management may be willing to give an additional “commercial”

discount – it has no underwriting logic but does have business logic. However,
such authority must be given with care. Experience has shown that once
commercial discounts begin to be given freely, they become devalued and result
in significant under-pricing of the account.

Operational Premium Issues

Rating the Policy

Having built our technical rate we can now apply it in an operational environment.
We will build underwriting manuals with sections on the primary rating base.
Examples of these are likely to be as follows:

Insurance Exposure Classification Additional rating /

coding underwriting
features
Fire Rate % or per mille The individual Construction,
Insurance on Buildings / risks will be Fire Extinguishers,
Contents Sum divided by trade Undivided Floor
Insured (often on and ideally by Space,
reinstatement sub-process Deductible, etc.
basis ex-stock)
Business Rate % or per mille The individual In addition to those
Interruption on Gross Profit risks will be following the fire
Sum Insured (often divided by trade rate, we will have
on reinstatement adjustments for
basis) indemnity period
Burglary Rate % or per mille The individual Security i.e. Burglar
on Contents Sum risks will be Alarms,
Insured divided by trade Other security
devices, etc.

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 Discounts for larger
risks,
Deductible, etc.
Third Party Rate per mille on The individual Adjusted for
turnover or rate % risks will be Limit of Indemnity,
on wage roll where divided by trade Deductible, etc.
manual work at and ideally by
third party sub-process
premises
Products Rate per mille on The separate Adjusted for
Liability turnover product risks will Limit of Indemnity;
be divided by US & Canada
trade exposures attract
loadings

Test Yourself 5

When insurance companies undercut each other to grab market share by reducing
premium, it is known as __________

A. Soft Market
B. Hard Market
C. Competitive Market
D. None of the above

On all risks, we will now examine the claims scenarios.

Initially we must remember that the insurer is in the business because he is willing
to pay claims. We would, therefore, tend not to load for the single claim, unless
the circumstances were unusual and showed poor management or some other
underwriting weakness.

Where there is however a run of claims, we would examine the circumstances

and liaise with the insured. Is it that all (or a majority of) claims have arisen from
a single cause that has now been eradicated?

Example

Motor Insurance: Investigating a number of motor claims we find that they were
all caused when a certain individual was driving. This individual has now left the
company or been removed to a non-driving role.

Fire Insurance: Following a series of fires at the old premises, the insured has
moved to purpose-built new premises of superior construction.

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There is always a temptation to look to recoup the losses when an insurer has a
run of claims but they must be aware that competing insurers will be only too
happy to take a piece of business away where it appears the risk management has
improved the risk substantially.

Where a risk is big enough, we may look at a burning cost basis – this is a common
rating method in Europe with a large Liability or Motor Fleet risk. Looking to see
what the Claims Cost is per unit (in a turnover or wage roll base for Liability or
per motor vehicle for a fleet).

Year Total Claims – Paid Number of Average Cost of

and Outstanding Vehicles Claim per Vehicle
(Rs.) (Rs.)
04/05 12000000 50 240000
05/06 15000000 53 283019
06/07 4500000 57 78947
07/08 1600000 60 26667
08/09 18000000 61 295082
TOTAL 51100000 281 181851

Now we have an estimated claims cost per vehicle over 5 years of Rs. 1,81,851

If we work to a Loss ratio of 65% this should give us a premium of Rs. 2,79,770 for
each vehicle in 2009/10.

However, there are a few small comments to be made here:

1. We need to build in the inflationary increases in the earlier years – for instance,
the average cost of the claim in 04/05 (240000) will need to be brought up to
08/09 real terms to be fully accurate.

2. We may need to investigate the trends in the claims – an unusual dip in 06/07
& 07/08 – was there any reason for this? Does it need to be factored in?

3. Element of Catastrophe reserve to be included.

However, it does give a reasonable illustration as to how this method can be used
for rating.

No Claims Bonus / Malus

In motor covers (and occasionally in other classes), there is a recognised scale of

discounts for risks with no claims or limited claims – a No Claim Bonus

This is used in many countries to encourage the insured to drive carefully and, if
there is a small claim, to consider treating that as “self-insured” rather than

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jeopardising his no claim bonus, which can be substantial after say 4 years of
claims free driving.

As per the Indian practice, when the insurer settles a claim, the insured loses all
previously accumulated No Claim Bonus. However, he can again continue to earn
No Claim Bonus for claims free years at subsequent renewals.

Loading / Malus

There is also a reverse scenario where insurers load the premiums as per a
published schedule when the claims experience is bad. Such loading of premium
when the claims experience is poor is known as Loading / Malus. Conditions when
such loadings are done and the amount of loading are disclosed in advance. In
many situations, certain caps are imposed on the loading. Indian Motor insurance,
for instance, caps some loadings at 100% and some types of loadings at 200%.

The data on the prior accidents to a vehicle, insured with any insurer, is now
available on the site of IIB (available to Insurers on specific access basis) and they
need not approach the previous insurer for the details.

Section 64 VB, Insurance Act 1938 (as amended in 1967)

In many parts of the world, if the business is through an agent or a broker, the
insurer will give the cover on credit with up to a 3-month period. However, in
India the relevant rule is laid down under Section 64VB of the Insurance Act
(copied below) which states that the insured MUST pay the premium before the
cover starts.

Section 64 VB, Insurance Act 1938 (as amended in 1967):

No risk to be assumed unless premium is received in advance.

64VB. (1) No insurer shall assume any risk in India in respect of any insurance
business on which premium is not ordinarily payable outside India unless and
until the premium payable is received by him or is guaranteed to be paid by
such person in such manner and within such time as may be prescribed or unless
and until deposit of such amount as may be prescribed, is made in advance in
the prescribed manner.

(2) For the purposes of this section, in the case of risks for which premium can
be ascertained in advance, the risk may be assumed not earlier than the date
on which the premium has been paid in cash or by cheque to the insurer.

Explanation: Where the premium is tendered by postal money-order or cheque

sent by post, the risk may be assumed on the date on which the money-order
is booked or the cheque is posted, as the case may be.

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 (3) Any refund of premium which may become due to an insured on account of
the cancellation of a policy or alteration in its terms and conditions or
otherwise shall be paid by the insurer directly to the insured by a crossed or
order cheque or by postal money-order and a proper receipt shall be obtained
by the insurer from the insured, and such refund shall in no case be credited
to the account of the agent.

(4) Where an insurance agent collects a premium on a policy of insurance on

behalf of an insurer, he shall deposit with, or dispatch by post to, the insurer,
the premium so collected in full without deduction of his commission within
twenty-four hours of the collections excluding bank and postal holidays.

(5) The Central Government may, by rules, relax the requirements of

sub-section (1) In respect of particular categories in insurance policies.

The IRDAI had notified Regulations with regard to payment of premium, in 2002
as under

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240
241
Summary

 Pricing is critical to the success of any insurance venture. Underwriting profits

should be a consistent target.

 Basic pricing – premiums in : claims out – leads to pure premium

 Pure premium needs adjustment for all the working expenses and normal
outgoings of any insurer

 Technical rate and book rate are critical for long term underwriting profit

 Operational premium issues include rating, catastrophe loading and

commercial discounting

Some important terms / definitions you have learnt in this chapter

a. Loss ratio
b. Pure premium
c. Technical rate
d. Burning cost

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Answers to Test Yourself

Answer to TY 1

The correct option is B

To create this fund the amount of premium each factory owner would need to
contribute is – Rs. 1 lac

Rs. 20,00,00,000 divided by 2,000

Answer to TY 2

The correct option is D

Investment income does not form part of the book price formula

Answer to TY 3

The correct option is D

Exposures will not be considered as an extra factor – they will be taken into
account in the base calculation

Answer to TY 4

The correct option is B

The correct rate is 0.25%

Answer to TY 5

The correct option is A

When insurance companies undercut each other to grab market share by reducing
premium it is known as soft market

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Self-Examination Questions

Question 1

“The loss lighteth rather easily upon the many than heavily upon the few.” – The
English Act of Parliament in 1601. What does this best sum up?

A. Concept of the insurance pool

B. Concept of responsible underwriting
C. The need for more insurance companies
D. The need for responsible claims handling

Question 2

Pure premium is defined as which of the following?

A. Total Amount of Claims Incurred per Year divided by the number of

exposure units
B. Total Amount of Claims divided by Premium
C. Total premium Divided by the Total Claims
D. Total premium Divided by the number of exposure units

Question 3

Within the calculation of technical pricing there are a number of future

trends the underwriter needs to consider – 4 are given below. Which one
is incorrect?

A. Inflation
B. Claims made during the year
C. Technology
D. Legal Changes

Question 4

Which of the following is unlikely to be a rating / underwriting factor in

Fire Insurance?

A. Construction
B. Fire Extinguishers
C. Building Security
D. Deductible

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Question 5

The claims loading applied to a policy is known as ________

A. Claims Bonus
B. Claims Malus
C. Claims Fides
D. Claims Minus

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Answer to Self-Examination Questions

Answer to SEQ 1

The correct option is A.

It is related to the concept of the insurance pool

Answer to SEQ 2

The correct answer is A

Total Amount of Claims Incurred per Year divided by the number of exposure units

Answer to SEQ 3

The correct answer is B

The claims will certainly be considered by the underwriter but not under the
heading of future trends

Answer to SEQ 4

The correct answer is C

Building security is likely to be a Burglary rating/underwriting factor but not Fire

Insurance

Answer to SEQ 5

The correct answer is B

The claims loading applied to a policy is known as Claims Malus.

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 CHAPTER 8
CLAIMS
Introduction

The main reason why people buy insurance is for peace of mind (usually the
individual) or protection of a company’s balance sheet (the corporate). Buying
insurance gives a comfort that if something disastrous does happen then the
insurance company will support the insured through the handling and settlement
of the claim, so that the affected individual or company can once again stand on
its feet.

A company’s claims service is, therefore, the principal point of service as regards
the insured. Failure in this area can cause irreparable damage to the insurance
company’s reputation; lead to loss of valued customers, and even lead to law
suits being filed against the company. This does not, however, mean that every
claim should be paid. Claims have to be handled very judiciously.

The reverse of the above is a well handled claim, which could be rewarded by a
happy customer by way of renewing his cover with that insurer year after year as
also spreading a good word about the insurer; which might bring in new customers.

This chapter will take us through the basics of claims handling and the various
stages in the claim settlement process.

a) Understand the basics of a claim

b) Work through the claim process
c) Understand the process of claims management
d) Identify some of the claim related main issues and problems
e) Grievance Handling

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Case Study

The terrorist attack of September 11, 2001 on the Twin Towers of the World
Trade Centre in New York was the colossal loss in the history of the insurance
industry. Over 100 insurers around the globe had to shell out an estimated USD
40 billion or more dollars to settle thousands of claims.

It is an extreme case study of so many facets of insurance claims:

 it resulted in numerous life insurance claims from the deaths of the people
on board 4 aircrafts and people who died in the twin towers and outside it,

 it impacted aviation insurance in a big way,

 it changed the dynamics of property insurance (terrorism),

 it also impacted business interruption insurance, liability insurance and

health insurance, etc.

The shock waves from this event will impact the pricing and availability of
insurance coverage for years to come.

The above 9/11 terrorist attack case study highlights the importance of insurance
and the claims settled by the insurance companies, which slowly but surely
resulted in business regaining confidence and returning back to normalcy over a
period of time.

India also experienced a similar situation, though not of that magnitude, in 2008
when terrorist attacked Mumbai.

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1. Understand the basics of a claim
[Learning Outcome a]

Claims
As a general rule; claims incurred constitute the largest cost for any insurer. Out
of every Rs. 100 that the insurer receives as premium, he is likely to pay out Rs.
65 or more to settle claims, with the balance of Rs. 35 being required for covering
the other expenses such as commissions, management expenses, etc.

A claim is also the prime time when the insurer can make the best impression on
the policyholder (as the marketers call it – the moment of truth).

So, we have a dichotomy of the insurer attempting to reduce his claims costs,
improve their bottom line and satisfy their shareholders and at the same time
ensuring that the best possible services are offered to the customer and ensuring
that he is fully indemnified within the policy wording and at the lowest possible
cost.

What is a claim?
The payment of claims is the prime reason why the insurer is in business.
Insurance is an unusual industry compared to most other industries. In insurance
business, nothing other than a policy document and a promise to pay a claim is
given to the customer when he hands over his or her premium.

It gives peace of mind to an individual that he has financial security to the extent
he is insured. The corporates also gets satisfaction that the major risks to their
balance sheet are taken care of.

It’s the insurer’s responsibility to satisfy the above by fair and equitable handling
of a claim, should an insured contingency arise.

Definition

Claim: a claim is a notification to an insurance company for compensation for loss

on the happening of an insured event, under the terms of the policy.

What happens when a loss occurs?

The insured gets a shock but then checks up whether he has insurance covering
the particular loss and then notifies the loss to the concerned insurer and the
claim process begins.

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Example

Situation 1

Motor Insurance: the insured is driving down the road, loses concentration and
collides with an oncoming vehicle (the third party). By law, he is required to have
Third Party Insurance for injury to the person in the other vehicle if he (or his
driver) can be proved negligent. The third party insurance will also provide cover
for damage to the other vehicle. But then what about his own vehicle? In that
case, he will need to check whether he has “own damage cover” cover which will
insure the damage to his own vehicle.

Example

Situation 2

Fire Insurance: there is a serious fire in the insured’s factory. Unless deliberately
caused by the insured (arson), it is likely that the fire policy will compensate for
the financial loss in respect of the building damage; together with the damage to
the contents (machinery and stock). The insured will need to check to ensure
that there are no clauses or warranties restricting cover in certain areas or
processes e.g. excluding claims where flammable liquids have been involved.

Example

Situation 3

Liability Insurance: the insured has visitors to his offices. An employee has
negligently left a large box in the corridor. One of the visitors comes in and trips
over the box, fracturing her ankle. She believes that the insured is at fault and
sues for damages.

Policy conditions relating to claims

The responsibility of proving that a claim falls not just within the policy terms but
also that all the policy conditions are fulfilled, is entirely the insured’s.

What the insured must do?

The procedure varies from insurer to insurer but the common practice is as follows:

Heading Comment
Notice to the insurer The insured must
- immediately
250
  minimise the damage and recover any missing
property
 inform the insurance company in writing
 get in touch with the relevant authorities (e.g.
police, if it’s a theft)
 Send any writ or summons and not admit ANY
responsibility (if Liability)
Notice to the insurer The insured must
– within a period as  put a claim in writing, detailing the amount lost or
may be specified by damages
the particular policy.  advise of any other insurance, possibly covering the
loss
Provide detailed The insured must provide all relevant information,
information to the books of accounts etc. to the insurer again within the
insurer specified time or extension thereof if agreed by the
insurer.
Possession to the The insured must allow the insurer to take possession
insurer – Property of any building or property that is the subject of the
Claims claim If the insurer so desires. However, this does not
allow the insurer to abandon the property.
No admission of Where a claim involves a Third Party suing the insured,
Liability – Third Party it is a condition that the insured must make NO
Claims admission of liability but pass the summons, writs,
claims for damages, etc. directly to the insurer

Test Yourself 1

Rajesh’s car collides with another car due to his / driver’s negligence and the other
car’s driver is injured. Who will pay for the claims of the other driver?

