IRDAI Refresher

Summary IC 38
Chapter 1 – Introduction to insurance
1. History of Insurance:
a. The origins of modern commercial insurance business as practiced today
can be traced to Lloyd’s coffee house in London
b. First life insurance company in the world was amicable society for a perpetual
assurance.
c. History of insurance in India:

First Life insurance Company in India Oriental Life Insurance Company

First Non-Life Insurance Company Trition Insurance co Ltd.
First Indian insurance company Bombay Mutual Assurance Society Ltd.
The Oldest insurance company in India National Insurance Co. Ltd.

d. The Insurance Act 1938 was the first legislation to regulate the conduct of
insurance companies in India.
e. Life insurance business was nationalized on 1st Sep 1956 and LIC was formed.

2. Life insurance industry today: Total 24 Companies

One Public Sector Company which is LIC and 23 Private sector Company.
3. How insurance works:
a. Definition of Insurance: Insurance can be considered as a process by which
the losses of few who are unfortunate to suffer a loss are shared amongst
those exposed to similar uncertain events.
b. Insurer: Someone who determines the contribution that each individual must
make to the pool and arranges to pay to those who suffer the loss.
c. The chance of loss is called Risk. The cause of the risk event is known as Peril.
d. The Pooling of Risk consists of collecting numerous individual contributions
from various person who has similar risk.
e. Life insurance is a contract between Insurer and the Insured.
4. Primary Burden of risk consists of losses that are actually suffered by household or
business unit as result of
Pure Risk events.
5. Pure Risk: These losses are often direct and measurable and can be easily compensated by
insurance.
6. Secondary burden of risk consists of physical or mental strain and cost involving in
keeping Reserve Fund.
7. Risk Management Techniques:
a. Risk avoidance: Controlling risk by avoiding loss situation.
b. Risk retention: Bearing the risk and its effects by oneself. Also known as Self
Insurance.
c. Risk Reduction and control: Taking steps to lower the chance of
occurrence of a loss and reduce severity of impact. It is done in the following
ways:
i. Education and training
ii. Making environmental changes
iii. changes made in dangerous or hazardous operations
iv. separation
d. Risk Financing: Risk Transfer is an alternative to the risk retention.
Insurance is one of the methods of Risk Transfer.
e. Insurance refers to protection against an event that might happen where
as assurance refers to protection against an event that will happen.
8. Consideration before opting for insurance is
i. Don’t risk a lot for little
ii. Don’t risk more than what you can afford and
iii. Consider the likely outcomes of the risk carefully

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9. Insurance protects the capital in industry and releases the capital for further expansion and
development.

10. Insurance generates employment opportunities.

11. Insurance helps to take loans on property by assigning the policy as security.

Role of Insurance in Society

12. Huge amount is collected as premium.
13. These funds are held for the benefit of policyholders. So successful companies are not
found to be investing in speculative ventures like stock and shares.
14. Insurance gives direct benefit to the insured as they are protected from the
consequences of loss which may be caused by an accident or a fortuitous event.
15. Insurance removes fear and anxiety.
16. Banks also insist on assigning the insurance policy as collateral security for taking advance
loans on property.
17. Insurance is an earner of foreign exchange for the country – just like export trade, shipping
and banking.

Insurance and Social Security

18. Employee state insurance Act 1948 provides for Employee state insurance
corporation (ESIC) to pay for sickness, maternity and death for the benefit of
industrial employees and their families.
19. Crop insurance scheme (RKBY) benefits insured farmers.
20. Rural insurance schemes are designed to benefit rural families.
21. Insurance industry offers support to govt schemes with the objective of social security
like Janata Personal Accident, Jan Arogya etc.

Chapter 2 – Customer service

Importance of customer service

1. Why customer service?
• Customers provide the bread and butter of a business, and no enterprise can
afford to treat them indifferently. The role of customer service and
relationships is far more critical in the case of insurance than in other
products. This is because insurance is a service and very different from real
goods.
• What the customer really derives is a service experience. If this is less than
expected, it causes dissatisfaction. If the service exceeds expectations, the
customer would be delighted. The goal of every enterprise should thus be to
delight its customers.
2. Quality of service
A well-known model on service quality (named “SERVQUAL”) would give us some
insights. It highlights five major indicators of service quality:
• Reliability: The ability to perform the promised service dependably and accurately.
• Responsiveness: Refers to the willingness and ability of service personnel
to help customers and provide prompt response to the customer’s needs.
• Assurance: Refers to the knowledge, competence and courtesy of service
providers and their ability to convey trust and confidence. It is given by the
customer’s evaluation of how well the service employee has understood needs
and is capable of meeting them.
• Empathy: Is described as the human touch. It is reflected in the caring
attitude and individualized attention provided to customers.
• Tangibles: Represent the physical environmental factors that the customer
can see, hear and touch. For instance, the location, the layout and cleanliness
and the sense of order and professionalism that one gets when visiting a life
insurance company’s office can make a great impression on the customer.
3. Customer service and insurance

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• Ask any leading sales producers in the life insurance industry about how they
managed to reach the top and stay there. You are likely to get a common
answer, that it was the patronage and support of their existing clients that
helped them build their business.
• Customer lifetime value may be defined as the sum of economic benefits
that can be derived from building a sound relationship with a customer over
a long period of time.

Insurance agent’s role in providing great customer service.

Let us now consider how an agent can render great service to the customer. The role
begins at the stage of sale and continues through the duration of the contract.
4. Point of sale - Best advice
The first point for service is the point of sale. One of the critical issues involved
in purchase of life insurance is to determine the amount of coverage (sum assured)
to be bought.

5. Proposal stage
The agent has to support the customer in filling out the proposal for life insurance.
The insured is required to take responsibility for the statements made therein.
6. Acceptance stage
a. First premium receipt (FPR):-
It is the agent’s responsibility to ensure that the FPR is issued by the company to
the insured.
b. Delivery of the policy document
Delivery of the policy is another major opportunity that an agent gets to make
contact with the customer.
c. Premium payment
The agent has to be in touch with the client to remind him / her of the
premium payable so that the policy does not lapse.
7. Claims settlement
The agent has a crucial role to play at the time of claim settlement. It is her /his
task to ensure that the details of claim are immediately informed to the insurer
and any claim investigations that may be necessary are supported to expedite
the process.
8. Grievance redressal
Customers get upset and infuriated a lot more because of their interpretations
about such failure. There are two types of feelings and related emotions that arise
with each service failure:
• Firstly there is a sense of unfairness, a feeling of being cheated.
• The second feeling is one of hurt ego – of being made to look and feel small.
A complaint is a crucial “moment of truth” in the customer relationship; if
the company gets it right there is a potential to actually improve customer
loyalty.

Communication skills
9. Process of communication
All communications require a sender, who transmits a message, and a recipient
of that message. The process is complete once the receiver has understood the
message of the sender. Communication may take place in several forms:
• Oral,
• Written,
• Non-verbal and
• Using body language
10. Non-verbal communication
Let us now look at some concepts that the agent needs to understand.
a. Making a great first impression
• Be on time always.
• Present yourself appropriately.

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• A warm, confident and winning smile

• Being open, confident and positive
• Interest in the other person
b. Body Language
Body language refers to movements, gestures, facial expressions. The
way we talk, walk, sit and stand, all say something about us, and what is
happening inside us.
i. Confidence
Here are a few tips about how to appear confident and self-assured –
giving the impression of someone to be seriously listened to:
• Posture – standing tall with shoulders held back
• Solid eye contact - with a "smiling" face
• Purposeful and deliberate gestures
ii. Trust
11. Listening skills
Active Listening:

Active Listening is where we consciously try to hear not only the words but also, more
importantly, try to understand the complete message being sent by another.
Let us look at some of the elements of active listening.
• Paying Attention
• Demonstrating that you are listening
• Provide feedback
• Not being Judgmental
• Responding appropriately
• Empathetic listening

Chapter 3 – Grievance redressal mechanism

1. Insurance industry is essentially a service industry where, in the present context,
customer expectations are constantly rising and dissatisfaction with the standard
of services rendered is ever present. Alive to this situation the Government and
the regulator have taken a number of initiatives.
2. IRDA’s regulations stipulate the turnaround times (TAT) for various services.
These are part of the IRDA (Protection of Policyholders’ Interests Regulations),
2002.
a. Grievance redressal mechanism
i. Integrated Grievance Management System (IGMS)
• IRDA has launched an Integrated Grievance Management
System (IGMS) which acts as a central repository of
insurance grievance data.
• Policyholders can register on this system and lodge their
complaints. Complaints are then forwarded to the
respective insurance companies.
ii. Grievance redressal mechanism
• IGMS tracks complaints and the time taken for their
redressal. The complaints can be registered at the
following URL:
• http://www.policyholder.gov.in/Integrated_Grievance_Manage
ment.aspx
b. The Consumer Protection Act, 1986
3. This Act was passed “to provide for better protection of the interest of consumers
and to make provision for the establishment of consumer councils and other
authorities for the settlement of consumer’s disputes”.
a. “Service” means service of any description which is made available to
potential users and includes the provision of facilities in connection with
banking, Financing, insurance etc to name few.
b. “Consumer” means any person who Buys any goods for a consideration
and includes any user of such goods but it does not include a person who
obtains such goods for resale or for any commercial.