A. Rajesh will pay from his own pocket.

B. The other driver will have to pay on his own for the treatment costs as he does
not have any insurance
C. Third Party Insurance Pool
D. Rajesh’s insurance company

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 2. Work through the claims process
[Learning Outcome b]

This is a relatively consistent process, involving a number of well-defined steps

as below. The basic objectives are to:

1) provide efficient and effective customer service; and

2) meet the needs of the customer (or third party claimant)

in accordance with the terms and conditions of the policy, at the lowest cost
(i.e. the actual cost to settle the claim and the costs of administering the
claim).

A. Contingency occurs

An event (mishap) has happened, which the insured believes, falls within the scope of his /
her policy.

B. Initial intimation of a claim

It is a condition of most insurance policies that the client has to provide initial details of the
claim in writing, immediately when it happens. This enables the insurer, in complex claims,
to get on the site as soon as possible.

At this time, after verifying that the claim falls under the concerned policy, the insurer will
register the claim with the initial details, such as:
1. Policy number
2. Date of loss occurrence
3. Location of loss
4. Brief circumstances of loss
5. Preliminary reserve – a rough indication of potential costs
Depending on the size / complexity of the loss, the insurer may wish to appoint an
independent Loss Assessor (surveyors) to get immediately involved with the investigation of
the loss. Any loss for Rs. 20000 or more must be surveyed by licensed insurance surveyor.
(Or for amounts as specified by the Authority from time to time)

Example

If there is a severe fire, the insurer would want his Loss Adjuster and Risk
Engineers to reach the site immediately, to ensure that the loss to the insurer
can be reduced as much as possible. For good reason, the Fire Brigade has a prime
responsibility to save lives first – not look after property. Without hindering the
Fire Brigade, prompt arrival of the risk engineers and action to save the property,
can reduce a claim significantly.

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 C. Forwarding of further details
Under many policies, the insured has a responsibility to report a claim immediately
to the insurer. However, he or she will have little by way of details, depending on his
own investigation of what happened and what damage has been caused.

It may not be possible for the insured to furnish detailed information at the initial
stage. The insurer generally has a claim form to elicit the required information and
so they insist on furnishing completed claim form.

The details to be furnished along with intimation are:

1. Name, Address, Policy number
2. Place of loss
3. Circumstances of the loss including time, date, etc.
The insurer depending on the nature of the loss may call for further details. They may
promptly and accurately submitted.

D. Claim reserve
As soon as the claim is intimated the insurer makes reserve in his books for the claim.
He appoints a surveyor depending on estimated value of the claim and gets the
surveyors opinion as to the likely quantum of the claim. This helps the management
to get an idea about the insurer’s liability in a particular year.

E. Investigation
Once sufficient information has been received, the insurers will examine the facts to
check aspects such as the following:
 claim is covered under the policy
 policy conditions have been complied with
 whether the amount claimed for, is within policy sum insured / limits

This may involve external specialists and experts in the relative field like:
valuers – with works of art, classic cars, etc.
 investigators – tracing stolen high-value vehicles, cause of loss
 consultants – engineering consultants to check whether work methods are
applied accurately
this helps the insurer to get full information / documents to decide on admissibility or
otherwise of the claim and also the quantum of loss.

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 F. Offer / negotiation or declinature
With confirmation on claim admissibility and the quantum, will come an offer to the
insured, relating to settlement of the claim.
If settlement offer is accepted, the claim is settled.
If settlement offer is declined both parties move into a negotiation stage with
discussions, until an agreement is reached (see later note regarding arbitration)

 If the claim is declined - and this would have been done at senior level - then this
should be communicated to the insured as soon as possible, with relevant
reasoning. It is appreciated that the declinature may have a significant impact on
relations with the policyholder.

G. Final Settlement
Once agreement is reached on quantum etc. the claim will be settled accordingly.
This could be done by cheque or it could be through a number of other formats such
as:
 Reinstatement
 Rebuilding
 Restoration
 Repair
The final payment figures will be entered against the claim with any outstanding
estimates (provision) replaced or reduced to zero.

The insured will be asked to confirm that he or she is satisfied with the full and final
settlement. Within the nationalized era, this was by way of a ‘discharge voucher’
and had a standardized format. With the liberalization, insurers have their own
format but the aim is the same.

H. Closure
Once the settlement issues have been completed then the insurer will look towards
 Closing the file
 Examining potential of recovery – this could be by subrogation, contribution,
salvage, etc
IRDAI Regulations for protection of policy holders interest may be referred which lay
down various norms.

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Test Yourself 2

The sharing of a claim between two insurers is called ______________

A. Subrogation
B. Contribution
C. Reinsurance
D. Reinstatement

Information Technology Systems

During the period of nationalisation, all records were maintained manually.

However, today, the IT systems supporting the claims process are critical.

The IT systems will:

 help in delivering the service expected by the policyholder and promised by

the insurer with easy access to files, file tracking, etc.

 facilitate the optimum claims management approach

 capture claims data accurately i.e. updated reserves to feed the reserving
and management information / pricing processes elsewhere in the operation

 assist in the identification of potential fraud or error by issuing warning

messages when certain parameters are triggered

 ease the recovery of all amounts due to the insurer in respect of claims paid
e.g. excesses or deductibles, recoveries from other insurers or third parties,
reinsurance recoveries, etc.

The process of claims management is using Technology in a big way. The process
starts in a seamless manner from the time of intimation, (through Mobile apps,
and call centres), connect with Surveyor & Loss Assessor (Block chain), submission
of photos and documents (web / app based), procurement of documents (Digi
Locker etc.), assessment of losses ( AI, ML, Picture scanning) , clarifications
(Whatsapp and others) and payment of claims ( Digital Transfer of funds) . Insure-
tech companies are innovating more. And more way and means to make the
customer experience better when claims situations arise. IRDAI is also
encouraging his endeavors by Sand Box interventions.

Management Information / Claims Coding

In the modern insurance world, it is critical that the operating functions and
management keep a track of what is happening. Fortunately, with the IT systems
mentioned above, much of this information can be delivered in real time; as long
as the input data have been entered accurately – remember GIGO.

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Definition

 GIGO: Garbage In, Garbage Out is a phrase in the field of computer

science or information and communication technology. It is used primarily
to call attention to the fact that computers will unquestioningly process
the most nonsensical of input data (garbage in) and produce nonsensical
output (garbage out). It was most popular in the early days of computing,
but applies even more today, when powerful computers can spew out
mountains of erroneous information in a short time. (Courtesy: Wikipedia)

Sophistication of the system, results in generating detailed reports. Detailed

history can be built up of claims costs, their cause and the segment of the policy
cover impacted, particularly with the complex and, packaged type of product
now commonly sold (i.e. a single contract covers a range of risks, both property
and liability).

This history can then be analysed to assess profitability not just at product level,
but also at separate cover level within the product, assuming that the premium
has been built up by element of cover, so that the relative profitability of each
segment can be ascertained.

In theory, a good understanding of profitability combined with a good knowledge

of future developments in claims impact and frequency, should enable more
accurate (profitable) pricing of products in the future.

Example

In a Motor Insurance claim we would expect that the information that may be
gathered could include the following:

 Date of Accident

 Time of Accident

 Vehicle Details e.g. Registration Number

 Driver Details e.g. Name, Age, Gender

 Coded Description of Accident / Loss

 Coded Details of Damage

 Coded Details of Injury

 Third Party Details

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Proof of Loss

As mentioned earlier, the “onus of proof” is important. Onus of proof is a legal

term relating to the person who must provide the evidence. It is a legal obligation
to provide proof of what is alleged and, it lies with the insured.

However, usually most insurers are not unreasonable, and will only require
reasonable proof, not absolute proof of everything. As much proof as possible
always helps, but once the claimant has done all that they can, they have met
the requirements of the policy.

Example

For example, if the policyholder claims for a theft, then they must show evidence
of that theft. It is not enough to simply say that it happened; they would be
expected to explain how the thief broke in and what property was taken. The
explanation should provide reasonable proof, not necessarily absolute proof. Of
course, the insurer may have concerns over whether the loss is covered under the
terms of the policy. They may allege that the locks or alarm fitted to the premises,
breached security conditions of the policy and they may seek to decline the claim
for this reason.

In this example, the onus of proof switches to the insurer to prove that the cause
of the loss was a breach of the condition. The onus of proof is stronger for the
insurer. The evidence from the insurer must be strong enough, to convince a
judge. If they cannot provide this proof then the claim will succeed. Of course,
even if the insurer is convinced that the incident has occurred, they still need to
consider other factors.

Test Yourself 3

The responsibility of proving that claim is covered by the policy rests with ______

A. The third party

B. The insurer
C. The insured
D. All of the above

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3. Understand the process of claims management
[Learning Outcome c]

Total claims management capability is the key competence of a successful insurer.

Key areas in the claims process mentioned above; where management control
will need to be adequate:

Acceptance: not every claim / incident notified by a policyholder is necessarily a

valid claim under the policy. The insurer needs to have quality people assessing
the validity of the claim against the policy wording and terms, in order to decide
whether to accept the claim.

 Management & quantification: taking control of the resolution of the problem,

identifying and delivering the most cost effective solution within the terms of
the policy, accurately identifying the total cost of the solution. This phase
may involve significant input from third party suppliers to mitigate the
damage, assess and evaluate solutions, and to deliver the agreed solution.

 Settlement and closure: finalising the claim, making payments to suppliers,

third parties and / or the policyholder and closing the claim once all amounts
are settled. The insurer’s principal interest, when notified of a claim, is to
take control of the claim in its entirety. In this way it can ensure that:

a. Damage / loss is minimised by early action (e.g. emergency repairs to

buildings to prevent further damage).

b. The most cost effective solutions are provided (e.g. preferred repairer /
supplier arrangements, replacement of goods rather than monetary value).

c. The overall time taken to settle a claim is managed in the most efficient
way possible.

In practice however, an insurer may not be able to establish direct and complete
control over a claim, e.g. when a third party is involved - a policyholder being at
fault in a car accident involving another vehicle or property. In such a case, the
other insurer / party can take control of that element of the claim, which relates
to them and then seek to recover from the policyholder’s insurer. The insurer
can then only challenge the quantum of the claim submitted by / on behalf of
the third party, specially if that is clearly overstated, and then, the insurer has
little opportunity to manage the total cost. Some insurers may offer to provide
full claims solution services even to third parties, where their insured is at fault,
to enable full control over the claim to be established.

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Determining liability / acceptance of the claim

The first question the insurer needs to determine is whether the claim is valid
under the terms of the policy, and if yes, whether there is any other party, who
should share or take full liability for the loss being claimed for.

Example

In a motor car accident involving damage to a policyholder’s vehicle and a third

party's vehicle, the questions would come down to:

 What was the policy cover?

 Who was at fault? If the other party was responsible for the accident, all costs
of the claim are then potentially recoverable from the third party or its
insurers.

Problems can arise in assessing the eventual cost to the insurer if, either, fault
cannot be clearly determined or the other party is uninsured and held to be at
fault.

In certain cases, the extent of cover and whether a particular event was covered
by the policy can be much more complex. At the extreme end, the exact wording
of the policy as issued, will be used in a Court of Law, if necessary, to resolve
the issue.

It should be realised that the onus is on the underwriter to specify the coverage
of the policy as clearly as possible at the outset itself. If there is any ambiguity,
it is almost certain that the court will give the benefit of doubt to the
policyholder.

Quantification: Underinsurance (Property Insurance)

Most insurance policies will specify a ‘sum insured’ or limit on the value insured
under the policy.

It is the policyholder's responsibility to determine whether this is adequate for

their needs. However, there are times when the actual value at risk is greater
than the sum insured. In such cases, the insurer has the right to settle the claim
in the same ratio that the sum insured bears to the total value. This is so because
the insured has not paid the premium for the full value at risk and so, cannot
expect the claim to be settled fully.

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Example

Sum insured on the building : Rs. 10 crore

True value of the building : Rs. 15 crore

Claim submitted for partial damage of Rs. 6 crore.

Settlement will be based on the ratio of 10 : 15

Sum Insured (10 crore)

True Value (15 crore) X Value of claim (6 crore) = 4 crore

Underinsurance can arise for a variety of reasons, although it is usually a result

of the policyholder incorrectly assessing the value at risk, or specifying a sum
insured limit that was inadequate for their needs.

The condition prescribing underinsurance is called “Condition of Average”.

Quantification - complex claims

Many complex claims can take a long time before they could be fully quantified.
In the case of liability / injury claims this can be a period of years after the date
of the incident, and often result in legal cases where the final award i.e. the
indemnification amount, is determined by the Courts.

Even complex property damage claims can take a long time to fully quantify
where the cost of rectification / rebuilding and the time required to complete
the work, can be difficult to assess, and may take months or even years in very
complex cases such as historic buildings or complex engineering or chemical
plants.

The issue becomes one of assessing the most accurate reserves to establish at
any point in time, and keeping them up to date.

Test Yourself 4

ABC building is insured for Rs. 12 crore and the Machinery for Rs. 3 crore. The
true values are Rs. 18 crore and Rs. 4 crore respectively. There is a serious fire
and the building suffers damage to the tune of Rs. 10 crore and the machinery,
Rs. 3.6 crore. What is the payable claim amount?

A. Rs. 8.10 crore

B. Rs. 9.36 crore
C. Rs. 9.28 crore
D. Rs.10.20 crore

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Arbitration

Arbitration is introduced in property claims, where the insurer has admitted

liability under the policy but there is no agreement on the amount being offered.
Liability claims present their own problems as they may have to deal with
intangibles. However, decision of the arbitrators is normally obtained before
approaching a court of law.

The arbitration condition does vary from company to company and cover to cover
with some examples being as below:

 Number of arbitrators can be as low as one as long as both parties agree but
common numbers are frequently two (one proposed from either party) with a
third acting as the umpire.

 Other conditions will relate to the location of the arbitration – usually country
of policy location - and language the proceedings will be conducted in – usually
English.

Modes of Settlement (Property Insurance)

1. Repair and Replacement

Under the Policy Conditions, the insurer has the option of repairing or replacing
the damaged or destroyed property.