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c. “Defect” means any fault, imperfection, shortcoming inadequacy in the

quality, nature and manner of performance which is required to be
maintained by or under any law.
d. “Complaint” means any allegation in writing made by a complainant that:
i. An unfair or restrictive trade practice has been adopted
ii. The goods / services bought by him suffer from one or more defects
iii. Price charged is in excess of that fixed by law or displayed on package
iv. Goods which will be hazardous to life and safety when used are
being offered for sale to the public in contravention of the
provisions of any law.
e. “Consumer dispute” means a dispute where the person against whom
a complaint has been made, denies and disputes the allegations
contained in the complaint.
i. Consumer disputes redressal agencies - “Consumer disputes
redressal agencies” are established in each district and state and
at national level.
1. District Forum: The forum has jurisdiction to entertain
complaints, where value of the goods or services and the
compensation claimed is up to `20 lakhs.
2. State Commission
a. It entertains appeals from the District Forum.
b. It also has original jurisdiction to entertain
complaints where the value of goods/service and
compensation, if any claimed exceeds `20 lakhs
but does not exceed `100 lakhs.
3. National Commission
a. The final authority established under the Act is the
National Commission
b. It can hear the appeals from the order passed by
the State Commission and in its original
jurisdiction it will entertain disputes, where
goods/services and the compensation claimed
exceeds `100 lakhs and It has supervisory
jurisdiction over State Commission.
c. All the three agencies have powers of a civil court.
ii. Procedure for filing a complaint
• The complaint can be filed by the complainant or by his
agent personally or can even be sent by post.
• There is no fee for filing a complaint or filing an appeal
iii. Consumer Forum Orders
If the forum is satisfied that the goods complained against suffer
from any of the defects specified in the complaint, the forum can
issue an order directing the opposite party to do one or more of
the following
a. To return to the complainant the price, (or premium in case of
insurance)
b. To award such amount as compensation to the
consumers for any loss or injury suffered by the
consumer due to negligence of the opposite party
c. To remove the defects or deficiencies in the services in question
d. To discontinue the unfair trade practice or the restrictive
trade practice or not to repeat them
e. To provide for adequate costs to parties
iv. Nature of complaints
The majority of consumer disputes of insurance business fall in
the following main categories
a. Delay or Non-settlement / Repudiation of claims
b. Quantum of loss
c. Policy terms, conditions etc.

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4. The Insurance Ombudsman: The Ombudsman, by mutual agreement of the

insured and the insurer can act as a mediator and counselor within the terms of
reference. The decision of the Ombudsman, whether to accept or reject the
complaint, is final.
a. Complaint to the Ombudsman: Any complaint made to the
Ombudsman should be in writing, signed by the insured or his legal heirs,
addressed to an Ombudsman within whose jurisdiction, the insurer has a
branch/ office, supported by documents if any.
Complaints can be made to the Ombudsman if:
i. The complainant had made a previous written representation to
the insurance company and the insurance company had either
rejected the complaint or the complainant had not received any
reply within one month after receipt of the complaint by the
insurer.
ii. The complainant is not satisfied with the reply given by the insurer
iii. The complaint is made within one year from the date of rejection
by the insurance company.
iv. The complaint is not pending in any court or consumer forum or in
arbitration.
b. Recommendations by the Ombudsman: There are certain
duties/protocols that the Ombudsman is expected to follow:
i. Recommendations should be made within one month of the receipt of
such a complaint
ii. The copies should be sent to both the complainant and the insurance
company
iii. Recommendations have to be accepted in writing by the
complainant within 15 days of receipt of such recommendation
iv. A copy of acceptance letter by the insured should be sent to the
insurer and his written confirmation sought within 15 days of his
receiving such acceptance letter
c. Award
If the dispute is not settled by intermediation, the Ombudsman will pass
an award to the insured which he thinks is fair, and is not more than what
is necessary to cover the loss of the insured.
The awards by Ombudsman are governed by the following rules:
i. The award should not be more than `20 lakh.
ii. The award should be made within a period of 3 months from the
date of receipt of such a complaint, and the insured should
acknowledge the receipt of the award in full as a final settlement
within one month of the receipt of such award.
iii. The insurer shall comply and send a written intimation to the
Ombudsman within 15 days of the receipt of letter.
iv. If the insured does not intimate in writing the acceptance of such
award, the insurer may not implement the award.
Chapter 4 – Regulatory aspects

Insurance regulations and regulatory framework

1. Importance of Insurance Regulations

An insurance agent should always bear in mind that she is selling a promise that the
insurance company will pay a certain amount of money if a misfortune occurs. The
insured person would undoubtedly have many worries about the insurance that is
being purchased.
Some common concerns of an insured would be:
• Is the insurance legal?
• Are insurance agents recognized by law?
• Are these insurance companies regulated or supervised?
• Is the document given to me by the insurer legally valid?

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• Will the insurance company pay me the money if a loss happens?

• Will they pay me the full money that is due to me?
• If I do not get a claim, can I go to court based on the documents they have given
me?
• Are there any hidden provisions in the insurance contract whereby the
insurance company can avoid paying me a claim?
• Do I have to go through any complicated procedures to get my claim paid?
2. Why are Insurance Regulations required?
The prime purpose of insurance regulation is to protect the policyholder.
• First and foremost, an insured should understand that insurance is an
absolutely legal contract, in compliance with the provisions of the Indian
Contract Act and other laws of the country.
• The Government is duty bound to protect all its citizens and all entities in
the country through its legal and judicial systems.
• Regulations made by IRDA are to ensure that insurance companies should
exist as financially sound organizations to honor the contracts that they have
entered into. IRDA regulates companies from their registration onwards and
monitors all their major activities like investments, accounting etc.
• All insurance policy wordings, rates and the documents issued by insurance
companies are scrutinized and approved by IRDA. The advertisements issued
by insurers are also regulated.
• There are guidelines about prompt settlement of claims, grievance handling
systems in every company and at IRDA level to address complaints at the
company and at IRDA level.
• IRDA has issued directions to ensure that the insurance company targets rural
areas of the country and weaker sections of the population towards providing
significant coverage of these segments.
• All people dealing with selling and servicing of insurance policies, viz. agents,
corporate agents, brokers, surveyors, third party administrators (TPAs) and
insurance companies are licensed as well as regulated by IRDA as per various
regulations.
3. Insurance regulatory framework in India
The Insurance Act, 1938 and the Insurance Regulatory and Development Authority
Act, 1999 form the basis of insurance regulations in India. There are a few other
legislations in the country that are directly or indirectly applicable to insurance
business.
a. The Insurance Act, 1938
The Insurance Act, 1938 is the basic insurance legislation of the country, which
governs insurance business in India. It was created to protect the interest of
insured public, with comprehensive provisions for effective control over the
activities of insurers and came into effect on 1st July, 1939.
This Act has been amended from time to time to strengthen the legal provisions of the
Act.
The Insurance Act 1938 has provisions for monitoring and control of operations
of insurance companies. Some important sections of the Act are listed below:
i. Registration of insurance companies and renewal of registrations (Sec. 3 & 70)
ii. Requirement to have sufficient capital for the company and to maintain solvency
(Sec. 64 V)
iii. Compulsion that assets of insurance companies should be invested only as
per norms prescribed for the same (Sec. 27 & 85)
iv. Requirement to maintain audit and submit returns to the regulator (Sec. 28)
v. Obligations of insurers towards the rural and social sectors (Sec. 32B & 32C)
vi. Rules for assignment and transfer of policies and nominations (Sec. 38 &
39)
vii. Limitations on the expenses of the management (Sec. 40)
viii. Licensing of agents and their remunerations (Sec. 40 to 44)
ix. Prohibition on using rebates as an inducement to any person to take,
renew or continue an insurance policy in India (Sec. 41)
x. Solvency (financial strength) of the insurance companies who meet all their
commitments to policy holders (64V)

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xi. Advance payment of premium (Sec. 64VB)

xii. Need for survey of losses (Sec. 64UM)
b. The Insurance Regulatory & Development Authority Act, 1999
Insurance Regulatory and Development Authority (IRDA) was established in2000
as an independent authority to regulate and develop the insurance industry by
an Act of Parliament (namely Insurance Regulatory & Development Authority Act,
1999).
The preamble of the IRDA Act states:
“An Act to provide for the establishment of an Authority to protect the interests
of holders of insurance policies, to regulate, promotes and ensures orderly growth
of the insurance industry and for matters connected therewith or incidental
thereto.”
These regulations prescribe insurers’ obligations:
i. At the point of sale
ii. Towards policy servicing
iii. Claims servicing
iv. Control on expenses, investment and
v. Financial strength to meet the commitments to policyholders
c. Other legislations
In addition, insurance business in India is linked to various other Acts legislations
of the country, some of which are listed below:
i. The Workmen's Compensation Act, 1923 (amended and renamed as
Employees Compensation Act in 2010)
ii. Employees’ State Insurance Act, 1948
iii. Life Insurance Corporation Act, 1956
iv. Deposit Insurance and Credit Guarantee Corporation Act, 1961
v. Marine Insurance Act, 1963
vi. Export Credit Guarantee Corporation Act, 1964
vii. General Insurance Business (Nationalization) Act, 1972
viii. General Insurance Business (Nationalization) Amendment Act, 2002
ix. Motor Vehicles Act, 1988
x. Public Liability Insurance Act, 1991
Apart from these general laws, there are many regulations, orders and circulars
issued by IRDA from time to time on specific matters relating to the conduct of
insurance business and policyholders protection.