Under this condition:

a) Such repair or replacement may not be exact e.g. materials have changed,
local regulations may prohibit certain items, etc.

b) The costs of repair or replacement will not exceed the sum insured.

c) The repair or replacement will be completed in a reasonable manner.

d) The insured will be responsible for giving any requested plans, specifications,
measurements, etc. that the insurer may require to complete the repair and
replacement (at the insured’s cost).

2. Reinstatement

The objective of insurance, as specified in most policies, is to reinstate the

policyholder to the position they were in, prior to occurring the loss event.

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Example
When a policyholder suffers loss or damage to a five-year-old item such as a piece
of manufacturing plant, item of furniture, etc. the insurer is responsible for
compensation up to the level of a five-year-old item, not a brand new one.

However, in many property policies e.g. Hull, the insurance policy specifically
allows for the replacement of items lost or damaged on a ‘new for old’ basis, i.e.
all items that are to be replaced will be replaced by brand new goods, even if
the original items were not new.

Policy like fire allows insurance on reinstatement value basis which is a little
departure from the principal of strict indemnity. The reinstatement of the
damaged property is allowed for its value at the time of reinstatement (provided
it is done within the period allowed, rather than its market value then.)

This is partly:

 consumer driven: the value of a three year old video recorder or TV may only
be a small fraction of the new price, and the policyholder would be unhappy
having to pay the difference, in order to replace it with a new one themselves;
and partly

 insurer driven: it would cost the insurer a lot of time and effort to calculate
the current value of a wide range of damaged articles. Also, identical
replacement goods would not be readily available. Further, policyholders are
much more likely to inflate the size of the claim, if they think that they will
only receive a fraction of the total replacement value claimed, requiring
much more investigation and argument.

The condition is that the sum insured MUST be on the new replacement value
basis and the premium calculated on this; so the insurer receives the correct
premium and also avoids client issues at claims time, around the calculation of
the appropriate depreciation.

Repair
A further option is for the insurer to insist on repair rather than replacement,
where this is economically feasible and the repaired item is “fit for purpose” and
has the same economic value as a replacement item of similar age / wear, even
where the insured would prefer replacement.

Write-Off
Where the repair cost of an item is greater than the economic value of the item,
the insurer can insist on the item being written off and a payment based on the
100% sum insured or equivalent - even where the insured would prefer for it to
be repaired.

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Definition

Write-off is also used in vehicle insurance to describe a vehicle, which is cheaper

to replace than to repair, sometimes colloquially referred to as being "totalled"
(a total loss).

One insurer quoting that “.....the insured car is declared a write-off when in our
opinion, it is so badly damaged that it would not be either safe or economical to
repair or if the policy covers theft, when it has not been found within 14 days of
you reporting its theft to us and we are satisfied that the claim is in order”
(Courtesy: Wikipedia)

Modes of Settlement (Liability Insurance)

The different classes will naturally vary as to the claims settlement and these
should be examined independently. However, one major policy we will look at
now is the liability cover. Here, the payments are not made to the insured but to
the Third Party claiming damages for the insured’s negligence. There will also be
payments made in respect of legal fees that the insured has incurred – although
these will be normally controlled by the insurer and paid directly to the legal
team of the insured.

Claim recoveries (amounts due to the insurer in respect of claims paid)

In many claims, there will be an option for the insurer to recover some of the
amount from the insured or a third party.

Typically, the main areas for recovery are:

Type of Recoverable Comments

Recovery from
Excess and Insured Many insurance policies have stated excesses or
Deductible deductibles - the amount the policyholder must
contribute towards a claim. This may be
relatively low for a household policy e.g. a few
hundreds of rupees, or could be hundreds of
thousands of dollars for a large professional
indemnity policy.
Subrogation Third Where a third party can be shown to be at fault
parties or in causing the loss, then under the insurance
their principle of subrogation, the insurer can take
insurers over the insured’s legal rights to recover the cost
of the claim from the offending third party and /
or their insurers.

The key issue here is establishing fault and

getting the other party to accept liability. Fault
can often be difficult to prove categorically, and

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 many court cases result from attempts to
ascertain liability for incidents leading to a
claim.
Contribution Other There will be times when the same property is
Insurer insured by two different insurers under different
polices.
As long as there is more than one policy covering
 same property,
 same interest,
 same peril
The loss will be shared proportionately between
the insurers concerned (one insurer will control
the claim and then recover appropriate amount
from the other insurer/s.)
Reinsurance Reinsurer Where a policy is individually (facultatively)
reinsured, a recovery can be made from the
reinsurer in accordance with the terms of the
policy.

Example

Subrogation: the most common example of this is the car accident where there
is no fault of the policyholder but claims are paid for the damages to his or her
vehicle under the terms of the own damage cover. In this instance, once the
claim is settled with the insured; the insurer can seek recovery from the driver
of the other vehicle who is responsible for the accident or their insurer.

Example

Contribution: a typical example is a camera, lost or damaged while on holiday

which may be covered by both a Household Contents Policy and a separate Travel
Policy. The insurer who handles the claim can recover a proportion of the cost
from the other insurer.

Test Yourself 5

A subrogation claim is recovered from the Third Party and/or which other party?

A. Client's insurers
B. Third Party's insurers
C. Reinsurers
D. Third Party's Reinsurers

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Leakage

Definition

Leakage is the term for any additional costs incurred by the insurer beyond those
necessary to fulfil its claim obligations under the insurance contract, excluding
fraud. Thus, it covers any inefficiencies or errors in the handling or settling of
the claim, failures of service or replacement goods suppliers to act efficiently or
according to their service contract, or any other unnecessary cost.

Examples of leakage include:

 failure to recover excesses / deductibles from policyholders

 Failure to recover amounts reclaimable from third parties, other insurers,

reinsurers, etc.

 unintentional overpayment of the claim (e.g. payment in excess of limits of

cover or amount claimed)

 excessive claims administration costs, inefficiency, etc.

 failure to decline claims that are not covered by the policy.

Leakage is largely preventable through effective management. Most insurers will

establish some form of audit or benchmarking process, to regularly assess the
effectiveness of their claims handling service and the level of leakage
experienced. From this, actions and targets can be established to seek to improve
efficiency and reduce leakage.

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4. Identifying some of the claim related main issues and problems
[Learning Outcome d]

Ex-gratia Payments

There are times when a claim is not covered but it is felt by senior management
that a payment may be made to the insured as a goodwill gesture – in insurance
this is termed an “ex-gratia” payment.

Such payments are totally a matter of grace on the part of the insurer, as there
is no legal obligation under the contract.

Authorisation to make such a payment must be made at a very senior level and
should only be made where it is clearly in the insurer’s interest to maintain
goodwill, retain profitable business, etc.

Example

 A very longstanding personal customer with no previous claims is told at the

time of a claim event that he is underinsured, which is quite possible due to
inflation over many years. In such a case, as a goodwill gesture for the loyalty
and past profitability of the customer, the insurer might consider an ex-gratia
payment to cover the underinsured element of the claim.

 A broker has been bringing significant amount of profitable business to an

insurer. Now, one of his corporate clients, finds that due to a
misunderstanding or administrative error, they are not covered for a
particular claim event. In such a case, the insurer may offer an ex-gratia
payment.

Claims fraud and fraud prevention

Fraud ranges from mild overstatement of the value of items lost or damaged,
through to organised criminal activity, designed to obtain large sums of money.

Every insurer, therefore, faces a constant challenge to minimise the cost of

fraudulent claims, while also providing the desired level of service and claims
solution delivery for all valid claimants. Insurers will use a range of techniques
to seek to identify fraud, which vary depending on the insurance cover / product
offered. These include:

 fraud awareness training for all claims staff to enable potential fraud to be
detected, as the claim is handled

 computer programmes that highlight potential fraud, based on defined

criteria, identified from previous fraud experience

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 establishment of specialist internal fraud investigation departments

 employment of external fraud investigation services

 sharing of claims data with other companies via shared databases e.g. CUE -
the Claims and Underwriting exchange Database in the UK, where the majority
of UK insurers share data on all Household and Motor claims made

 co-operation with police, government, industry, etc. and all other anti-fraud
initiatives.

 using contracted replacement goods and services suppliers, to minimise fraud

(the claimants seeking to be put into a better position than they were before
the event) and supplier overcharging / fraud (the local supplier, appointed by
the claimant, either overcharging (‘because it’s an insurance claim’) or
charging for work not done.

Market Practice

Indian regulator has brought in a number of controls on settlement of claims,

from time to time. The Regulations for Policy Holder’s protection lays out the
time lines for appointment of Surveyors, the TAT for settlement of clam, provision
for penal interest for delayed settlement. It also insists that the attributes of the
necessary documents should be clearly communicated to the customer at the
inception itself. Timely communications also should be given. In health Insurance
segment these guidelines are more stringent

IRDAI regulations of Protection of Policy Holders Regulation brings in regulatory

oversight on the process of Claims Management in India. It has laid down the
following broad time lines.

1. Surveyors have to be appointed within 72 hours of intimation. Interim

report to be submitted within `15 days
2. Surveyor shall start the survey within 48 Hrs. of appointment.
3. Insurers / Surveyor has to inform the claimant on the documents to be
submitted within 7 days of claim intimation
4. Normally the Surveyor has to submit the Report within 30 days
5. Insurer may seek any clarifications / additions from Surveyor within 15
days of submission of reports.
6. Insurer have to settle/ reject claims within 30 days of the Survey Report
/ Additional documents / additional Report as the case may be.
7. In Health Insurance, the regulator has laid down, similar segment specific
guidelines.

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5. Grievance handling
[Learning Outcome e]

The Regulator puts a lot of stress on protection of rights of the Policy holders
whether it is about correct information and product details, correct details on
how to claim and also what to do in case there is a grievance on any aspect of
servicing of the Policy by insurer. The Regulator insists that all insurers should
have an elaborate Grievance handling machinery with specified grievance officers,
clear communication to insured, web site to register grievances. And time lines
to respond and redress the grievances. Every office of the insurer should have a
Grievance handling person, specifically named.

The Regulators has put in place an Integrated Grievance Redressal System (IGRS)
which is connected to all insurers and will mirror all grievances. They have also
made it quite clear how the grievances should be closed. Aggrieved customers
can directly write to IRDAI as well.
If the customer is not satisfied with the resolution she can go to an Insurance
Ombudsman, and all policies should carry the address of that state’s Ombudsman.
The website of IRDAI also provides the details of Ombudsman. And the process to
approach them for a grievance.
The customer can still go to District, State or National Consumers forums
depending on the size of the claim. The customer can also approach a civil court
or seek arbitration depending upon the nature of claims, the grievance etc.
The Consumer movement, the active judiciary & public opinion are becoming
quite forceful against unfair practices of insurers or opaque practices adopted by
them.
Insurance Fraud

Insurance fraud is widespread and the situation continues to deteriorate. For

example:
In the UK, ABI research suggests that 40% of consumers think it acceptable to
exaggerate a claim, and 29% even think it acceptable to invent one.
In the USA, the Insurance Services Office estimates that the cost of fraud to
the property and casualty sector is $24 billion p.a., representing 10% of total
claim payments.

Test Yourself 6

Which of the following is an ex-gratia payment?

A. Payment made when risk not covered under policy

B. Payment made when policy voided
C. Payment made when policy cancelled
D. None of the above

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Summary

 Claims handling is the most important service an insurer can give, as regards
customer service.

 At the same time, poor claims handling can also hit the company’s bottom
line and shareholder profits.

 A claim can be very simple or very complex to handle but in any case, it’s
crucial the insured follows the claims conditions in the policy.

 Claim process is relatively consistent in big and small claims – initial intimation,
gathering of facts, investigating the claim, declinature of claim, negotiation,
settlement and the closure.

 Correct classification of the claim details is very important for management

information and managing the portfolios.

 Leakage is a serious issue with any insurer. Leakage refers to where the claims
team forgets to recover all that is owed to it i.e. recovering the excess,
exercising its subrogation rights against a third party, obtaining contribution
from another insured or obtaining cash against salvage items.

Some important terms / definitions you have learnt in this chapter

a) Claim
b) GIGO
c) Write Off
d) Ex Gratia payments
e) Leakage
f) Recoveries

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Answers to Test Yourself

Answer to TY 1

The correct option is C

The claims of the other driver will be paid from the Third Party Insurance pool.

Answer to TY 2

The correct option is B

The sharing of a claim between two insurers is called contribution

Answer to TY 3

The correct answer is C

The onus of proving a claim rests with the insured

Answer to TY 4

The correct answer is B

ABC Building is insured for Rs.12 crore and the Machinery for Rs.3 crore. The true
values are Rs.18 crore and Rs. 4 crore. The building suffers damage to the tune
of Rs.10 crore and the machinery Rs.3.6 crore.

The claim consists of 12/18 X 10 (6.66) plus 3/4 X 3.6 (2.7) giving us a total of
9.36 crore

Answer to TY 5

The correct option is B

The insurer recovers amounts (claim) from the Third Party and / or Third Party’s
insurers, under subrogation.

Answer to TY 6

The correct option is A

An ex-gratia payment relates to the event when the claim is not covered but for
business reasons, payment is made

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Self-Examination Questions

Question 1

When there is a possible claim, the insured must initially advise the insurer within
what time period?

A. Immediately
B. 1 week
C. 2 weeks
D. 1 month

Question 2

A fire deliberately caused by the insured is called ____________

A. Immolation
B. Malicious Damage
C. Deliberation
D. Arson

Question 3

Which of the following describes Quantum?

A. The time the accident happened

B. The likely cost of the claim
C. The number of claims
D. The size of the claims

Question 4

Leakage relates to which of the following ________

A. Water leaking from damaged pipe

B. Cash losses from employee embezzlement
C. Relates to claims losses which can be recovered through subrogation, excess
etc.
D. Drop in claims reserves

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Answer to Self-Examination Questions

Answer to SEQ 1

The correct option is A.

The insured must advise the insurer immediately

Answer to SEQ 2

The correct answer is D

Arson is the criminal offence of burning ones own property (usually to defraud)

Answer to SEQ 3

The correct answer is B

Quantum is the likely cost of the claim

Answer to SEQ 4

The correct answer is C

Leakage relates to the losses a company has every right to recover but does not
i.e. contribution, subrogation etc.

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 CHAPTER 9

INSURANCE RESERVES AND ACCOUNTING

Introduction

In this chapter, we will look at one of the main activities that a claim department
has to perform to maintain discipline and also meet statutory requirements. We
will see how an insurance company sets aside funds for claims that may arise in
future. We will also learn how the reserve fund money is invested to earn
maximum returns.

a) Understand the different types of reserves maintained by insurance

companies
b) Learn about the reserving process followed by insurance companies
c) Examine the premium investment strategies followed by insurance
companies

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1. Understand the different types of reserves maintained by insurance
companies [Learning Outcome a]

The Management of Reserves

Poor Reserving

“There is no acceptable excuse for poor reserving. Unless we are accurate with our
reserves they will threaten our very existence.”
(Tony Lancaster – CEO, Groupama UK, CII Conference, 2001)

Insurance is an unusual industry in that a majority of its costs are both delayed
and uncertain and it is critical, therefore, that all insurers estimate the future
liabilities as accurately as possible and put aside (reserve) money to meet them.