Regulations and code of conduct applicable to insurance agents

4. Regulations applicable to insurance agents

As per the Insurance Act, 1938 (Section 42), to work as an insurance agent, one must have
a license.
a. The Insurance Act, 1938
• An insurance agent has to be licensed under Section 42. Under the
Section, an insurance agent receives or agrees to receive “payment by
way of commission or other remuneration in consideration of his soliciting
or procuring insurance business including business relating to the
continuance, renewal or revival of policies of insurance”.
• An individual agent is an individual representing an insurance company
while a corporate agent is other than an individual, representing an
insurance company.
• Insurance agents who hold license to act as agent for both a life insurer
and a general insurer are called composite insurance agents.
b. Agents for standalone health insurance companies
• The standalone health insurers desirous of converting life insurance agents
into composite agents to sell their products, based on IC-33 certification,
can do so after making such agents undergo an internal training
programme on health insurance, which shall cover the basics of health
insurance, health insurance terminology, and products etc. for a minimum
period of 25 hours.

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• It has also been decided by IRDA to allow standalone health insurance

companies to avail the services of agents, corporate agents of other life
and / or non-life insurance companies to distribute their products
provided such agents and corporate agents undergo 25 hours training.
• IRDA also recognizes the fact that the Agriculture Insurance Corporation
of India (AIC) is engaged in providing crop insurance with no conflict of
interest or competition with the activities of any GIPSA Company in the
country.
• However, no agent, corporate agent of life and / or non-life insurance
company shall offer his / her services to more than one standalone health
insurance company.
5. Adverse selection (Anti-selection)
This denotes the insurance firm's acceptance of applicants who are at a
greater than normal risk (or uninsurable), but conceal / falsify information
about their actual condition or situation. Acceptance of their application has
an 'adverse' effect on insurance companies
6. Rules governing licensing of insurance agents
Rules relating to issuance and renewal of licenses to insurance agents and the
procedures for obtaining the license are stated in the Insurance Act and regulations,
summarized below:
a. Qualifications of the applicant
The applicant must possess the minimum qualification of a pass in 12th
Standard or equivalent examination conducted by any recognized Board
/Institution, where the applicant resides in a place with a population of five
thousand or more as per the last census, and a pass in 10th Standard or
equivalent examination from a recognized Board / Institution if the
applicant resides in any other place.

b. Disqualifications of the applicant

• Is a minor
• Is of unsound mind
• Has been found guilty of criminal misappropriation or criminal breach
of trust / cheating / forgery / abetment of / attempt to commit any such
offence, by a court of competent jurisdiction
• Has been found guilty of knowingly participating in or has connived
at any fraud, dishonesty or misrepresentation against an insurer or an
insured
• In the case of an individual does not possess the requisite
qualifications and practical training for a period not exceeding twelve
months, as may be specified by the regulations made by the authority,
• In the case of a company or firm, if a director / partner / the chief
executive officers / other designated employees does not possess
the requisite qualifications and practical training and have not passed the
prescribed examination
• Violates the code of conduct as specified by the regulations made by the IRDA
c. Practical training
• The first time applicant for agency license shall have completed from an
IRDA approved institution, at least, fifty hours’ practical training in life
or general insurance business, which may be spread over two to three
weeks.
• The first time applicant seeking license to act as a composite insurance
agent shall have completed from an IRDA approved institution, at least,
seventy five hours practical training in life and general insurance
business, which may be spread over two to three weeks.
• Where the applicant is:
o An Associate / Fellow of the Insurance Institute of India,
o An Associate / Fellow of the Institute of Chartered Accountants of India,
o An Associate / Fellow of the Institute of Costs and Works Accountants of

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India,
o An Associate / Fellow of the Institute of Company Secretaries of India,
o An Associate / Fellow of the Actuarial Society of India,
o A Master of Business Administration of any Institution / University
recognized by any State Government or the Central Government;
or
o Possessing any professional qualification in marketing from any
Institution / University recognized by any State Government or
the Central Government and shall have completed, at least,
twenty five hours’ practical training from an approved
institution.
d. Examination: The applicant shall have passed the pre-recruitment
examination in life or general insurance business, or both, as the case may
be, conducted by the Insurance Institute of India, Mumbai, or any other
‘examination body’.
e. Fees payable: The fees payable to the Authority for issue / renewal of license
to act as insurance agent or composite insurance agent shall be Rupees Two
Hundred and Fifty or as amended from time to time.
f. Procedure to apply for agent’s license
• The licensing process usually starts with the insurer sponsoring a candidate
for practical training.
• On completion of the mandated training, the applicant has to make n
application in specified format for undergoing a written exam.
• On clearing of her written exam, the applicant will make an application to the
designated person.
• “Designated person” means an officer normally in charge of marketing
operations, as specified by an insurer, and authorised by the Authority to
issue or renew licenses under the regulations.
• The license is valid for a period of 3 years unless terminated or surrendered.
• For any renewal of license, the agent needs to undergo additional 25 hours
• The applications for license to the ‘designated person’ should be in prescribed
forms.
i. If the applicant is an individual, application should be in Form IRDA
Agents VA
ii. If the applicant is a firm/company, application should be in Form
IRDA-Agents-VC
g. Cancellation of license
The designated person may cancel a license of an insurance agent, if the
insurance agent suffers, at any time during the currency of the license, from
any of the disqualifications mentioned in the regulations.
h. Issue of duplicate license
The Authority may issue a duplicate license to replace a license lost,
destroyed, or mutilated on payment of a fee of rupees fifty.

7. Agents’ Code of Conduct

IRDA Regulations stipulate that every person holding a license as an insurance agent
shall adhere to the code of conduct specified below:
a. Every insurance agent shall
• Identify himself and the insurance company of whom he is an insurance agent;
• Disclose his license to the prospect on demand;
• Explain carefully the requisite information in respect of insurance
products offered for sale by his insurer and take into account the needs
of the prospect while recommending a specific insurance plan;
• Disclose the scales of commission in respect of the insurance product
offered for sale, if asked by the prospect;
• Indicate the premium to be charged by the insurer for the insurance product
offered for sale;
• Explain to the prospect the nature of information required in the proposal
form by the insurer, and also the importance of disclosure of material
information in the purchase of an insurance contract;

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• Bring to the notice of the insurer any adverse habits or income

inconsistency of the prospect, in the form of a report (called “insurance
agent’s confidential report”) along with every proposal submitted to the
insurer, and any material fact that may adversely affect the underwriting
decision of the insurer as regards acceptance of the proposal, by making
all reasonable enquiries about the prospect;
• Inform promptly the prospect about the acceptance or rejection of the proposal
by the insurer;
• Obtain the requisite documents at the time of filing the proposal form
with the insurer; and other documents subsequently asked for by the
insurer for completion of the proposal;
• Render necessary assistance to the policyholders or claimants or
beneficiaries in complying with the requirements for settlement of claims
by the insurer;
• Advise every individual policyholder to effect nomination or assignment
or change of address or exercise of options, as the case may be, and offer
necessary assistance in this behalf, wherever necessary.
b. No insurance agent shall
• Solicit or procure insurance business without holding a valid license;
• Induce the prospect to omit any material information in the proposal form;
• Induce the prospect to submit wrong information in the proposal form or
documents submitted to the insurer for acceptance of the proposal;
• Behave in a discourteous manner with the prospect;
• Interfere with any proposal introduced by any other insurance agent;
• Offer different rates, advantages, terms and conditions other than those
offered by his insurer;
• Demand or receive a share of proceeds from the beneficiary under an insurance
contract;
• Force a policyholder to terminate the existing policy and to effect a new
proposal from him within three years from the date of such termination;
• Have, in case of a corporate agent, a portfolio of insurance business under
which the premium is in excess of fifty percent of total premium procured,
in any year, from one person (who is not an individual) or one
organization or one group of organizations;
• Apply for fresh license to act as an insurance agent, if his licence was
earlier cancelled by the designated person, and a period of five years has
not elapsed from the date of such cancellation;
• Become or remain a director of any insurance company;
c. Every insurance agent shall
With a view to conserve the insurance business already procured through
him; make every attempt to ensure remittance of the premiums by the
policyholders within the stipulated time, by giving notice to the policyholder
orally and in writing. It means the agent should ensure that premium is paid
well in advance on renewal or else the risk will not be assumed by the insurer.

8. Prohibition of rebates
No intermediary is allowed to induce anyone to take a policy. Section 41 of the
Insurance Act, 1938 is hence an important section for an insurance agent. It reads
as follows:

Section 41 of the Insurance Act, 1938

“41. (1) No person shall allow or offer to allow, either directly or indirectly, as an
inducement to any person to take or renew or continue an insurance in respect
of any kind of risk relating to lives or property in India, any rebate of the whole
or part of the commission payable or any rebate of the premium shown on the
policy, nor shall any person taking out or renewing or continuing a policy accept
any rebate, except such rebate as may be allowed in accordance with the
published prospectuses or tables of the insurer; Provided that acceptance by an
insurance agent of commission in connection with a policy of life insurance taken

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out by himself on his own life shall not be deemed to be acceptance of a rebate
of premium within the meaning of this sub-section if at the time of such
acceptance the insurance agent satisfies the prescribed conditions establishing
that he is a bona fide insurance agent employed by the insurer.”
“41.(2) Any person making default in complying with the provisions of this section
shall be punishable with fine which may extend to five hundred rupees.” This
states that an agent cannot offer any rebates on premium as an
inducement to the policyholder, except as allowed by the insurer.

Chapter 5 – Legal principles of life insurance

1. A Contract: A contract is an agreement between parties, enforceable at law. The

provisions of the Indian Contract Act, 1872 govern all contracts in India, including
insurance contracts.
An insurance policy is a contract entered into between two parties, viz., the company,
called the insurer, and the policy holder, called the insured and fulfils the
requirements enshrined in the Indian Contract Act, 1872.
2. The elements of a valid contract are:
a. Offer and acceptance
When one person signifies to another his willingness to do or to abstain
from doing anything with a view to obtaining the assent of the other to such
act, he is said to make an offer or proposal. Usually, the offer is made by
the proposer, and acceptance made by the insurer.
If any condition is put, it becomes a counter offer. The policy bond becomes
the evidence of the contract.
b. Consideration
This means that the contract must contain some mutual benefit for the
parties. The premium is the consideration from the insured, and the
promise to indemnify, is the consideration from the insurers.
c. Agreement between the parties
Both the parties should agree to the same thing in the same sense. In other
words, there should be “consensus ad-idem” between both parties. Both
the insurance company and the policyholder must agree on the same thing
in the same sense.
d. Free consent
There should be free consent while
entering into a contract. Consent is said
to be free when it is not caused by
Coercion (Involves pressure applied through criminal means),
Undue influence, Fraud, Misrepresentation, Mistake
When consent to an agreement is caused by coercion, fraud or misrepresentation,
the agreement is voidable.
e. Capacity of the parties
Both the parties to the contract must be legally competent to enter into the
contract. The policyholder must have attained the age of majority at the
time of signing the proposal and should be of sound mind and not
disqualified under law. For example, minors cannot enter into insurance
contracts.
f. Legality
The object of the contract must be legal, for example, no insurance can be
had for illegal acts. Every agreement of which the object or consideration
is unlawful is void. The object of an insurance contract is a lawful object.
3. Special Features of Insurance Contracts:
a. Uberrima Fides or Utmost Good Faith
The concept of "Uberrima fides" is defined as involving “a positive duty to
voluntarily disclose, accurately and fully, all facts material to the risk being
proposed, whether requested or not".
If utmost good faith is not observed by either party, the contract
may be avoided by the other. This essentially means that no one should

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be allowed to take advantage of his own wrong especially while entering

into a contract of insurance.

It is expected that the insured should not make any misrepresentation

regarding any fact that is material for the insurance contract. The insured
must disclose all relevant facts. If this obligation did not exist, a person
taking insurance might suppress certain facts impacting the risk on the
subject matter and receive an undue benefit.

4. Material facts: Material fact has been defined as a fact that would affect the
judgment of an insurance underwriter in deciding whether to accept the risk and if
so, the rate of premium and the terms and conditions. Whether an undisclosed fact
was material or not would depend on the circumstances of the individual case and
could be decided ultimately only in a court of law. The insured has to disclose facts
that affect the risk.
Let us take a look at some of the types of material facts in insurance that one needs
to disclose: Facts indicating that the particular risk represents a greater exposure
than normal.
5. Material Facts that need not be disclosed
It is also held that unless there is a specific enquiry by underwriters, the proposer has
no obligation to disclose the following facts:
a. Measures implemented to reduce the risk. E.g.: The presence of a fire
extinguisher
b. Facts which the insured does not know or is unaware of. E.g.: An
individual, who suffers from high blood pressure but was unaware about
the same at the time of taking the policy, cannot be charged with non-
disclosure of this fact.
c. Which could be discovered, by reasonable diligence?
It is not necessary to disclose every minute material fact. The underwriters
must be conscious enough to ask for the same if they require further
information.
6. Matters of law: Everybody is supposed to know the law of the land. E.g.: Municipal
laws about storing of explosives.
7. About which insurer appears to be indifferent (or has waived the need for further
information)
The insurer cannot later disclaim responsibility on grounds that the
answers were incomplete. When is there a duty to disclose?
In the case of life insurance contracts, the duty to disclose is present throughout the
entire period of negotiation until the proposal is accepted and a policy is issued. Once
the policy is accepted, there is no further need to disclose any material facts that
may come up during the term of the policy.
8. Breach of Utmost Good Faith: We shall now consider situations which would involve
a Breach of Utmost Good Faith. Such breach can arise either through Non-Disclosure
or Misrepresentation.
a. Non-Disclosure: May arise when the insured is silent in general about
material facts because the insurer has not raised any specific enquiry. It may
also arise through evasive answers to queries raised by the insurer. Often
disclosure may be inadvertent (meaning it may be made without one’s
knowledge or intention) or because the proposer thought that a fact was not
material.
In such a case it is innocent. When a fact is intentionally suppressed it is
treated as concealment. In the latter case there is intent to deceive.
b. Misrepresentation: Misrepresentation is of two kinds:
a. Innocent Misrepresentation relates to inaccurate statements,
which are made without any fraudulent intention.
b. Fraudulent Misrepresentation on the other hand refers to false
statements that are made with deliberate intent to deceive the
insurer or are made recklessly without due regard for truth.
c. An insurance contract generally becomes void when there is a
clear case of concealment with intent to deceive, or when there

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is fraudulent misrepresentation.
9. Insurable interest: The existence of ‘insurable interest’ is an essential ingredient of
every insurance contract and is considered as the legal pre-requisite for insurance.
Let us see how insurance differs from a gambling or wager agreement.
a. Gambling and insurance
Consider a game of cards, where one either loses or wins. The loss or
gain happens only because the person enters the bet. The person who
plays the game has no further interest or relationship with the game other
than that he might win the game. Betting or, wagering is not legally
enforceable in a court of law and thus any contract in pursuance of it will
be held to be illegal. In case someone pledges his house if he happens to
lose a game of cards, the other party cannot approach the court to ensure
its fulfillment.
It would be relevant here to make a distinction between the subject
matter of insurance and the subject matter of an insurance contract.
i. Subject matter of insurance relates to property being insured
against, which has an intrinsic value of its own.
Subject matter of an insurance contract on the other hand is
the insured’s financial interest in that property. It is only when
the insured has such an interest in the property that he has the
legal right to insure. The insurance policy in the strictest sense
covers not the property per se, but the insured’s financial interest
in the property.
b. Time when insurable interest should be present
In life insurance, insurable interest should be present at the time of taking
the policy. In general insurance, insurable interest should be present both
at the time of taking the policy and at the time of claim with some
exceptions like marine policies.
10. Proximate Cause
a. Proximate cause is a key principle of insurance and is concerned with how
the Loss or damage actually occurred and whether it is indeed as a result
of an Insured peril if the loss has been caused by the insured peril, the
insurer is Liable if the immediate cause is an insured peril, the insurer is
bound to make Good the loss, otherwise not.
b. Under this rule, the insurer looks for the predominant cause which sets
into motion the chain of events producing the loss. This may not
necessarily be the Last event that immediately preceded the loss i.e. it is
not necessarily an event this is closest to or immediately responsible for
causing the loss
c. Other causes may be classified as remote causes, which are separate
from proximate causes Remote causes may be present but are not
effectual in causing an event
d. Proximate cause is defined as the active and efficient cause that sets in
motion a chain of events which brings about a result, without the
intervention of any force started and working actively from a new and
independent source
e. How does the principle of proximate cause apply to life insurance
contracts? In general, since life insurance provides for payment of a death
benefit, regardless of the cause of death, the principle of proximate cause
would not apply.
f. However many life insurance contracts also have an accident benefit rider
wherein an additional sum assured is payable in the event of accidental
death. In such a situation, it becomes necessary to ascertain the cause -
whether the death occurred as a result of an accident. The principle of
proximate cause would become applicable in such instances
11. Contract of Adhesion: Adhesion contracts are those that are drafted by the party
having greater bargaining advantage, providing the other party with only the
opportunity to adhere to i.e., to accept the contract or reject it. Here the insurance
company has all the bargaining power regarding the terms and conditions of the
contract.