Furthermore, since it is, by definition, the larger claims that take time and are
difficult to judge, the total amounts required to be reserved per year can be
enormous.

Example

Size of Reserves: In a mature property and casualty operation, these technical (or
specifically allocated) reserves may be larger than the annual premium income
and can be up to 2 to 3 times the premium in liability classes.

Definition

Technical reserves: the assets that an insurance company maintains to meet

future claims for losses.

The technical reserves required can be classified as follows:

a) Reserves for unexpired risks

b) Reserves for incurred but unreported claims

c) Reserves for outstanding claims

d) Fluctuation reserves

Technical reserving is critical to any insurer and directly impacts profitability and
solvency; the two principal dangers being:

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 1. Under-reserving is where an insurer may take in an over-optimistic view of
future claim payments. Initially it will boost profits and seem like the
underwriting strategy and pricing is correct; however, over time there will be
difficulty in paying claims and the insurer will have to call upon shareholders’
funds (sometimes known as free reserves) reducing its solvency.

Case Study : Independent Insurance, UK

Independent Insurance (estd.1903) was reinvented in 1987 when it

metamorphosed into a forward thinking, fast-growing, broker-only company. In
1996, Independent combined with a merchant bank to buy the UK business of
US insurer Allstate. It had become a Public Listed Company in 1993 and by 2000
had grown significantly :

 2,000 employees in 16 locations in the UK as well as in Europe.

 500,000 individuals on home and motor policies,
 40,000 commercial customers
 premiums in excess of £850m

The company wrote property, liability, home and motor business in the
commercial and personal sectors when it moved into the highly competitive
London market.

In early 2001, problems regarding liquidity, claims ratios and need for new
capital emerged. There followed a downward spiral of director resignations,
failure to raise capital and a general failure of credibility. In June 2001, the
liquidators were called in after unquantifiable losses from claims surfaced,
many of which had never been entered in the company's accounts.

While many were surprised at its collapse, several brokers and insurers were
not. Almost from its re-launch in 1987 there had been market rumours of
accounting irregularities and other practices, which no one could manage to
substantiate.

The details of what went wrong and who was to blame are still being argued
over. The fundamentals for failure were attributed to excessive growth,
inability to reserve adequate premiums for long-tail liabilities, insufficient
reinsurance and underpricing.

(Courtesy Ian Youngman FCII)

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Test Yourself 1

Reserves for unexpired risks come under the heading of which of the following?
A. Accounting reserves
B. Technical reserves
C. Unexpired risk
D. Asset Liability Reserves

Stakeholders

With regard to a company’s reserving practices, there are a number of

stakeholder groups who will take close interest – albeit from different
perspectives. These stakeholders can be detailed as follows:

1.Shareholders

The major interest a shareholder will have is to see his or her investments
increase and the company stay viable, solvent and attractive to the market. They
will be kept informed as regards the company’s reserves through the Annual
Report and Accounts, together with the quarterly / half-yearly reports.

They will look for the company to be adequately reserved to ensure its future
prosperity and avoid nasty shocks - they will be less than happy if under-reserving
results in a requirement for significant reserves.
On the other hand, over-prudent reserving will reduce the money available for
distribution as dividend or available for new investment and therefore, will not
be welcomed.

2.Government / Regulator

A government may consider a company’s reserving from two distinct standpoints.

a. As a regulator the Government would like to see prudent reserving in order

to:
1. protect the customers from company failure
2. protect the insurance market from instability and the burden of funding
corporate failure
3. avoid future calls on the companies’ capital when solvency is threatened

b. As a collector of taxes, conversely, the Government would prefer that taxable

profit is not delayed or avoided by being placed in reserves. For these reasons
some governments have set down rules about making a ‘best estimate’ of
reserves and their observance has to be confirmed in the annual audit.

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3.Underwriters

The importance of claims experience in the pricing process was mentioned earlier.

1. Underwriters study the pattern of reserves development to understand the

true cost of claims for whole classes of business to determine the appropriate
pure risk premiums going forward.

2. they will use specific claims histories on cases which are individually
underwritten

Accurate reserving is, therefore, essential, although in reality it is impossible to

fully predict the economic, legal and regulatory impacts on claims which may not
be settled for years.

4.Insurance Company Management

Reserving is also of great importance to company senior management as it:

1. indicates the relative profitability of various parts of the portfolio

2. highlights trends

3. provides an early warning of future problems

Types of Technical Reserves

There are two basic types of technical reserves: those relating to premiums and
those relating to claims. Although the actual terminology may vary, the following
would be recognised in most companies.

1) Premium Reserves

a) Unearned Premium Reserve

Since all the policies do not renew at the same time and do not tie in with the
end of the financial year, there will be some amount of premium that is
“unearned” at the time the accounts need to be finalised.

For example, if the financial year is the beginning of April and a policy was taken
out only 3 months earlier at the beginning of January, there will still be 9 months
left of potential claims and “unearned” premium.

The unexpired proportion of all premiums is, therefore, held until expiry in an
Unearned Premium Reserve.

In practice, expenses are deducted from written premiums and the resulting net
figure is used to calculate reserves on a monthly or even daily pro rata basis.

b) Unexpired Risk Reserve

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 This is a reserve that is no longer commonly used. If an insurer wrote
premiums during a year which, in retrospect, are considered to be inadequate
because of, say, a soft market, a reserve may be set up for the shortfall. This
is called an Unexpired Risk Reserve.

If an insurer has to set up such a reserve, questions really ought to be asked why
it has changed its mind about rates so soon after underwriting the business.

2) Claims Reserves

Outstanding Claims Reserve

This represents the money put aside for paying claims on business that has been
written, whether or not these claims have been reported to the insurer. There
are two separate parts:

3) Open Claims Reserve

The open claims reserves are the ones that have been reported, entered onto the
system and a formal reserve has been input for each one.

4) IBNR Reserve

In addition to this, every insurer will have claims that, for some reason or other,
have not yet been reported and the insurer does not know about. The term for
this is IBNR i.e. these are claims that have been incurred But Not Reported.

This is one of the main problem areas for general insurers. It is relatively easy to
make a reasonable assessment of claims that have been reported. At the very
minimum, an insurer can apply an average cost for the class of business for any
claim arising. The next difficulty arises when the insurer has to speculate what
might happen in the future. Typical reasons for an insurer to set up IBNR reserves
are detailed below.

Another claims factor which may be included in the IBNR reserve is the provision
made for any increase on the original estimate for open claims.

In addition to IBNR, the insurer also have to provide for IBNER (Incurred But Not
Enough Reported). IRDA has mandated that all Claims Reserves of in insurers,
including IBNR & IBNER has to be analyzed by the Appointed Actuary and certified
as correct. Nowadays, the calculation of IBNR and IBNER has become a actuarial
function.

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 Case Study – Reserving for Asbestos

Asbestos is a naturally occurring mineral with remarkable properties, which

have led to it being used in a wide range of industries. It is fire and chemical
resistant, an excellent insulator, a reinforcing additive for cement and motor
vehicle brake linings, and it can be woven into textiles. Its disadvantage, which
eventually resulted in its abandonment, is that it forms extremely fine fibrous
dust particles which may cause the degenerative lung disease, asbestosis or
possibly the rare cancer, mesothelioma up to 40 years after the exposure.

Asbestos related diseases have given rise to many claims on employers, public
and product liability policies for producers, distributors and users of asbestos
products. Recently, the frequency and volume of claims have been increasing
rapidly, particularly in the USA, where more than an element of emotion has
affected the court awards and the fact that judges do not appear to require
the disease to have actually manifested itself. In recent cases, workers have
received damages in excess of $1 million merely for the emotional distress of
having been exposed to asbestos. The awards to actual disease sufferers are
even larger e.g. one mesothelioma claimant has received $33 million. In the
UK, similar cases are being settled at about £150,000. The effect on the P & C
market in the USA has been little short of crippling.

Many companies have had to reserve hundreds of millions of dollars for past
exposures, and regular strengthening of these reserves shows no sign of
reducing. Current reserves for asbestos related claims already run into
hundreds of billions of dollars.

5) Claims Equalisation Reserve

In some countries, insurers are permitted to set up a reserve to smooth the overall
result. In years, when claims experience has been favourable, an amount is put
into a reserve from where it can be withdrawn in poor years. In theory, it is an
in-house method of reducing the impact of catastrophes. In practice, some
companies may treat this so called equalisation reserve as a tax management tool.

Test Yourself 2

IBNR stands for what?

A. Income Before Net Reported

B. Incurred But Not Reviewed
C. Incurred But Not Reported
D. Investment Before Net result

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2. Learn about the reserving process followed by insurance companies
[Learning Outcome b]

The reserving process at operational level is extremely simple in theory but can
go badly wrong in practice. The whole purpose of the reserving policy is to ensure
that the most reasonable estimates of the reported claims are made and can
reflect on a single client, a portfolio and the company in general.

Usually in the modern market, the estimate is to be input by a claims handler

into the system.

Smaller claims, simpler risks e.g. motor, health, etc.

Within the commoditised classes, the figure to be input (if there is no obvious
accurate figure already) is likely to be based on an average figure from past
experience. Issues such as inflation are built in to make it as realistic and up-to-
date figure as possible.

Larger and more complex claims

This will be controlled by a more experienced handler and by gauging the claims
circumstances and using their own experience; they should be able to make a
subjective judgement on the estimate.

It is crucial that the claims reserves are revisited regularly to ensure that the
figures are as up-to-date as possible.

The system will then holds and total up all claims reserves in real time, to produce
the open claims reserve.

The next step is for the claims professionals and actuaries to:
 bring the data together

 break it into practical sub-classes

 review and refine it

 build in provisions for IBNR

 construct auditable reserves

The selection of sub-classes is critical if any subsequent analysis is to be

meaningful. For this reason, there are at least three aspects to bear in mind as
regards the sub-classes. They should:

1. be as homogeneous as possible, so that the data can be reasonably reliable

2. not be too big as it will give the underwriters difficulty in premium setting
280
 3. not be too small, or the law of large numbers will not apply i.e. statistical
variances will be large

Challenges

A significant issue is that of factoring in the IBNR and the reported claims
development into the sub-class reserves. One approach is to look at the past
claims experience in the sub-class, apply this to the data and then project into
the future.

However, there are limitations

1. in a changing business environment

2. in long tail classes

3. where there is little relevant applicable claims experience (e.g. in new and
emerging risks)

The remedy in such circumstances is to try to develop a deeper understanding of

what drives claims, see how these factors are likely to change in the coming years
and then make a judgement on how this could affect the reserves. Where possible,
the reserver should also seek to identify steps that could be taken to manage
down the eventual costs.

To analyse the pattern of claims, perhaps the most widely used tool is the Chain
Ladder.

Triangulation or Chain Ladder

The Triangulation or Chain Ladder technique is a simple operation to give an idea

of the claims development in a risk or sub-class over a number of years. The idea
is to display and compare the development of claims from different years, using
tables usually in the shape of a triangle.

A simple grid for claims paid on a property account is shown below. This particular
example records the year of reporting and the amount paid out in the successive
years - known as the years of development.

Claims paid in lakhs Year of Development

0 1 2 3 4 5 6
1998 938 841 740 605 328 105 88
1999 1191 906 781 635 461 205 --
2000 1183 1038 848 701 564 -- --
2001 1274 1177 994 832 -- -- --
2002 1427 1260 1018 -- -- -- --
2003 1886 1519 -- -- -- -- --
2004 2129
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The aim of the reserver is to fill in the missing half of the triangle by projecting
the pattern of previous years.

A surprising amount can be done by an experienced reserver, just by using simple

arithmetic calculations. However, in many of reserving exercises, sophisticated
statistical modelling is used involving complicated software, providing highly
precise answers. It must be emphasised that these are only mechanical
calculations and do not take into consideration the fundamental changes that
might be happening to the drivers of the claims. These changes can be:

 inflation rate
 rebuilding costs
 legal framework
 court awards
 medical costs etc.
Wherever possible, the reserver needs to make appropriate adjustments to
compensate for these.

Other Triangulations can be created to compare different claims data. For

example; loss ratios, case reserves or the number of claims may be plotted
against:

1. year reported
2. year the claim was incurred
3. year the policy was written
Each type of plot has its own particular advantages and disadvantages and each
is likely to produce a different answer. It is the job of the reserver to try various
techniques and produce what he or she considers to be a reasonable answer.
Claims reserving never has been and is never likely to be an exact science.

Test Yourself 3

The Chain Ladder format is also known as _____________

A. Steps Formulation
B. Triennial Calculation
C. Triangulation
D. Trigonometric

The following checklist for claims reservers, compiled by the Institute of

Actuaries in the UK, clearly sums up the whole essence of this complex but vitally
important subject.

282
 Checklist for Reservers

a) What historical data are available to the reserver and how far can confidence be
placed in its reliability?
b) To what extent is homogeneity of the groups in the risk classification satisfactory?
c) What conclusions have shaped the past experience and what significant changes
can be deduced which may affect the future turn out?
d) What methods of projection are proposed, and, are these properly suited to the given
circumstances?

(Institute of Actuaries, UK)

Market Practice

In India, Regulator has laid down detailed norms on how reserves should be
calculated, and provided for and the accounting norms for the same, Appointed
Actuary of each insurer is responsible for ensuring and certifying correct
accenting of all reserves. The Statement of accounts formats are also stipulated
by IRDAI. The Regulations on preparation of Financial statements and Audit
reports, exhaustively deals with all the reserves and how premium and expenses
and claims should be accounted. Students are advised to visit the web site of
IRDAI to keep themselves updated.

283
3. Examine the premium investment strategies followed by insurance
companies
[Learning Outcome c]

With the significant amount of reserving mentioned above, it is imperative that

the insurers make their reserves work as hard as possible – this can be shown to
be effective globally in that globally, insurers held USD 22.6 Trillion (year end
2009).

With this in mind it is critical that insurers are given an amount of freedom in
deciding where to invest their cash without losing some form of monitoring

It is also critical that the insurers have in place specific guidelines and controls
for their investment business.
The guidelines should match the insurer’s liability constraints as well as the
availability of matching investments.

It is appreciated that globally insurers invest in fundamentally different ways,

although the guiding principles are the same:

a) Modern Portfolio Theory

b) Asset Liability Management

Definition

Modern Portfolio Theory (MPT)

The fundamental concept behind MPT is that the assets in an investment portfolio
should not be selected individually, each on their own merits. Rather, it is
important to consider how each asset changes in price, relative to how every
other asset in the portfolio changes in price.

Investing is a trade-off between risk and expected return. In general, assets with
higher expected returns are riskier. For a given amount of risk, MPT describes
how to select a portfolio with the highest possible expected return. Or, for a
given expected return, MPT explains how to select a portfolio with the lowest
possible risk (the targeted expected return cannot be more than the highest-
returning available security, of course, unless negative holdings of assets are
possible.)

MPT is, therefore, a form of diversification. Under certain assumptions and for
specific quantitative definitions of risk and return, MPT explains how to find the
best possible diversification strategy.

However, there are a number of arguments against it:

 financial returns do not follow a symmetric distribution

284
 correlation between asset classes is not fixed but can vary depending on
external events (especially in crises).

 growing evidence that investors are not rational and markets are not efficient

Definition

Asset-liability management
Asset-liability management basically refers to the process, by which an institution
manages its balance sheet, in order to allow for alternative interest rate and
liquidity scenarios. Banks and other financial institutions provide services, which
expose them to various kinds of risks like credit risk, interest risk, and liquidity
risk. Asset liability management is an approach that provides institutions with
protection that makes such risks acceptable.

Indian Regulations

In India, the insurance premium investment structure is laid down very clearly
under the Insurance Regulatory and Development Authority (Investment)
Regulations, 2000

Sr. Type of Investment Percentage

No.
i) Central Government Securities being not less than 20%
ii) State Government securities and other Guaranteed 30%
securities including (i) above being not less than
iii) Housing and Loans to State Government for Housing 5%
and Fire Fighting equipment, being not less than
iv) Investments in Approved Investments as specified in Schedule II
a) Infrastructure and Social Sector Not less than
Explanation: For the purpose of this requirement, 10%
Infrastructure and Social Sector shall have the
meaning as given in regulation 2(h) of Insurance
Regulatory and Development Authority (Registration
of Indian Insurance Companies) Regulations, 2000 and
as defined in the Insurance Regulatory and
Development Authority (Obligations of Insurers to
Rural and Social Sector) Regulations, 2000 respectively
b) Others to be governed by Exposure / Prudential Norms Not exceeding
specified in Regulation 5 30%
v) Other than in Approved Investments to be governed by Not exceeding
Exposure / Prudential Norms specified in Regulation 5 25%

(For further details see http://www.irdaindia.org/regulations.htm)

285
Test Yourself 4

Insurers follow two premium insurance styles: Asset Liability Management and
__________

A. Modern Portfolio Theory

B. Modern Profit Theory
C. Multiple Portfolio Theory
D. Multiple Profit Theory

Insurance Accounting

Insurance accounting basics are similar to basics of other forms of accounting.

However, there are certain peculiarities that make for specialisations in Insurance
Accounting.

The objective of this chapter is not to go into the details of Insurance Accounting;
so we shall examine these differences at headline level only.

 General Accounting

Items such as the Balance Sheet, Receipts and Payments Account [Cash Flow
Statement] and Profit & Loss Account etc. will be in line with the Accounting
Standards (AS) issued by the ICAI to the extent applicable to insurers carrying on
general insurance business with 3 exceptions. The 3 exceptions are:

(a) Cash Flow Statement to be prepared only under Direct Method

(b) Accounting for Investments is not applicable

(c) Segment Reporting applies to all insurers

 Premium

Premium is to be recognised as income over the contract period or the period of

risk. Premium received in advance not relating to the current accounting period
to be disclosed separately under the head “Current Liabilities”.
Premium reserve for unexpired risks has to be created.

Premium deficiency to be recognised if the expected claim costs and related

expenses exceed the related reserve for unexpired risks.

 Acquisition Costs

Acquisition costs to be placed in the period in which they are incurred.

286
 Claims

The ultimate cost of claims to an insurer comprises claims under the policies and
specific claims settlement costs. Claims under policies comprise the claims made
for losses incurred, and those estimated or anticipated under the policies
following a loss occurrence. A liability for outstanding claims shall be brought to
accounts in respect of both direct business and inward reinsurance business. The
liability shall include:
(a) Future payments in relation to unpaid reported claims
(b) Claims Incurred But Not Reported (IBNR) including inadequate reserves
[sometimes referred to as Claims Incurred But Not Enough Reported (IBNER)].

The accounting estimates shall also include claims cost adjusted for estimated
salvage value if there is sufficient degree of certainty of its realisation.

 Investments

A detailed procedure has been prescribed for determining value of various

investments, such as:
a) Real Estate – Investment Property

b) Debt Securities

c) Equity Securities and Derivative Instruments that are traded in active markets

d) Unlisted and other than actively traded Equity Securities and Derivative
Instruments

 Loans

Loans to be measured at historical cost

 Catastrophe Reserve

Catastrophe Reserve has to be created in accordance with the norms, if any,

prescribed by the Authority.

Accounting Module
As seen earlier, the basic insurance functions including accounts are carried on
at the operating office of the general insurance company. With the reliance now
in most companies on IT systems, except for preparation of journal vouchers and
few other emerging transactions, all other transactions input to the system can
be system generated.

To sum up – the important accounting functions in a general insurance company

are:
a) Premium accounting

287
b) Commission / brokerage accounting

c) Claims accounting

d) Accounting of expenses of management

e) Co-insurance accounting

f) Re-insurance accounting

g) Investment accounting

h) Accounting of foreign operations

Test Yourself 5

General Accounting must be in line with which of the following?

A. Accounting Standards issued by the ICAI

B. GAAP Standards Risk
C. International Accounting Standards
D. Insurance Regulatory and Development Authority (Investment) Regulations,
2000

288
Summary

 Accurate claims reserving is critical for continuing profitability of an insurer

 The interests of the stakeholders are varied – ranging from those of the
shareholder, the government, underwriters and the company management.

 There are two main sets of Reserves – premium (unearned premium and
unexpired risk) and claims (open claims reserve and IBNR & IBNER).

 The process of claims reserving is at operational level and its accuracy is

critical.

 Insurance companies follow two basic investment theories – Modern Portfolio

Theory and Asset Liability Management. Investment by insurers are regulated
very closely by the Regulator.

 Insurance Accounting – basically the same as other industries but with some
differences in view of the way insurance sector works

Market Practice

As stated earlier, the investment processes of Insurers in India are tightly

regulated by IRDAI through regulations, guidelines, circulars and other directives.
The Authority also insists that the Actuary checks on the Investment, adequacy
of reserves the adequacy of funds low. The Financial Condition Report (FCR) that
an appointed actuary of every Insurer have to submit to Regulator, every year,
has to deal with all these areas in detail.

Unearned reserve are also computed as 100 % of net written premium of past 12
months in Marine Hull. In other segments it is either 50 percent of Net Written
Premium during the preceding twelve months; or on the basis of 1/365th method
on the unexpired period of the respective policies

Some important terms / definitions you have learnt in this chapter

 Technical reserves
 Unearned premium reserve
 Triangulation
 IBNR
 Modern Portfolio Theory

289
Answers to Test Yourself

Answer to TY 1

The correct option is B

Reserves for unexpired risks comes under the Technical Reserves heading

Answer to TY 2

The correct option is C

IBNR is incurred but Not Reported

Answer to TY 3

The correct option is C

The Chain Ladder format is also known as Triangulation

Answer to TY 4

The correct option is A

Insurers follow two premium insurance styles: Asset Liability Management and
Modern Portfolio Theory

Answer to TY 5

The correct option is A

General Accounting must be in line with Accounting Standards issued by ICAI.

290
Self-Examination Questions
Question 1
Mentioned below are some insurance company stakeholders. Which is the odd one
out?
A. Underwriter
B. Government / Regulator
C. Shareholder
D. Policyholder

Question 2

If a policy is taken out on June 1st and the Financial Year starts on 1st April; the
unearned premium reserve is _________

A. 2/12ths
B. 3/12ths
C. 10/12ths
D. 9/12ths

Question 3

As per premium investment guidelines by IRDA, investment in Central

Government Securities should not be less than _____________

A. 20%
B. 15%
C. 10%
D. There are no such guidelines and insurance companies can invest the premium
collected the way they want to invest.

291
Answer to Self-Examination Questions

Answer to SEQ 1

The correct option is D

The policyholder is not directly a stakeholder.

Answer to SEQ 2

The correct answer is A

2/12ths are what’s left of the unearned premium reserve

Answer to SEQ 3

The correct answer is A

As per premium investment guidelines by IRDA, investment in Central

Government Securities should not be less than 20%.

292
Introduction: This study guide introduces you to general insurance. You will learn about the origin
of insurance, the insurance market and the different roles within the insurance industry.

Origin of insurance

 Insurance existed during Aryan civilisation

 Insurance had its origin in the „bottomry bonds‟ which were issued by the Mediterranean
merchants as early as fourth century B.C.
 Bottomry loan was an advance of money on a ship on voyage. The interest payable constituted a
sort of premium for the risk of loss of the ship.
 Loans granted on the security of cargo were called “respondentia bonds”.
 References to insurance practices are also found in “Manab Dharma Shastra” (Code of Manu).

Constituents and structure of Indian insurance market

 Insurance Regulatory and Development Authority (IRDA) – Insurance regulator in India.

 Public Sector Insurers – 100% owned by the Government.
 Private Insurance Companies – Fully owned by Indian companies or JVs with foreign partners.
 Brokers – Direct Broker(Life/General/Both), Reinsurance Broker, Composite Broker.
 Marketing Agents -
 Agents – Appointed by insurers after passing certification examination from IRDA.
 Loss assessors – Assess and certify losses above Rs. 20,000 in general insurance.
 Training – ATI‟s for agents, III and NIA for various insurance courses.

Chapter 1 – Introduction to general insurance

 Chapter 1 – Introduction to general insurance

Insured Name given to any person or organisation who buys an

insurance policy by paying premium for insurance protection.

People or organisations who sell insurance for insurers -

Intermediaries bringing together those who offer insurance protection and
those who want to buy it.

Organisations that offer and provide the capital for insurance

Insurer protection.

Companies conducting all lines of business

Health insurance companies

Agriculture insurance company

Classification of general insurance
companies
Credit insurance company

Reinsurance company

State government insurance department/funds

International insurance market

 Largest insurance market in the world.

 In 1575 a Chamber of Assurance was established to
Development register policies and settle disputes.
of insurance in  The practise of underwriting took shape in a coffee house
UK started by Edward Lloyd in 1680.
 Law Accident Insurance Society Ltd. started writing motor
insurance business from the year 1898 onwards.

Roles in Insurance

Role of Insurers

Providing and managing capital. To manage capital at an operational level insurers have two key roles:
 that of the underwriter; and
 that of the claims technician

Chapter 1 – Introduction to general insurance

 Chapter 1 – Introduction to general insurance

Insurance Regulatory and Development Authority (IRDA)

 Constituted as an Act of Parliament in 1999.

 Authority to administer the Insurance Act and to regulate, promote and ensure orderly growth of
the insurance industry.
 The Chairman and other members of the IRDA are appointed by the Government of India.
 Has the authority to issue licences to insurers and the intermediaries.
 Has authority to frame regulations relevant to proper functioning of the industry.
 Can issue guidelines and directions to insurance companies on operational matters.
 Protection of interests of the policy holders, relating to fair pricing, proper policy wording and
claim settlement.
 Underwriters

 Underwriters decide whether or not to accept a particular risk.

 They decide whether insurance cover is to be granted or not after securing factual information
from/about the applicant, evaluating the information, and deciding on acceptance/declinature.
 If cover is to be granted, then the underwriters will decide at what price, terms, conditions and
exceptions it will be granted.
 They estimate the potential exposure, check retention and arrange reinsurance where required.
 They confirm terms, draft the policies to cover the risk and issue the policy.
By performing the above four functions, the underwriter increases the
possibility of securing a safe and profitable distribution of risk.

Risk Engineer

 A risk engineer is the “Eyes of the Underwriter”.

 Their main role is to advise about quality of risk, based on technical knowledge and good practice.
 They are also known as risk surveyors, risk consultants, risk control surveyors or risk control
advisers.

Chapter 1 – Introduction to general insurance

 Chapter 1 – Introduction to general insurance

Property/Fire

Business Interruption

Customer Safety

Non-life insurance specialisation

Engineering

Security

Liability
Internal claims technician

A poor claims performance / service can impact the relationship between the insurers and their clients.
 Claims handled unfairly and / or slowly can give bad word-of-mouth publicity or even unwelcome
press and media attention.
 Claims overpaid will impact on bottom line (profitability).
 Omissions to chase recoveries by way of contribution, subrogation will adversely affect profitability.
 Claims handled fairly and efficiently will eventually give a company a solid, dependable reputation.
 Claim Process

Not Covered Claim Intimation from Insured

U/W docket checked Claim Registered &

Covered
for risk cover Surveyor appointed

Intimation to insured
If not covered Preliminary Report

Further details called for

On Account Payment
Recommended
Final Survey report submitted

Interim payment done

Final Settlement

Chapter 1 – Introduction to general insurance

 Chapter 1 – Introduction to general insurance

Role of loss adjusters

Checking whether the loss has been caused by any of the insured perils

Checking on whether any other aspects may affect an insurance company‟s

liability
Damage reclamation services like independent technical advice, through
expert guidance on loss limitation opportunities, thereby preventing wastage

Reporting, commenting on the loss reserves and incorporating facts,

opinions and recommendations

Checking the presented claim for accuracy and presenting the final report

Checking whether someone else may have been responsible for the loss

Satisfy himself that the policyholder has an insurable interest

Check whether there are any other policies for apportionment of loss
 Reinsurer Retrocessionaire

Through reinsurance, the insurance company The retrocessionaire is the reinsurer of the
taking it, becomes an insured, known in the reinsurance company and the ceding reinsurer is
context of reinsurance, a reinsured or the cedant known as the retrocedent.

Categories of Insured

Retail Individual Retail - SME Corporate

Personal accident insurance Small shops May be sub-divided on the basis of

Motor insurance Offices sectors (energy, finance, leisure) or
Health insurance Restaurants and cafes size like mid-size companies,
Building and Contents Hotels national companies, MNCs etc.)

 Insurance Broker – Direct, reinsurance, composite

 Reinsurance Broker
 Agent
Intermediaries  Third Party Administrators (TPA)
 Lloyd‟s Broker

Chapter 1 – Introduction to general insurance

 Chapter 1 – Introduction to general insurance

Ancillary roles

Help in valuation of buildings, specialised plants, classic cars,

Professional valuers works of art etc.

In developed insurance markets there are not only insurance

Insurance lawyers lawyers but there are lawyers specialising in certain areas
such as marine, professional indemnity, IT, etc.