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To neutralize this, a free-look period has been introduced whereby a policyholder,

after taking a policy, has the option of cancelling it, in case of disagreement, within
15 days of receiving the policy document. The company has to be intimated in writing
and premium is refunded less expenses and charges.

Chapter 6 – What life insurance involves

1. Insurance involves four aspects:

i. An asset
ii. The risk insured against
iii. The principle of Pooling
iv. The contract
2. The Asset-Human Life Value(HLV)
a. HLV Concept devised around seventy years ago by Prof. Hubener.
b. HLV concept considers human life as kind of property or asset that earns an income.
c. HLV measures the value of human life based on individual’s expected net
future earnings (Net future earning = Expects to earn each year in future -
Amount spend on self)
• Discount value (earnings of value from Death claim)
d. HLV helps to determine how much insurance one should have for full protection
and upper limit beyond it would be speculative.
e. Asset is a kind of property that yields value or a return
f. Car, Human life, House termed as an asset
g. Human life value is a method to calculate the amount of insurance needed by an
individual
3. The Risk
a. There are three kinds of typical concerns faced by ordinary people
i. Dying to early
ii. Living too long
iii. Living with disability
b. General insurance deals with risks like loss of cargo, theft, burglary, motor
accidents. Also cover events like loss of name and goodwill which called as liability
insurance & personal risks which can be affect the person.
4. Difference between General & Life Insurance
a. General insurance is usually contracts of indemnity except personal Accident.
While life insurance are contracts of assurance.
b. Indemnity means exact amount of loss that has occurred and pays compensation
only to the amount of loss - no more, no less.
c. Assurance contracts mean amount of benefit to be paid in the event of death has
to be fixed at beginning itself at the time of contract.
d. In General insurance contracts, the risk event protected against is uncertain
while in life insurance it’s certain but the time is uncertain.
e. In general insurance, in case of perils, like fire or earthquake, the risk does not
increase with age. In life insurance, the probability of death increases with age.
5. Level Premium
a. Level premium is fixed that does not increases with age but remains constant the
contract period.
b. Premiums collected in early years would be more than the amount needed to
cover death clams while collected in later years would be less than what is needed
to meet claims.
c. The Level premium is an average of both.
d. The excess premium of earlier ages compensate for the deficit of premiums in later ages.
e. The Excess amount of premium in early year held in trust for the benefit of
policyholders called as “Reserve”
f. The excess amount also creates a ‘Life fund’ which would invest and earn an interest.
g. The level premium has two components.
i. Term or protection
ii. Cash value element
h. Insurance policy with more cash value element considered as saving oriented insurance
policy.

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6. The Principle of Risk Pooling

Mutuality or pooling principle & Diversification are two ways to reduce risk in financial
markets both are fundamentally different.
7. Difference between mutuality & Diversification
a. In diversification the funds are spread out among various assets while in mutuality
is combined
b. In diversification funds flowing from one source to many destinations while in
mutuality its many source to one.
c. In financial market they diversify and reduce risk by investing funds across various asset
classes.
8. Mutuality
Mutuality or the pooling principle plays two specific kinds of roles in life insurance
i. Providing protection against the economic loss arising as a result of one’s
untimely death.
ii. It can involve the pooling and evening out of financial risk which help
insurer to pay uniform rate of return (a uniform bonus) through
smoothing out the returns across time.
9. The life insurance Contract
a. The Final aspect of life insurance is the contract.
b. Sum Assured is contractually guaranteed which make life insurance a vehicle of financial
security.
c. Life insurance is subject to stringent regulation and strict supervision.
d. Life insurance contracts involve both risk and saving element.
10. Deference between Pure term insurance and saving plans
a. Pure term plan provides only a death benefit where in savings plans having large cash
value.
b. Pure tern plan having low premium where in savings plan have quite large and
form a significant part of individual’s savings called as ‘opportunity cost’.

Advantage & Disadvantages of Traditional Cash Value Insurance Contracts

11. Advantage:
a. It has historically proved to be a safe and secure investment. Its cash values
guarantee a minimum rate of return, which may increase with contract duration.
b. Regularity of premium payments calls for compulsory planning of one’s savings
and provides the discipline that savers require.
c. Insurer takes care of investment management and frees the individual of this
responsibility
d. It provides liquidity. The insured can take a loan on or surrender the policy and thus
convert it into cash.
e. Both cash value type life insurance and annuities may enjoy some income tax
advantages.
f. It may be safe form creditor’s claims, generally in the event of the insured’s bankruptcy
or death.
12. Disadvantages:
a. As an instrument with relatively stable returns it is subjected to the corroding
effect of inflation on all fixed income investments.
b. The high marketing and other initial costs of life insurance polices, reduce amount
of money accumulated in earlier years. The yield while guaranteed may be less
than that on other financial market instruments. Lower yield is the result of a
trade-off, which also reduces the risk.

Chapter 7 – Financial planning

Financial planning and the individual life cycle

1. What is financial planning?
a. Financial planning is a process of identifying one’s life’s goals, translating these
identified goals into financial goals and managing one’s finances in ways that will
help one to achieve those goals.

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b. Financial planning is a process through which one can chart a roadmap to meet
expected and unforeseen needs in one’s life. It involves assessing one’s net worth,
estimating future financial needs, and working towards meeting those needs
through proper management of finances.
c. Financial planning is taking action to turn one’s goals and desires into reality.
d. Financial planning takes into account one’s current and future needs, one’s
individual risk profile and one’s income to chart out a roadmap to meet these
anticipated needs.
2. Types of Goals
i. These goals may be short term: Buying an LCD TV set or a family vacation.
ii. They could be medium term: Buying a house or a vacation abroad.
iii. The long term goals may include: Education or marriage of one’s child or post
retirement provision.
3. Individual’s Life Cycle - Life Stages and Priorities
i. Learner [till say age 20 to 25]: For instance, meeting the high cost of fees for
an MBA in a prestigious management institution.
ii. Earner [from 25 onwards]: For instance, a young man in a Multinational job
takes a housing loan and invests in a house.
iii. Partner [on getting marriage at say 28 to 30]: This stage brings into
immediate focus a host of concerns associated with building a family and the
liabilities that come in its wake – like having a house of one’s own, perhaps a car,
consumer durables, planning for children’s future etc.
iv. Parent [say 28 to 35]: These are typcal; years when one has to worry about
their health and education – getting them into good schools etc.
v. Provider [say age 35 to 55]: Marriage and education of children is the number
one motive for savings among most Indian families today in this stage.
vi. Empty Nester [age 55 to 65]: This is the period when children have married
and sometimes have migrated to other places for work, leaving the parents.
Health care protection becomes paramount as thus the need for financial
independence and security of income.
vii. Retirement – the twilight years [age 60 and beyond]: This is the age when
one has retired from active work and now draws largely on one’s savings to meet
the needs of life.
4. The economic life cycle has three phases:
a. Student Phase
b. Working Phase
c. Retirement Phase
5. Why does one need to save and purchase various financial assets?
The reason is that each stage in an individual’s life, when he or she performs a particular
role, brings with it a number of needs for which funds have to be provided.
6. Savings may be considered as a composite of two decisions.
i. Postponement of consumption: an allocation of resources between present and future
consumption
ii. Parting with liquidity (or ready purchasing power) in exchange for less liquid
assets. For instance, purchase of a life insurance policy implies exchanging
money for a contract which is less liquid.
7. Individual Needs
a. Enabling future transactions
i. Specific transaction needs: Linked to specific life events which
require a commitment of resources. For instance, making a
provision for higher education / marriage of dependents; or
purchase of a house or consumer durables
ii. General transaction needs: Amounts set aside from current
consumption without being earmarked for any specific purposes
–these are popularly termed as ‘future provisions’
b. Meeting contingencies: Contingencies are unforeseen life events that may call for
a large commitment of funds which are not met from current income and hence
needing to be pre-funded. Such needs may be addressed through insurance.
c. Wealth accumulation: savings and investments are primarily driven by a desire
to accumulate wealth. Higher return is desired because it enables to multiply

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one’s wealth or net worth more rapidly.