Technical consultants These are experts who work on short term technical projects

Insurance software Major Indian operators, such as Wipro, TCS, L&T Infotech and
specialists Infosys have insurance verticals

III offers Associateship, Fellowship courses. NIA offers various

Educational Institutes courses apart from two- year post graduate diploma course in
insurance. Institute of Actuaries of India conducts
examinations for actuarial sciences.
Introduction: This study guide will help understand the major documents used in the insurance
industry.

The insurance contract

One party – Insurer

In return for a consideration – Premium

Insurance
Contract Agreement whereby
Undertakes to pay to the other party – Insured

Sum of money (claim) on happening of certain

specified event

Elements of an insurance contract

 Offer and acceptance

 Consideration The absence of one or
 Legality more of these will
 Agreement
 Contractual capacity make the contract
 An intention to create a legal relationship void, voidable or
 No intention to commit fraud unenforceable.

Chapter 2 – Policy documents and forms

 Chapter 2 – Policy documents and forms

Utmost Good Faith

Insurance contracts are different from normal contracts because:

 Insurance does not deal with physical sale / purchase and
 The true facts of the risk are better known to the proposer than to the insurer, the insurer is relying
on the proposer to disclose all material facts about the proposed risk.

Structure of an insurance policy

Heading Includes the name, address and contact details of the insurer.

Contains proposal form, sum insured, premium, cover that insurer will
Preamble provide as agreed, names of parties to the contract.

Signature The signature of an authorised official of the company.

Operative clause Insuring clause where the actual cover provided is outlined.

Exceptions This section details what the insurer will not pay for.

Conditions Describes to the insured what he or she must do or must not do

Includes insured’s title, address, nature of business, insurance

Policy schedule tenure, premiums, limits of liability, policy number, any special
exclusions / conditions or aspects of cover etc.
Interpreting a policy
Insurance Policy – It is a legal document that is enforceable in a court of law. In the event of any
dispute between the policyholder and the insurer, the policy will be interpreted by the court.

Insurer responsibility
 Parties to an insurance contract must make their intentions clear in the contract.
 It is the responsibility of the insurer to make sure the terms are certain and enforceable

Written Words v/s Printed Words

When there is a conflict between printed words and written clauses then greater consideration will be
paid to handwritten clauses. The written words will be given more effect than the printed words.

Principles of construction
 The construction of a policy of insurance is a matter to be decided by the Court.
 Where the Court has already decided the meaning of words used on a policy of insurance, the
doctrine of precedent will be applied.

Principles rules of construction

Where a clause framed in general terms and capable of a wider significance is followed by another
clause of narrower significance, the second clause is to be regarded as explanatory of the first and
limiting its application accordingly.

Chapter 2 – Policy documents and forms

 Chapter 2 – Policy documents and forms

Policy v/s Proposal

Where there is an inconsistency between the wording of the policy and that in the proposal or other
earlier document/s, the policy is to be regarded as the true intention of the parties, in the absence of
valid evidence to the contrary.

Policy Endorsement
Any changes / amendments in the policy details like personal details, policy details, coverage details
or cancellation of cover can be done through policy endorsement.

Name and address

Policy number
Contact information of the insurer, agent / broker
Contact information of the agent / broker
Renewal
document Likely consists of Address of client
Period of insurance
Renewal premium
Declaration reminder
64 VB reminder
Marketing adage: It is much more expensive to obtain a new customer than retain an existing one.

Insurance proposal forms and certificates

Certificate proving the existence of the cover and policy of insurance

Insurance
Certificates
It is required by a number of authorities including the registration
authorities and the police

Certificate contents

Identification of the certificate

Effective date of the insurance
Details of the insured
Details of who can drive the vehicle
Details of the vehicle
Purposes as to use

Chapter 2 – Policy documents and forms

 Chapter 2 – Policy documents and forms

Insurance proposal form

Insurance-specific
Generic questions Specific questionnaire
questions

 Name  Exposure Examples

 Website  Policy limits  Contractor’s all risk
 Contact information  Specific questions  Liability covers
 Address  Crime covers
 Business  Marine covers
 Period of insurance
 Insurance history
 Claims experience
 Convictions
 Declaration

The insurer will usually request for completion of a claim form,

Insurance Claim Form once initial advice of a claim has been received. The format will
vary from class to class and from insurer to insurer.
Introduction: This study guide will make you aware of the features of fire insurance and marine
insurance.

Cover provided under fire insurance policy

 Fire
 Lightning
 Aircraft Damage
 Riot, Strike and Malicious damage
Standard Fire and  Terrorism Damage
Special Perils Policy  Storm, Cyclone, Hurricane, Flood etc.
 Impact Damage
 Subsidence and Landslide
 Missile Testing Operations
 Bursting and / or Overflowing of Water Tanks, Apparatus
Terrorism Damage And Pipes
 Accidental Leakage from Automatic Sprinkler Installations
 Bush Fire

 Excluded in the standard policies, however it can be covered by payment of extra premium.
 In the above scenario cover will be granted by attaching an endorsement.

Chapter 3 – General insurance products - Part 1

 Chapter 3 – General insurance products - Part 1

Deductibles for Terrorism Cover

Every claim under terrorism cover will be subject to a deductible as under:

Industrial Risks : 0.5% of Total Sum Insured subject to a minimum of Rs. 1 lakh.
Non-industrial Risks : 0.5% of Total Sum Insured subject to a minimum of Rs. 25,000

General exclusions from fire insurance policy

The first amount of 5% of each claim subject to a minimum of (differs)- in respect of loss arising
out of “Act of God” perils such as Lightning, STFI, Landslide and Rockslide.

The first Rs.(differs) for each and every loss arising out of other perils

Loss, destruction, damage caused by war, kindred peril, nuclear peril, pollution contamination

Loss, destruction, damage to stocks in cold storage premises caused by change of temperature

Loss, destruction, or damage to any electrical machine, apparatus, fixture due to specified reason
Some general conditions for fire insurance

Policy shall be voidable in the event of mis-representation, mis-description or non-disclosure

of any material particular.

All insurance under the policy shall cease on expiry of seven days from the date of fall or
displacement of any building or part thereof subject to certain conditions.

If there is a marine policy covering the loss; the fire policy will pay only the excess over the
amount payable under the marine policy.

If the claim is fraudulent then the insured loses all benefits under the policy

Insurer has the option to reinstate or replace the property that is lost / damaged instead of
paying the amount of claim to the insured

Condition of average applies for properties that are not insured for full value.

In the event of more than one policy covering the loss; all policies will contribute their
proportionate claim amount (principle of contribution).

Every notice and other communication to the company required by these conditions must be
written or printed

Chapter 3 – General insurance products - Part 1

 Chapter 3 – General insurance products - Part 1

Add-on covers available with fire insurance

 Architects, etc. Fees (in excess of 3% of claim amount)

 Debris Removal Expenses (in excess of 1% of claim amount)
 Deterioration of Stocks in Cold Storage premises
 Spontaneous Combustion
 Forest Fire
 Impact Damage
 Earthquake (Fire and Shock)
 Spoilage Material Damage cover
 Loss of rent

Cover provided under special policies

Floater policy Cover stocks at various specific locations under one sum
insured

Declaration policies For coverage of the frequent fluctuations in stocks/stock

values

In the event of loss, the amount payable is the cost of

Reinstatement value policy reinstating property of the same kind or type, by new
property. Other than stocks
 Industrial All Risk Package cover designed for industrial risks (both
Insurance Policy manufacturing & storage facilities) with an overall sum
assured of Rs.50 crores and above.

Agreed Bank Clause: Policies in which a Bank has a partial interest are to be made out in the
name of the Bank and Owner or Mortgagor and the Agreed Bank Clause incorporated in the policy.

Claim is payable to the bank whose receipt shall be a complete

discharge and binding on all parties insured.
Salient features of
the clause
Any settlement, compromise etc. in relation to dispute if made
with the bank shall be valid and binding on all parties insured.

 Construction of external walls and roof,

number of storeys.
Fire  Occupation of each portion of the building.
Proposal Includes information on
 Presence of hazardous goods.
Form  Process of manufacture.
 The sums proposed for insurance.
 The period of insurance.
 Insurance history

Chapter 3 – General insurance products - Part 1

 Chapter 3 – General insurance products - Part 1

Cover provided under consequential loss (fire) policy

Protection in respect of loss of or damage to buildings, machinery, furniture and fittings, goods and
merchandise, etc. by fire and allied perils

Turnover of a business consists of

Variable charges Standing charges Net profit Gross profit

Provides indemnity in respect of loss of gross profits during the

Indemnity
indemnity period which is selected by the insured. The period chosen
Period
may vary from 3 months to 3 years.

As the indemnity provided by the consequential loss policy is in

The Sum respect of loss of gross profits for the indemnity period naturally the
Insured sum insured should represent the gross profits of the indemnity
period selected.
Marine Insurance

Marine insurance

Cargo insurance Hull insurance

 Provides legal framework for transaction

of marine insurance.
Marine Insurance Act, 1963  Act deals with basic principles, basis of
valuation under the policies, basis of
settlement of losses etc.

 Cover note
 The marine policy
Marine Insurance form
Practice Documents used in cargo insurance
 The clauses
 Slip

Chapter 3 – General insurance products - Part 1

 Chapter 3 – General insurance products - Part 1

 Export and import shipments by ocean-going vessels of all

Marine Cargo types,
Insurance Concerns  Coastal shipments by steamers, sailing vessels, mechanised
boats, etc.,
 Shipments by inland vessels or country craft, and
 Consignments by rail, road, or air and articles sent by post.

Covers export / import

Institute Cargo Clauses shipments by sea

Institute Cargo Clauses (C) Institute Cargo Clauses (B) Institute Cargo Clauses (A)

 fire or explosion  Perils of Clause (C) &  These clauses

 vessel or craft being  Earthquake, Volcanic eruption provide cover for all
stranded, grounded or lightning
 overturning or  Washing overboard risks of loss or
derailment of land  Entry of water into vessel, damage, to the
conveyance craft, hold, container, liftvan subject matter
 collision  Loss of any package overboard insured.
 discharge of cargo at a or dropped whilst loading or
port of distress unloading from vessel.
 Jettison
 General Average, Both
to Blame
General exclusions for all three clauses

 Loss caused by wilful misconduct of the insured.

 Ordinary leakage, ordinary loss in weight or volume or ordinary wear and tear.
 Loss caused by inherent vice or nature of the subject matter.
 Loss caused by delay, even though the delay be caused by an insured risk.
 Deliberate damage by the wrongful act of any person (malicious damage).
 Loss arising from insolvency or financial default of owners, operators, etc. of the vessel.
 Loss or damage due to inadequate packing.
 War and kindred perils.
 Strikes, riots, lock-out, civil commotions and terrorism.

Inland Transit (Rail / Road) Clauses

Clauses C Clauses B Clauses A

 Fire  Fire, Lightning  All risks of loss or

 Lightning  Breakage of bridges damage to the insured
 Collision, Overturning goods.
 Derailment

Chapter 3 – General insurance products - Part 1

 Chapter 3 – General insurance products - Part 1

Registered postal sendings

 No standard set of clauses. ICC or Inland Transit Clauses may be used.
 The cover attaches from the time of issue of the registered post receipt and terminates on delivery
of parcel to the addressee (consignee).

Types of marine policies

Specific policy: Covering a single shipment or consignment. Valid for a particular voyage or transit.

Open policy: It is a floating policy issued to take care of all shipments coming within its scope.

Duty Policy: insurance of customm duty for imports

Special storage risk insurance: Covers goods lying at the railway premises or carrier’s godowns
after termination of open cover or special declaration policy but pending clearance by the consignees.

Annual policy: Covers goods in transit, which are not under contract of sale, for 12 months.

Increased value insurance: Covers increased value of cargo if market value has gone up.
 Total loss Full insured value

Particular average Partial losses

Covers loss caused by a general

General average average act
Claims
Amount payable is difference between
Salvage loss insured value and net proceeds of sale

Reimbursement for any expenses

Sue and labour charges incurred by the insured to minimise the
loss or damage payable under the policy

Reimbursement for survey fees,

Extra charges settling agents fees, etc.

Chapter 3 – General insurance products - Part 1

 Chapter 3 – General insurance products - Part 1

Marine Hull Policy

Covers only the loss or damage caused to the vessel and not the loss or damage to the cargo carried.

 Perils of the seas, rivers, lakes or other navigable

waters.
 Fire, explosion
 Violent theft by persons from outside the vessel.
Coverage provided by  Jettison
hull policies  Piracy
 Breakdown of or accident to nuclear installations
or reactors.
 Contact with aircraft or similar objects.
 Earthquake, volcanic eruption or lightning.
 accident in loading, discharging or shifting of cargo
or fuel
 bursting of boilers
 negligence of Master, Officers, Crew or Pilots.

The Institute Time Clauses – Hulls (1.10.83) (ITC – Hulls)

For basis for most policies used for insurance of vessels and their machinery
Introduction: This study guide explains the features of motor, liability, personal accident and health
insurance.

Motor Insurance

Classification of motor vehicles

Private cars Motor cycles and Commercial

motor scooters vehicles

Goods carrying Passenger carrying Miscellaneous

vehicles vehicles vehicles

Types of losses

Own damage (OD) Third party liability (TPL)

Chapter 4 – General insurance products - Part 2

 Chapter 4 – General insurance products - Part 2

Motor Vehicles Act (1988): Prescribes rules and regulations for licensing, use and insurance of all
types of vehicles.

Liabilities which require compulsory insurance

 Any liability incurred by the insured in respect of death or bodily injury of any person including
owner of the goods or his authorised representative carried in the carriage,
 Liability incurred in respect of damage to any property of a third party,
 Liability incurred in respect of death or bodily injury of any passenger of a public service vehicle,
 Liability arising under Workmen’s Compensation Act, 1923 in respect of death or bodily injury of
driver; conductor, or ticket examiner; workers, carried in a goods vehicle;
 Liability in respect of death or bodily injury of passengers who are carried for hire or reward or by
reason of or in pursuance of contract of employment.

Section 140 of Motor Vehicles Act, 1998

 Provides for liability of the owner of the Motor Vehicle to pay compensation in certain cases, on the
principle of no fault.
 The amount of compensation, so payable, is Rs.50,000/- for death, and Rs.25,000/- for permanent
disablement of any person resulting from an accident arising out of the use of the motor vehicle.
  Certificate of insurance: provides evidence
of insurance to the Police and Registration
authorities (R T O).
 Cover notes: provides cover on a provisional
Motor insurance basis. It is issued as evidence of protection for
documents a temporary period to prove that cover is in
force.
 Renewal notice: issued one month in
advance of the date of expiry, inviting renewal
of the policy.