8. Financial products
a. Transactional products
Bank deposits and other savings instruments that enable one to have
adequate purchasing power (liquidity) at the right time and quantum.
b. Contingency products like insurance
These provide protection against large losses that may be suffered in the event of
sudden unforeseen events.
c. Wealth accumulation products
Shares and high yielding bonds or real estate are examples of such products. Here
the investment is made with a view to committing money for making more
money.
9. Risk profile and investments

Role of financial planning

10. Financial planning
Elements of financial planning include:
a. Investing - allocating assets based on one’s risk taking appetite,
b. Risk management,
c. Retirement planning,
d. Tax and estate planning, and
e. Financing one’s needs
11. Role of Financial Planning
The challenges facing our society and our customers are far different today. Some of them
are:
i. Disintegration of the joint family
ii. Multiple investment choices
iii. Changing lifestyles
iv. Inflation
v. Other contingencies and needs
12. When is the right time to start financial planning?
There is however an important principle that should guide us – the longer the time
period of our investments, the more they will multiply.

Financial Planning – Types

There are six such areas we shall take up
i. Cash planning
ii. Investment planning
iii. Insurance planning
iv. Retirement planning
v. Estate planning
vi. Tax planning

13. Cash planning

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Managing cash flows has two purposes:

i. Firstly one needs to manage income and expenditures flow including
establishing and maintaining a reserve of liquid assets to meet
unanticipated or emergency needs.
ii. Secondly one needs to systematically create and maintain a surplus of cash
for capital investment.
14. Insurance planning
i. Life insurance may be decided by estimating the income and expense
requirements of the dependents in the event of premature death of the
bread winner.
ii. Health insurance requirements may be assessed in terms of the
hospitalisation expenses that are likely to be incurred in any family medical
emergency.
iii. Finally insurance for one’s assets may be considered in terms of the type
and quantum of cover required to protect one’s home/vehicle/factory etc.
from the risk of loss.
15. Investment planning
Investment planning is a process of determining the most suitable investment and
asset allocation strategies based on an individual’s risk taking appetite, financial goals
and the time horizon to meet those goals.
a. Investment parameters
b. Selection of appropriate investment vehicles
The actual selection would depend on the individual’s expectations about return and risk.
16. Retirement planning
Retirement planning involves three phases:
i. Accumulation: Accumulation of funds is done through various kinds of
strategies to set aside money for investment with this purpose.
ii. Conservation: Conservation refers to the efforts made to ensure that
one’s investments are put to hard work and that the principal gets
maximized during the individual’s working years.
iii. Distribution: Distribution refers to the optimal method of converting
principal (which we may also call the corpus or a nest egg) into
withdrawals / annuity payments for meeting income needs after
retirement.
17. Estate planning
• It is a plan for the devolution and transfer of one’s estate after one’s demise.
• There are various processes like nomination and assignment or preparation of a will.
18. Tax planning
Finally tax planning is done to determine how to gain maximum tax benefit from
existing tax laws and for planning of income, expenses and investments taking full
advantage of the tax breaks. It involves making strategies to reduce, time or shift
either current or future income tax liabilities. One must note that the purpose here is
to minimize and not evade taxes.

Chapter 8 – Life insurance products – I

1. What is a product?
The difference between a product (as used in a marketing sense) and a commodity
is thus that a product can be differentiated. A commodity cannot. This means that the
products sold by different companies, though they may belong to the same category,
may be quite different from one another in terms.
2. Products may be:
a. Tangible: Refers to physical objects that can be directly perceived by touch (for
instance a car or a television set).
b. Intangible: Refers to products that can only be perceived indirectly.
3. Life insurance is a product that is intangible. A life insurance agent has the
responsibility to enable the customer to understand the features of a particular life
insurance product, what it can do and how it can serve the customer’s unique needs.
4. Riders in Life Insurance Products:
a. A rider is a provision typically added through an endorsement, which then

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becomes part of the contract. Riders are commonly used to provide some sort of
supplementary benefit or to increase the amount of death benefit provided by a
policy.
b. Riders can be the way through which benefits like Disability cover, accident cover
and Critical Illness cover can be provided as additional benefits in a standard life
insurance contract. These riders may be availed of by the policyholder by opting
for them and paying an additional premium for the purpose.

Traditional Life Insurance Products

5. Term insurance plans
a. Term insurance is valid only during a certain time period that has been specified in the
contract.
b. All premiums received under such a policy may be treated as earned towards the
cost of mortality risk by the company. There is no savings or cash value element
accruing to the insured.
c. Purpose: Death benefit to nominee in case unfortunate death of the life insured.
A term insurance policy also comes handy as an income replacement plan.
d. Term insurance can be provided as rider also.
e. Convertibility: Convertible term insurance policies allow a policyholder to
change or convert a term insurance policy into a permanent plan like “Whole
Life” without providing fresh evidence of insurability.
f. USP: The Unique Selling Proposition (USP) of term assurance is its low price,
enabling one to buy relatively large amounts of life insurance on a limited
budget.
g. Variants:
i. Decreasing term assurance: These plans provide a death benefit that
decreases in amount with term of coverage.
• Mortgage redemption: Is a plan of decreasing term insurance
designed to provide a death amount that corresponds to the decreasing
amount owed on a mortgage loan.
• Credit life insurance is a type of term insurance plan designed to pay
the balance due on a loan, if the borrower dies before the loan is repaid.
ii. Increasing term assurance: The plan provides a death benefit, which
increases along with the term of the policy.
iii. Term insurance with return of premiums: If life insured survives till the
term total premium paid will be refunded.

6. Whole Life Insurance

There is no fixed term of cover but the insurer offers to pay the agreed upon death
benefit when the insured dies, no matter whenever the death might occur. Whole life
premiums are much higher than term premiums since a whole life policy is designed
to remain in force until the death of the insured.
7. Endowment Assurance
a. The product thus has both a death and a survival benefit component.
b. Variants:
i. Money Back Plan: It is typically an endowment plan with the provision for
return of a part of the sum assured in periodic installments during the term
and balance of sum assured at the end of the term.
ii. Par and Non-par Schemes: Represent policies which do not participate in
the profits. Typically without profit plans are those where the benefits are
fixed and guaranteed at the time of the contract and the policyholder would
be eligible for these benefits and no more.
iii. Participating (Par) or With Profit Plans: These plans have a provision for
participation in profits. Profits are payable as bonuses or dividends. Bonuses
are normally paid as reversionary bonuses.

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8. Dividend method of profit participation

There are certain other markets like the USA where profits are shared in the form of
dividends. Two approaches have been followed for dividend crediting.
a. The traditional approach was the “Portfolio Method”. Here the total investment
return on the portfolio held by the company was determined and all policyholders
were credited their share of the divisible surplus. No attempt was made to
distinguish the rate of return earned on monies that had been invested with the
company in previous years from that deposited recently. The portfolio method
thus homogenised rates of return and made them stable over time. It applied the
principle of pooling of risks over time and is quite analogous in this respect to
the uniform reversionary bonus mechanism.
b. The second approach is the “Current Money Method”. Here the return depends
on when the investment was made and the rate that was secured at the time of
investment. It has also been called segmented or investment block method as
different investment blocks gets different returns.
9. IRDA’s new guidelines for traditional products
a. New traditional products will have a higher death cover.
i. For single premium policies it will be 125% of the single premium for those
below 45 years and 110% of single premium for those above 45 years.
ii. For regular premium policies, the cover will be 10 times the annualized
premium paid for those below 45 and seven times for others.
b. The minimum death benefit in case of traditional plan is at least the amount
of sum assured and the additional benefits (if any).
c. In addition to the sum assured, the bonus / additional benefits as specified in
the policy and accrued till date of death shall become payable on death if not
paid earlier.
d. These plans would continue to come in two variants, participating and nonparticipating
plans.
i. For participating polices the bonus is linked to the performance of the fund
and is not declared or guaranteed before. But, the bonus once announced
becomes a guarantee. It is usually paid in case of death of the policyholder
or maturity benefit. This bonus is also called reversionary bonus.
ii. In case of non-participating policies, the return on the policy is disclosed
in the beginning of the policy itself.