Form “A” To cover Act Liability, also known as

Liability Only Policy

Types of
policy forms
To cover Own Damage Losses and Act
Form “B” Liability, also known as Package Policy

Chapter 4 – General insurance products - Part 2

 Chapter 4 – General insurance products - Part 2

Covers liability to third parties

Policy „A‟ – Liability only policy

Specifies various conditions, important exceptions and
major conditions

Section I – Loss or damage (or ‘Own Damage’)

Policy „B‟ – Package Policy Section II – Liability to third parties

Section III – Towing of disabled veicles Appears only in

commercial vehicle policies

Understand the basic underwriting and rating features

Proposal form elicits information necessary

Rating for:
 Rating and
 Underwriting
 Factors important for Rating

Private cars Cubic capacity (CC), insured estimated value (IEV), area of operation

Motor cycle & scooters Cubic capacity, insured estimated value, area of operation

Buses CC, IEV and capacity by number of passengers, area of operation

Goods Carrying Vehicles Gross Vehicle Weight (GVW), IEV, area of operation

 Type of vehicle e.g. imported cars, sports cars,

Factors important for  Use of the vehicle,
underwriting  Geographical area etc.
 Age of the vehicle

Understand motor claims and procedures

Own Damage Claims

Receipt of notice Check policy is in Loss registered in Insured submits

of loss force and it Claims Register repair estimate
covers the vehicle

Chapter 4 – General insurance products - Part 2

 Chapter 4 – General insurance products - Part 2

Assessment: Independent automobile surveyors are assigned the task of assessing the cause and
extent of loss. They have to submit a survey report.

Settlement: Survey report is examined and settlement is effected in accordance with the
recommendations contained therein.

Total Loss When repairs are not an economic proposition then the insurer negotiates a
Claims reasonable sum representing the market value of the vehicle immediately prior
to the loss or the insured value if the market value is higher.

Theft If vehicle is stolen and remains untraced for a long period of time, the police
Claims file away the case certifying that the case is classified as true but undetected.
This certificate is essential before a total loss following theft is settled by the
insurers.
Claims Documents  Claim form and survey report
 Driving Licence
 Registration Certificate Book
 Fitness Certificate (Commercial Vehicles)
Documents required  Permit (Commercial Vehicles)
for processing a claim  Police Report
 Final Bill from repairers
 Satisfaction Note from the insured
 Receipted bill from the repairer, if paid by insured.

Third Party  Section 165 of the Motor Vehicles Act 1988, empowers the State
Claims Governments to set up Motor Accident Claims Tribunals for
adjudicating upon third party claims.

 Where there is clear liability, claims are negotiated with the third
Compromise party to accept a compromise settlement, which if accepted, is
Settlements registered with the MACT and its consent obtained.

 Pending cases with the MACT where the liability is not in doubt are
placed before the Lok Adalat or Lok Nyayalaya, for a voluntary and
Lok Adalats
amicable settlement between the parties.

Chapter 4 – General insurance products - Part 2

 Chapter 4 – General insurance products - Part 2

Liability insurance policies

Legal Liability Policies

Compulsory Public Public liability policy (industrial Product liability policy

Liability Policy / non-industrial risks

Public Liability Insurance Act, Cover for industrial Protects insured from
requires that any undertaking risks and non- public claims against
handling hazardous industrial risks. Policy death, bodily injury or
substances, has to indemnifies the illness or even damage
compulsorily insure liability for insured against their to property due to the
an amount not less than the legal liability. insured’s products.
amount of the paid up capital
of the undertaking.
Personal accident, health and specialty covers

Personal Accident
Insurance

Pays fixed compensation for death or disablement resulting from accidental bodily injury.

Mediclaim insurance: Provides for reimbursement of hospitalisation

expenses for illness suffered or accident sustained during the policy
period.
Critical illness benefit: provides for lump-sum payment for
Health Insurance specified major illness

Overseas medical policy: Provides for payment of medical

expenses for illness / accident during overseas travel for business,
official or holiday purposes.

Chapter 4 – General insurance products - Part 2

 Chapter 4 – General insurance products - Part 2

There are different covers offered under this product which offer
Speciality Covers protection against specific events categorised under this type of
insurance.

Credit and Political Covers

Cyber Risks Cover

Entertainment / Film Cover

Event Cancellation Cover

Rural / Crop Cover

Weather Derivatives

Entertainers / Sportsperson Cover

Introduction: This study guide will provide knowledge on engineering insurance and other classes of
insurance which take care of sectors like banks, jewellers, individuals etc.

Cover under Engineering Insurance Policies

Engineering Insurance: provides different policies for insurance needs during construction and
operational phase of a project

Classes of Engineering Insurance

Contractors All Risks (C.A.R.) Policy - designed to protect the interests of contractors and
principals in respect of civil engineering projects, like buildings, bridges, tunnels, etc.

Erection All Risks (EAR) Insurance Policy - concerned with erection / installation of plant,
machinery and equipment and structures involving no or very little civil engineering work.

Marine-Cum-Erection (MCE) Policy – provides cover from the moment the equipment/s leaves
the manufacturers warehouse and continues during the voyage to the port of entry, unloading at
the port of entry, inland transit to the site of erection including incidental storage and thereafter
during erection, testing and commissioning.

Advance Loss of Profits (ALOP) Policy - covers financial consequences of a project being
delayed because of accidental damage to the project materials.

Chapter 5 – General insurance products - Part 3

 Chapter 5 – General insurance products - Part 3

Classes of Engineering Insurance

Machinery Breakdown Policy - covers unforeseen and sudden physical damage by any cause
(subject to excepted risks) to the insured property. Covers mechanical and electrical breakdown.

Contractors Plant & Machinery (CPM) Policy – covers unforeseen and sudden external
physical loss or damage to plant and machinery due to specified causes.

Boiler and Pressure Plant Insurance Policy - covers damage to boiler and other pressure
plant and to surrounding property of the insured. It covers legal liability of the insured caused
by explosion or collapse of any boiler and / or pressure plant.

Machinery Loss of Profits (MLOP) Insurance Policy – covers business interruption costs
due to breakdown of or accident to a vital part of manufacturing plant .

Deterioration of Stock (DOS) Insurance Policy - a form of consequential loss cover granted in
the engineering department for stocks contained in large cold stores.
 Electronic Equipment Insurance (EEI) Policy

Equipment (Section 1) External Data Media Increased Cost of

(Section 2) Working (Section 3)

 cover applies to any  coverage applies if the  indemnifies the insured

unforeseen and sudden external data media for all additional costs
specified in the schedule incurred to ensure
physical loss or damage (type and quantity) continued data
from any causes (other inclusive of the processing on substitute
than those specifically information stored, equipment if such costs
excluded) which can be directly are incurred as an
processed in EDP unavoidable
systems, suffers consequence of loss or
material damage by a damage indemnifiable
peril covered under under material damage
Section 1 of the policy section of the policy

Chapter 5 – General insurance products - Part 3

 Chapter 5 – General insurance products - Part 3

Understand other insurance covers available under various categories

Cover for property in any form, including cash, in the business

premises.

Burglary Insurance
Risks covered:
 theft of property after actual forcible and violent entry into the
premises or theft following actual, forcible and violent exit from
the premises.
 damage to insured property or premises by burglars.

All Risks Insurance Suitable for covering jewellery, valuables, curios, antiques and
other works of art, paintings, watches, cameras, and other similar
Policy articles.

Covers accompanied baggage during specifies journey, which

Baggage Insurance includes air, sea, rail or road travel undertaken by the insured.
Money Insurance Cover against theft, robbery and accident

Fidelity guarantees Indemnifies the employers against the financial loss suffered by
insurance them due to the specified dishonest acts of their employees.

Individual policy Used where only one individual is to be guaranteed.

Used where entire staff or a number of selected

Collective policy individuals are to be covered.

Types of It is an extension of the collective form of contract in

Policy Floating policy which the names and duties of the individuals to be
or floater covered are inserted in a schedule with a specified sum
of guarantee is “floated” over the whole group.

Positions policy This is similar to a collective policy with the difference that
instead of using names, the "position is guaranteed for a
specified amount, so that a change in the person holding
the position does not affect the cover.
Covers the entire staff without showing names or
Blanket policy
positions.

Chapter 5 – General insurance products - Part 3

 Chapter 5 – General insurance products - Part 3

Television Covers television apparatus and antenna against loss or damage

insurance due to specified events.

Pedal Cycle Covers loss of or damage to the cycle by fire, lightning, explosion,
insurance burglary, housebreaking, theft and accidental external means.

Plate Glass Cover against the actual breakage of plain glass of ordinary glazing
quality completely and securely fixed, by any reason whatsoever
insurance except those that are specifically excluded.

Neon sign Cover in respect of loss of or damage to the neon sign installation
by (a) accidental external means or (b) fire, lightning, external
insurance explosion or theft

Package insurance scheme designed to meet the requirements of a

Householders householder by combining under a single policy a number of
insurance contingencies which are otherwise covered under separate policies
(comprises of 10 sections).
 Shopkeeper’s Policy is designed for small shopkeepers, that is, whose property
Insurance is valued at less than Rs.10 lacs (comprises of 11 sections).

Banker’s Blanket Policies

Bankers’ Indemnity Insurance is a combination of several specific covers, such as fire, burglary,
money-in-transit, fidelity guarantee and even Marine (inland transit). The policy provides indemnity
for direct loss of money and / or securities sustained by the insured and discovered during the period
specified in the policy.

Jewellers Block Policy is a package scheme covering several

Jeweller’s types of losses. Jewellery, gold and silver ornaments or plate,
Block Policies pearls and precious stones, cash and currency notes and / or
merchandise and materials usual to the conduct of the
insured’s business, is covered.

Policy offers combination of different covers:

Office  Building (if owned) – fire and allied perils,
Protection  Contents – fire and allied perils, burglary,
Shield  Tenant’s liability,
(General  Money on premises and in transit,
Office)  Electronic equipment and portable computer,
 Other events as specified in the policy

Chapter 5 – General insurance products - Part 3

 Chapter 5 – General insurance products - Part 3

Provides employee theft coverage, premises coverage, transit

Crime Insurance coverage, depositors’ forgery coverage, computer fraud coverage.

Aviation Hull

Aviation Hull War Risks

Insurance
Aviation Insurance
Aviation Hull Total Loss
Only Insurance

Aviation Liability
Insurance

Airline General Third

Party Liability Insurance
 Pre-launch insurance

Launch insurance
Satellite Insurance Covers
Orbit insurance

Third party liability

Oil and Energy Risks The drilling units and the equipment require insurance for
Insurance various perils like:
 Damage / total loss due to blow-out which means an
unintended flow from the well of drilling fluid, oil, gas
etc. which cannot be stopped.
 Fire
 Weather hazards, storm
 Collision
 War, Strikes etc.

Chapter 5 – General insurance products - Part 3

 Chapter 5 – General insurance products - Part 3

Cyber Liabilities

Cover looks to address:

 First Party losses including Consequential Losses and
 Third Party losses

Micro-Insurance

 Micro insurance provides cover to low income groups.

 It includes various products that provide protection to life, health and assets against various
risks.
Introduction: This study guide gives knowledge on how the insurer (underwriter) assesses the risk of
a proposal and accordingly, how he goes about pricing the risk (if the risk is to be accepted).

Concept of underwriting

Insurance underwriters evaluate the risk and exposures of potential clients.

 They first decide whether to accept the risk or not.
 If the risk is to be accepted, they decide how much coverage the client should receive and
how much they should pay for it.

Underwriting involves measuring risk exposure and determining the premium that needs to
be charged to insure that risk. The function of the underwriter is to acquire - or to "write"-
business that will bring money to the insurance company, and also to protect the
company's book of business, from risks that they reckon, will make a loss.

The underwriters may either

 decline the risk or
 may provide a quotation in which the premiums have been suitably loaded or
 may provide a quotation in which various exclusions have been stipulated which restrict the
circumstances under which a claim could become payable

Chapter 6 - Underwriting
 Chapter 6 - Underwriting

The underwriter’s maxim

 Maintain a regular review of the existing portfolio rates and terms to ensure that the insurer:
a. achieves maximum profitability
b. does not lose quality business
c. deals appropriately with poor quality business
 Obtain quality new business.

 Develop new products / product extensions

 Obtain information / feedback from customers, intermediaries and the market in general
 Identify target segments which will contribute to building of a profitable, quality portfolio.

 Maintain robust risk inspection / survey programmes for the existing portfolio:
a. ensuring that the portfolio quality is maintained and policy terms are related to the
quality of the risk.
b. providing risk improvement advice to customers, where applicable.
 Develop streamlined systems at minimum expense, to achieve the maximum degree of account
control and service to customers.
 Maintain tight control of expenses to ensure that optimum competitiveness and profitability are
achieved.
Underwriting process

Step 1:
Receipt, evaluation and
acceptance of risk

Step 2:
Consideration of terms and
conditions

Step 3:
Pricing the risk

Step 4:
Managing exposure

Chapter 6 - Underwriting
 Chapter 6 - Underwriting

 a telephone call to operating office or call centre

 a written proposal form through post from an
agent / broker
Receipt of Risk Ways  an online proposal through an e-channel (internet)
 a formal presentation of a large commercial risk by
a broker
 email request from client or broker

Examine /
Understand Can it be If yes, what are the
Evaluate the risk accepted? terms and conditions?
the risk

 Details of the proposer

 Business, trade and / or activity
Underwriter will have the  Cover required
risk proposal information in  Location of the risk
a standard format  Exposure (how big is risk – dependent on type of
insurance, sum insured, turnover, wages etc.)
 Claims experience
 Hazards can influence the probability and severity of loss.

Hazards

Physical Hazards Moral Hazards Financial Hazards

• Proposal Form
• Questionnaires
Collection of information
• Surveys
• Local language
• Websites

Acceptance of risk
 acceptable and non-acceptable types of
risk
Criteria in a company’s  geographical limitations
underwriting policy
 accumulation hazard
 limits of indemnity

Chapter 6 - Underwriting
 Chapter 6 - Underwriting

Standard wordings including definitions, conditions and

Policy Terms
exceptions. The underwriter will need to ensure that the standard
and Conditions
wording is satisfactory for the risk.

Risk sharing

An insurer must reinsure its risk portfolio because they have only a finite source of funds from
policy premiums and from this amount, all valid claims need to be settled.

Reasons to share risk

 To protect the account against large claims.

 To avoid undue fluctuations in underwriting results, ensuring a balanced set of results each year
without ‘peaks and troughs’ and comforting the shareholders.
 To look to obtain an international spread of risks.
 To gain access to the intellectual capital of the (specialist) reinsurer.
 To gain access to alternative source of capital.
 To allow the insurer to write more business / access other markets, than its own capital would be
able to.
 At a basic level, the insurer has two particular levels to think about

this could relate to very large limits being insured, involving

Risk level senior business people or celebrities.

this will relate to all the risks in a particular group – say Group
Portfolio level Personal Accident or Hospitalisation covers.

Risk Sharing Methods

Co-insurance A part of the risk is passed to another insurer, the co-insurer, usually by way of
a fixed percentage share of premiums and claims.

Reinsurance is where an insurer X involves a specialised insurance company (a

Reinsurer) to assist in sharing the risk. The insurer (the Ceding Company or
Reinsurance Cedant) will decide on how much risk they can keep (the Retention) and will
look to a reinsurer to take the balance risk.

Chapter 6 - Underwriting
 Chapter 6 - Underwriting

Contractual Relationship

 In coinsurance, both the Lead Company and the Follow Company (or companies) have separate
contractual relationships with the insured.
 In reinsurance, the reinsurer acts as a new insurer, with the primary insurer effectively becoming
the policyholder – the contractual relationship is between the insurer and reinsurer.
 The insured retains the original relationship with the insurer.
 The particular significance here is that IF the reinsurer is justified in declining the reinsurance
responsibility in any claim, then the FULL amount falls on the insurer.
 The insured does not have any direct relationship with the reinsurer.

Facultative (FAC) – at risk level

Types of reinsurance
Treaty Reinsurance – at portfolio level

Methods of reinsurance

Proportional Non-Proportional
Proportional
The quota share treaty is an automatic reinsurance
Quota share whereby the ceding insurer is bound to part with a
fixed percentage of every risk written by it.

An insurer decides that on any given risk or class of

risk, he will retain a certain maximum amount, called
Surplus retention. In reality, he may actually retain a lesser
than the said maximum amount, depending on the
risk. He will reinsure the surplus to one or more
reinsurers.

Non Proportional Treaty

Excess of Loss (XL) Stop loss

Chapter 6 - Underwriting
 Chapter 6 - Underwriting

Key Distinctions

FAC TREATY
 One risk at a time  Block or class of business
 Reinsurer can accept or reject FAC vs  Usually automatic and immediate
 Risk underwriting TREATY  Reinsurer not involved in risk decisions
 Short run (usually a year)  Long term relationship

Meaning of risk management and the steps involved

Identify

Manage Risk Management Assess

Evaluate
Risk Identification: Identifying the business’ exposure to uncertainty

Risk Identification Methodology

 Strategic
 Operational
 Financial
 Knowledge management
 Compliance

Risk Evaluation: risk must be examined carefully, identified and measured in terms of the following
factors:

 Frequency of its likely occurrence

 Probability of loss or damage
 Severity of the effects of a loss
 Perception of the probability of loss
and its effects

Chapter 6 - Underwriting
 Chapter 6 - Underwriting

Components of Risk Management Process

Recognition, anticipation of risks that threaten the assets &

Identification earnings of a business enterprise.
Estimating the likely probability of a risk occurrence & its likely
Evaluation and assessment severity.
Measures to avoid occurrence of risk, limit its severity and
Prevention & control reduce its consequences.
Determining what the cost of risk is likely to be or might be &
Financing ensuring that adequate financial resources are available.
Introduction: This study guide will give knowledge on the basics of pricing and also look at soft and
hard insurance markets.

Premium pricing mechanism

Premiums In Claims Out

Insurance companies create a pool by collecting premiums from a group of people, who are exposed
to the same risk, and pay out claims from the same pool to those who suffer from the risk.

Chapter 7 – Rating and premiums

 Chapter 7 – Rating and premiums

Expense components of premium

 Management expenses
 Commissions
 Claims expenses

Pure premium rating method

This approach reflects the expected losses. It is a calculation of the pure cost of,
say, property or liability insurance protection. This is without any loading for the
insurance company's expenses, premium taxes, contingencies and profit margins.

Pure Premium Total Amount of Losses Incurred per Year

Number of Units of Exposure
 Profit

Expenses

Profit rate is built Reinsurance cost

Book Rate Theory up as follows
Commission

Pure Risk Premium

Technical pricing (Book rate)

 Develops from the pure premium method

 Relies on the insurer having quality statistical information, based on historical loss details and
exposure information, collated at market level or intra-company e.g. national fire statistics,
weather records, crime statistics etc.
 The underwriter can then make comparisons with their experience with similar risks and attempt to
model the pattern of potential claims.
 From a comparison of the loss experience over a certain period, compared to the exposure at risk
over the same period, a technical rate can be identified, which can then be adjusted for expenses,
commission, small level of profit, etc.
 This will be converted to produce a rate per cent or per mille on sums insured, wage roll or
turnover etc. depending on the type of risk and type of policy as also based on the level or rate
required for the average risk. Such a rate is called the “Book Rate”.

Chapter 7 – Rating and premiums

 Chapter 7 – Rating and premiums

Exposure Measurement of how big a risk is

Property Insurance The sum insured on the building or contents

Employer’s Liability or The wage roll on a particular trade classification

Workmen’s Compensation

Products Liability Insurance Turnover on the relevant product line

 Inflation
 Political
Trends to be considered  Technology
for pricing and claims  Legal changes
 Attractiveness
 Others

To assist in getting the best possible technical

Classification pricing, the insurer must have high quality data
collection. This will ensure that the best risks are
called upon to pay the cheapest premiums and
the worst risks are charged the most.
 The underwriter:
 identifies, say, the last five years‟ claims experience
 divides that by 5, to get the average
Burning Cost  adjusts it for any special circumstances e.g. inflation
 identifies the total exposure for the equivalent
 divides by 5, to get the average
 divide the average claims by the average exposure

The „burning cost‟ is translated into a rate by adding allowances for expenses, commission, claims
inflation, profit, etc.

Information necessary to complete a burning cost rating calculation

 Claims experience split between claims paid and claims outstanding.

 Turnover or wages.
 Previous insurer(s) for each of the past five years.

Chapter 7 – Rating and premiums

 Chapter 7 – Rating and premiums

Soft market and hard market

In a “soft market”, insurance companies (the underwriters) are

Soft Market eager to write new business and to hold onto existing business;
and are likely to offer coverage improvements and / or reduced
premiums.

 Capacity is available
A soft market
 Insurers‟ results have improved
starts when
 Insurers have achieved their profit goals

In a “hard market”, insurance companies will often increase

Hard Market premiums and take back some of the coverage enhancements,
they provided during the soft market.

 A capacity issue
Hard Market  An underwriting issue
come due to
Introduction: This study guide will give knowledge on the basics of claims handling and the various
stages in the claim settlement process.

Basics of a claim

Claim A claim is a notification to an insurance company, requesting payment of an

amount, on the happening of a specified event, under the terms of the policy.

Benefits that insurance brings

 for the individual, the peace of mind that the property and liabilities are insured; and
 for the corporate, the satisfaction in knowing that the risks to the balance sheet are taken care of

Claims process

 provide efficient and effective customer service; and

 meet the needs of the customer (or third party claimant)
Basic objectives in accordance with the terms and conditions of the policy, at the
lowest cost (i.e. the actual cost to settle the claim and the costs of
administering the claim).

Chapter 8 - Claims
 Chapter 8 - Claims

Steps in claim process

event (mishap) has happened, which the insured believes, falls

Contingency occurs within the scope of his / her policy
client has to provide initial details of the claim in writing,
Initial intimation of a claim immediately when it happens
full description of circumstances including time and date along
Forwarding of further details with policyholder details, location of claim
the insurer will firm up on the claims estimate put against the
Setting up of claim reserves claim at the time of immediate notification
the insurers will examine the facts to check aspects and may also
Investigation take the help of experts like valuers, consultants, investigators etc.
offer is made to insured on the acceptance of which the claim is
Offer/negotiation or declinature settled. If not accepted, then both the parties negotiate
once settlement agreement is reached it is done by cheque, repair,
Final Settlement restoration, rebuilding or reinstatement
closing the file and examining potential of recovery through
Closure subrogation, contribution, salvage etc.
Management Information / Claims Coding

Proof of Loss: “Onus of proof” is a legal term relating to the person who must provide the
evidence. It is a legal obligation to provide proof of what is alleged and, it lies with the insured.

Claims Management Process

Acceptance: Insurer assesses validity of the claim against the policy wording and terms, in order to
decide whether to accept the claim

Management & quantification: Taking control of the resolution of the problem, identifying and
delivering the most cost effective solution within the terms of the policy, accurately identifying the
total cost of the solution

Settlement and closure: Finalising the claim, making payments to suppliers, third parties and / or
the policyholder and closing the claim once all amounts are settled

Determining liability / acceptance of the claim: If the claim is valid the insurer should
determine whether there is any other party, who should share or take full liability for the loss being
claimed for.

Chapter 8 - Claims
 Chapter 8 - Claims

Quantification

 Most insurance policies will specify a ‘sum insured’ or other limit on the
value insured under the policy. It is the policyholder's responsibility to
Underinsurance determine whether this is adequate for their needs.
(Property  However, there are times when the actual value at risk is greater than the
Insurance) sum insured.
 In such cases, the insurer has the right to settle the claim in the same
ratio that the sum insured bears to the total value .
 This is so because the insured has not paid the premium for the full value
at risk and so, cannot expect the claim to be settled fully.

 In the case of some liability / injury claims it may take years to quantify
complex claims.
 This often results in legal cases where the final award i.e. the
Complex claims indemnification amount, is determined by the courts.
 Even complex property damage claims can take a long time to fully
quantify where the cost of rectification / rebuilding and the time required
to complete the work, can be difficult to assess, and may take months or
even years in very complex cases such as historic buildings or complex
engineering or chemical plants.

 Introduced in property claims, where the insurer has admitted liability

Arbitration under the policy but there is no agreement on the amount being offered.
 Modes of Settlement
(Property Insurance)

Repair and
Reinstatement
Replacement

Leakage

Leakage is the term for any additional costs incurred by the insurer beyond those necessary to fulfil its
claim obligations under the insurance contract, excluding fraud.

Ex-gratia Payments

It is a claim which is not covered but it is felt by senior management that a payment may be made to
the insured as a goodwill gesture.

Chapter 8 - Claims
 Chapter 8 - Claims

Identifying some of the claim related main issues and problems

Techniques to identify fraud include

 fraud awareness training for all claims staff to enable potential fraud to be detected, as the claim is
handled.
 computer programmes that highlight potential fraud, based on defined criteria, identified from
previous fraud experience.
 the establishment of specialist internal fraud investigation departments.
 the employment of external fraud investigation services.
 sharing of claims data with other companies via shared databases e.g. CUE - the Claims and
Underwriting exchange Database in the UK, where the majority of UK insurers share data on all
Household and Motor claims made.
 co-operation with police, government, industry, etc. and all other anti-fraud initiatives.
 using contracted replacement goods and services suppliers to minimise betterment fraud and
supplier overcharging / fraud.
Introduction: This study guide will provide knowledge on how an insurance company sets aside
funds for claims that may arise in future and also how the reserve fund money is invested to earn
maximum returns.

Technical Reserves

Technical reserves are the assets that an insurance company maintains to meet future
claims or losses.

Technical reserves required can be classified as follows:

 Reserves for unexpired risks
 Reserves for incurred but unreported claims
 Reserves for outstanding claims
 Fluctuation reserves

Stakeholders

Shareholders Government Insurance Company

/Regulator Underwriters
Management

Chapter 9 – Insurance reserves and accounting

 Chapter 9 – Insurance reserves and accounting

Types of Technical Reserves

Premium Reserves

Unearned Premium Reserve: premium that is “unearned” at the time of accounts finalisation.

Unexpired Risk Reserve: Reserve set up to make up for shortfall of premiums which are
considered to be inadequate.

Claims Reserves

Open Claim Reserve

IBNR Reserve

Claims Equalisation Reserve

Reserving Process
The purpose of reserving policy is to ensure that most reasonable estimates of the reported claims are
made and can reflect the on-going performance of a single client, a portfolio and company in general.

Within the commoditised classes, the figure to be

input is likely to be based on an average figure from
Smaller claims, simpler risks past experience. Issues such as inflation are built in to
make it as realistic and up-to-date figure as possible.

Controlled by a more experienced handler and by

Larger and more complex claims gauging the claims circumstances and using their own
experience; they should be able to make a subjective
judgement on the estimate.

 bring the data together

Claims professionals and  break it down into practical sub-classes
actuaries  review and refine it
 build in provisions for IBNR
 construct auditable reserves

Chapter 9 – Insurance reserves and accounting

 Chapter 9 – Insurance reserves and accounting

The selection of sub-classes is critical if any subsequent analysis is to be meaningful.

 They should be as homogeneous as possible, so that the data

can be as reliable as possible.
Aspects as regards
 They should not be too big as it will give the underwriters
sub-classes
difficulty in premium setting.
 They should not be too small, or the law of large numbers will
not apply i.e. statistical variances will be large.

Simple operation to give an idea of the claims development in a risk

Triangulation or or sub-class over a number of years. The idea is to display and
Chain Ladder compare the development of claims from different years, using
tables usually in the shape of a triangle.

Premium Investment Strategies

Modern Portfolio Theory (MPT): For a given amount of risk, MPT describes how to select a portfolio
with the highest possible expected return. Or, for a given expected return, MPT explains how to select a
portfolio with the lowest possible risk. MPT is, therefore, a form of diversification.
Asset-liability Management: It refers to the process, by which an institution manages its balance
sheet, in order to allow for alternative interest rate and liquidity scenarios.

Insurance accounting basics are similar to basics of other forms of

Insurance accounting. However, there are certain peculiarities that make for
Accounting specialisations in Insurance Accounting.

Items such as the Balance Sheet, Receipts and Payments Account [Cash
Flow Statement] and Profit & Loss Account etc. will be in line with the
Accounting Standards (AS) issued by the ICAI to the extent applicable to
insurers carrying on general insurance business with three exceptions. The 3
General exceptions are:
Accounting  Cash Flow Statement to be prepared only under Direct Method
 Accounting for Investments is not applicable
 Segment Reporting applies to all insurers

Premium Premium is to be recognised as income over the contract period or the

period of risk.

Acquisition Acquisition costs to be placed in the period in which they are incurred.
Costs

Chapter 9 – Insurance reserves and accounting

 Chapter 9 – Insurance reserves and accounting

The ultimate cost of claims to an insurer comprises claims under the

Claims policies and specific claims settlement costs.

A detailed procedure has been prescribed for determining value of

various investments, such as:
 Real Estate – Investment Property
 Debt Securities
Investments  Equity Securities and Derivative Instruments that are traded in active
markets
 Unlisted and other than actively traded Equity Securities and
Derivative Instruments

Loans Loans to be measured at historical cost

Catastrophe Catastrophe Reserve has to be created in accordance with the

Reserve norms, if any, prescribed by the Authority.

With the reliance now in most companies on IT systems, except for

Accounting preparation of journal vouchers and few other emerging
Module transactions, all other transactions input to the system can be
system generated.