Chapter 9 – Life insurance products – II

1. Non Traditional Life Insurance Product - Purpose and Need

a. One of the principal purposes of saving and investing is to achieve inter-temporal
allocation of resources, which is both efficient and effective.
b. Inter-temporal allocation means allocation across time.
c. The term effective here implies that sufficient funds are available to successfully
satisfy various needs as they arise in different stages of the life cycle.
d. Efficient allocation implies a faster rate of accumulation and more funds available in
future.
e. Higher the return for a given level of risk, the more efficient would the investment be.
f. Traditional life insurance plans have been called bundled plans because of
the way their structure is bundled and presented as a single package of benefits
and premium
2. Limitations of Traditional Products
a. Cash value component: the savings or cash value component in such policies
is not well defined. It depends on the amount of actuarial reserve that is set up.
This in turn is determined by assumptions about mortality, interest rates,
expenses and other parameters that are set by the life insurer.
b. Rate of return: the value of the benefits under “With Profit policies” would be

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known for sure, only when the contract comes to an end. Again, the exact costs
of the insurer are not disclosed. This lack of clarity about the rate of return makes
it difficult to compare them with other alterative instruments of savings.
c. Surrender value: The cash and surrender values under traditional contracts
depend on the amount of actuarial reserve and the pro-rata asset share of the
policy etc. These values may be determined quite arbitrarily. The method of
arriving at surrender value is not visible.
d. Yield: the yields on these policies may not be as high as can be obtained from more
risky investments.
3. Shift occurred in the product profiles of Life Insurers
a. Unbundling: This trend involved separation of the protection and savings
elements and consequently the development of products, which stressed on
protection or savings, rather than a vague mix of both. Eg – In US market, term
insurance and new products like universal assurance and variable assurance, in
UK unit linked insurance.
b. Investment Linkage: The second trend was the shift towards investment linked
products, which linked benefits to policyholders with an index of investment
performance. New products like unit linked implied that life insurers had a new
role to play as efficient fund managers with the mandate of providing a high
competitive rate of yield, rather than mere providers of financial security.
c. Transparency: Unbundling also ushered greater visibility in the rate of return
and in the charges made by the companies for their services (like expenses etc)
all explicitly spelt out and could thus be compared.
d. Non-standard Products: The fourth major trend has been a shift from rigid to
flexible product structures (non–standard products). It is with respect to the
degree of choice which a customer can exercise with respect to designing the
structure and benefits of the policy.
There are two areas where customers may actively participate in this regard:
i. While fixing and altering the structure of premiums and benefits
ii. While choosing how to invest the premium proceeds
4. The appeal – Needs met
a. Direct linkage with the investment gains: Life insurers who are able to
efficiently manage their investment portfolios could generate superior returns for
their customers and thus develop high value products.
b. Inflation beating returns: The rate of return on a life insurance policy must be
significantly higher than the rate of inflation. This is where investment linked
insurance policies were especially able to score over traditional life insurance
policies.
c. Flexibility: Policyholders could now decide within limits, the amount of premium
they wanted to pay and vary the amount of death benefits and cash values. In
investment linked products, they also had the choice of investments and could
also decide the mix of funds in which they wanted to have the proceeds of their
premiums invested.
d. Surrender value: the policies also allowed the policyholders to withdraw from
the schemes after a specified initial period of years (say three to five), after
deduction of a nominal surrender charge which otherwise was much higher than
the surrender values available under erstwhile traditional policies.
• These policies became popular because they were meeting a critical
motive of many investors – the wealth accumulation motive which
generated a demand for efficient investment vehicles.
5. Universal Life
a. As per the IRDA Circular of November 2010, “All Universal Life products shall be
known as Variable
Insurance Products (VIP)”.

b. Universal life insurance is a form of permanent life insurance characterized

by its flexible premiums, flexible face amount and death benefit amounts, and
the unbundling of its pricing factors.
c. Universal life policies allow the policyholder within limits, to decide the amount
of premiums he or she wants to pay for the coverage.

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d. Larger the size of the premium, greater the coverage provided and greater the policy’s
cash value.
e. The major innovation of universal life insurance was the introduction of
completely flexible premiums after the first policy year.
f. The policy could be deemed to be in force, so long as its cash value was
sufficient to pay the mortality charges and expenses.
g. Premium flexibility allowed the policyholder to make additional premiums above the
target amount.
h. It also allowed one to skip premium payments or make payments that were lower than
the target amount.
i. Flexibility also meant that the death benefits could be adjusted and the face amounts
could be varied.
j. However this kind of policy could be mis-sold. In markets like the US, prospective
customers were enticed by the proviso that ‘one needed to make only a few initial
premium payments and then the policy would take care of itself’
k. Policyholders who failed to continue premium payments were shocked to find that
their policies had lapsed and they no longer had any life insurance protection.

Non Traditional Life insurance products in India

In India, as per the IRDA norms, there are thus only two kinds of non-traditional
savings life insurance products that are permitted:
a. Variable Insurance Plans
b. Unit Linked Insurance Plans
6. Variable Life Insurance Plan
a. Variable life insurance is a kind of “Whole Life” policy where the death benefit
and cash value of the policy fluctuates according to the investment
performance of a special investment account into which premiums are
credited.
b. The policy thus provides no guarantees with respect to either the interest rate or
minimum cash value.
c. Theoretically the cash value can go down to zero, in which case the policy would
terminate.
d. A traditional cash value policy has a face amount that remains level throughout the
policy term.
e. The cash value grows with premiums and interest earnings at a specified rate.
f. Assets backing the policy reserves form part of a general investment account
in which the insurer maintains the funds of its guaranteed products.
g. Assets representing the policy reserves of a variable life insurance policy are
placed in a separate fund that do not form part of its general investment
account.
h. In variable life insurance policy the cash values are funded by separate
accounts of the life insurance company, and death benefits and cash values
vary to reflect investment experience.
i. The policy also provides a minimum death benefit guarantee for which the
mortality and expense risks are borne by the insurance company.
j. Variable life policies should be typically bought by people who are
knowledgeable and quite comfortable with equity / debt investments and
market volatility.
k. Its popularity would depend on investment market conditions – thriving in
market booms and declining when stock and bond prices plummet. This
volatility has to be kept in mind while marketing variable life.
7. Unit Linked Insurance
a. Unit linked plans were introduced in UK, in a situation of substantial
investments that life insurance companies made in ordinary equity shares
and the large capital gains and profits they made as a result.
b. A need was felt for having both greater investment in equities and also
passing the benefits to policyholders in a more efficient and equitable
manner.
c. The benefits under these contracts are wholly or partially determined by the

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value of units credited to the policyholder’s account at the date when payment
is due.
d. Unit linked policies thus provide the means for directly and immediately
cashing on the benefits of a life insurer’s investment performance.
e. The units are usually those of a specified authorized unit trust or a
segregated (internal) fund managed by the company.
f. Units may be purchased by payment of a single premium or via regular premium
payments.
g. Unit linked contracts are unbundled. Their structure is transparent with the
charges to pay for the insurance and expenses component being clearly
specified.
h. Premium Break up – ULIP Premium = Expenses + Mortality + Investment.
i. Once the charges are deducted from the premium, the balance of the account
and income from it is invested in units.
j. The value of these units is fixed with reference to some pre-determined index of
performance.
k. The value of the units is given by the net asset value (NAV), which reflects
the market value of assets in which the fund is invested.
l. An endearing feature of unit linked policies is its facility of choosing between
different kinds of funds, which the unit holder can exercise.
m. Each fund has a different portfolio mix of assets. The investor thus gets to
choose between a broad option of debt, balanced and equity funds.
i. Equity Fund: This fund invests major portion of the money in
equity and equity related instruments.
ii. Debt Fund: This fund invests major portion of the money in
Government Bonds, Corporate Bonds, Fixed Deposits etc.
iii. Balanced Fund: This fund invests in a mix of equity and debt instruments.
n. Money Market Fund: This fund invests money mainly in instruments
such as Treasury Bills, Certificates of Deposit, Commercial Paper etc.
o. Each option that is selected must reflect one’s risk profile and investment need.
p. There is also provision to switch from one kind of fund to another if
performance of one or more funds is not perceived to be up to the mark.
q. The life insurer does not give any guarantee about unit values.
r. The investment risk is borne by the unit holder.
s. The life insurer may however bear the mortality and expense risk.
t. Unlike conventional plans, unit linked policies work on a minimum premium
basis and not on sum assured.
u. The insured decides on the amount of premium he or she wishes to contribute at
regular intervals.
v. Insurance cover is a multiple of the premiums paid. The insured has a
choice between higher and lower cover.
w. The premium may consist of two components – the term component may be
placed in a guaranteed fund (termed as the sterling fund in UK) that would
yield a minimum amount of cover on death.
x. The balance of premium is used to purchase units that are invested in the
capital market, particularly the stock market, by the insurer.
y. In case of death the death benefit would be the higher of the sum assured or
the fund value standing to one’s account.
z. The fund value is simply the unit price multiplied by the number of units in
the individual’s account.

Chapter 10 – Applications of life insurance

Married Women Property (MWP) Act

1. Section 6 of the MWP act 1874, provides for the security of benefits under a
life insurance policy to the wife and children by creation of trust.
2. Beneficiary under the MWP act can be:

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a. Wife Alone
b. One or more children
c. Wife and one or more children jointly
3. Each policy will remain a separate trust. Either the wife or child (over age 18 yrs) can
be a trustee.
4. The policy shall be beyond the control of court attachments, Creditors and even the life
assured.
5. The claim money shall be paid to the trustees.
6. No surrender, nomination and assignment are allowed.
7. If there is no special trust to receive the policy money then the policy becomes
payable to the official trustee of the state in which insurance was effected is
situated.
8. The trust that is set up is formed under irrevocable and non amendable trust
and can hold one or more insurance policies.
9. The creation of trust ensures that the policy proceeds will be invested wisely in
the event of death of the life assured and secures the benefits against future
creditors.
10. Beneficiaries in a trust can be any other legal person also other then Spouse and children.

Keyman Insurance
11. Keyman insurance is an important form of business insurance.
12. Keyman insurance can be described as an insurance policy taken out by a
business to compensate the business for financial loss that would arise from the
death or extended incapacity of an important member of the business.
13. It is used for business protection purpose.
14. Keyman policy is owned by business for losses incurred with the loss of key income
generator.
15. It does not indemnify the actual loss incurred but compensate with fixed monetary sum
as specified.
16. An employer can take out a key man insurance policy on the life or health
of any employee whose knowledge works or overall contribution is considered
uniquely valuable to the company.
17. Keyman insurance is a term plan where the premium is born by the company
and the sum assured is linked to the profitability of the company.
18. The premium is treated as an expenses for the company hence the company gets the
tax advantage.
19. On the death of the key person the benefits is paid to the company which is taxable.
20. A keyman can be any one directly associated with the business whose loss causes
financial strains to the business like
i. Director
ii. A partner
iii. Key sales person
iv. Key project manager
v. Person with specific skills or knowledge
21. Following losses are those for which key man insurance can provide compensation
a. Losses related to the extended period when the key person is unable to
work or to provide for the replacement cost of the same.
b. Insurance to protect profits: Offsetting loss of income or loss due to
cancellation of business or project where the key person was involved.

Mortgage Redemption Insurance:

22. It is a financial protection for home loan barrowers.
23. It is also known as loan protector.
24. It is a decreasing term assurance plan taken by the mortgagor to repay the
balance on mortgage loan if he/ she die before its full repayment.
25. The policy bears on surrender value or maturity benefits.
26. The insurance cover decreases each year unlike ordinary term where the cover
remains the same during entire term.

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Chapter 11 – Pricing & valuation of life insurance

Insurance Pricing: Basic Elements

1. Premium:
a. Premium is the price paid by an insured for purchasing an insurance
policy expressed in per thousand rates available in tables.
b. These premiums are known as “Office Premiums”
c. Premium remains same across the term of the plan in most cases
and sometimes it is also available in single premium and limited pay
period options.
2. Rebates: Two types of rebates offered by insurance companies
a. For higher sum assured
b. For mode of premium payment
3. Rebate for sum assured: The rebate for sum assured is offered to those who
buy policies with higher amounts of sum assured.
4. It is also available for mode of premium payment, more frequency in payments
results more cost. Also the insurer can utilize the money for the entire tenure to
earn interest, if it is annual mode.
5. Insurer may charge extra premium for monthly mode payments.
6. Extra charges:
a. “Standard Lives” are individuals who are not subject to any significant
factors that posses an extra risk.
b. Extra charges are levied on person who are not considered as standard
lives, either due to health or other reasons which can pose a hazard to
his/ her life. This is known as “Health Extra”.
c. Extra charges are levied imposed to those who are engaged in hazardous
occupation is called as “Occupation Extra”
d. Extra charges are also taken for extra benefits added to the policy. E.g.
Double Accidental benefits and Permanent Disability Benefit.
7. Determination of the Premium: Determination of premium is done by
actuary in case of traditional policies are as follows:
a. Mortality
b. Interest
c. Expenses of management
d. Reserves
e. Bonus Loading
8. Mortality is determined by using mortality table.
9. Mortality table gives an estimate of the rate of mortality for different age.
10. Mortality cost of different age is the cost of insurance for that age which
is known as the “Risk Premium”.
11. By summing up all the risk premium of different age group we estimate the future
liabilities under a policy which is the money needed by us to pay claims in future.
12. Interest is simply the discount rate we assume for arriving at the present value of future
claims.
13. Two major points that comes out is
a. Higher the mortality rate in the mortality table, higher the premiums would be.
b. Higher the interest rates assumed, lower the premium.
14. The “Net Premium” is the estimated present value of the Future claim costs.
15. The discounted present value of all future claim liability gives the “Net Single
Premium”.
16. “Net Single Premium” is leveled out to be payable over the premium paying term.
17. Gross premium = Net Premium + Loading

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18. Guiding Principles for determining Amount of Loading:

a. Adequacy: Loading to cover
• Company’s total operating expenses
• Provide margin for safety
• Contribute to the profits and surplus of the company
b. Equity: Expenses and safety margins for all kinds of policies. Each class to pay
for its own costs.
c. Competitiveness: To improve the competitive position of the company

Expenses & Reserves

19. The life insurer incurs two types of expenses:
a. New Business Expenses: Expenses at the beginning stage of the contract.
b. Renewal Expenses: Expenses incurred during subsequent years.
20. Life insurers required to hold margins as reserves.
21. Initial expenses plus margins are typically higher than the initial premium received.
22. The strain faced by the company because of the above reasons is known as new business
strain.
23. Different types of expenses are determined in different ways:
a. Commissions and incentives for agency managers /development
officers are decided as a percentage of the premiums earned.
b. Expenses like medical examiners’ fees and policy stamps vary depending
on the amount of sum assured, charged in relation to the sum assured.
c. Overheads like salaries and rents which generally vary with the amount
of activities charged as a constant amount per policy.
24. The insurer faces the risk that actual experience may be different from the
assumptions made while designing the contract.
25. One source of risk is that of lapses (discontinue the payment of premium) and
withdrawals (surrender and take money from the acquired cash value).
26. Insurers incorporates loading in anticipation of leakage that might arise.
27. Life insurers must also be prepared for the eventuality that the assumptions
on basis of which they set their premiums differs from actual experience. Mainly
Because of two reasons:
a. Inappropriate assumptions
b. Random fluctuations
28. Ways to address these risk can be:
o Pass it on to the customer: Like ULIPs, the risk of lower returns
has to be borne by the customer.
o Reinsurer: The mortality risk is borne by the reinsurer.
o Loading the premium: To absorb the divergence between expected and actual
experience.
29. Participating/With profit policy have a component called bonus loading into the
premium. This is to provide the customers a margin in profits.
30. In sum, Gross Premium = Net premium + Loading for expenses + Loading for
Contingencies + Bonus Loading
31. If we assume that the above loadings together comprise a total of K percentage
of gross premium (GP), we can find out the gross premium, given the net
premium (NP) as GP = NP + K (GP)

Surplus & Bonus

32. Every Insurance company does periodic valuations of assets and liabilities with two
purposes:
a. To asses the financial state – solvency status of the life insurer.
b. To determine the surplus available for distribution among policyholder / share
holders.
33. Surplus is the excess of value of assets over value of liabilities. If it is negative, it is
known as a Strain.
34. Firms in general have two concepts of profit. In the accounting sense, profit is
defined as the excess of income over outgo for a given accounting period, it
forms part of the profit and loss account.

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35. Profit also forms part of the balance sheet of a firm - it may be defined as
the excess of assets over liabilities.
36. Surplus = Assets – Liabilities
37. Ways of Valuing Assets:
a.Book Value: value at which the asset was purchased or acquired.
b.Market Value: The worth of the assets in the market place.
c. Discounted Present Value: Estimating the future income stream from
various assets and discounting them to the present.
38. Surplus is a function of how assets and liabilities are valued.
39. When a life insurer is very conservative in its valuation, it would result in liabilities
being overvalued than otherwise while assets are undervalued. As a result the
surplus that is declared would be reduced resulting low bonus.
40. On the other hand, if assets and liabilities are valued liberally, it has the Opposite result.
41. Surplus arise as a result of the life insurance actual experience being better
that what it had assumed resulting passing on to the customer as bonus.
42. It is also added to the company’s basic capital known as retained earnings.
43. Determining surplus:
a. Solvency requirements: The solvency margin may be defined as that
portion of surplus assets over liabilities specifically set aside as a cushion
for addressing any unforeseen deviations between expected and actual
experience.
b. Free assets: Another purpose for having surplus that is unallocated (for
distribution) is to increase the level of free assets. Free assets are
maintained for
i. Capital to finance new business
ii. Offer greater leverage and freedom in choosing investment strategies
44. Bonus is paid as an additional to the basic benefit payable under a contract.
45. The most common form of bonus is the reversionary bonus.
46. The company is expected to declare the bonus every year post valuation and once
declared its get attached to the policy and cannot be taken away. It is Payable to
the customer only when the contract becomes a claim by death or maturity.
Bonus may also be payable on surrender.
47. Types of reversionary bonuses are:
a. Terminal Bonus: Paid on termination of the contract, increases with the time
increase.
b. Compound Bonus: Bonus on bonus – expressed as % basic benefit and
attached bonus.
c. Simple Reversionary bonus: Expressed as a % of the basic cash benefit.
48. The Contribution Method: Under this method consideration is given to three
sources of surplus - excess interest, mortality savings and savings arising with
respect to expense and other loadings.
49. Dividends may be used in any of the four forms:
a. Dividends in cash.
b. Dividends adjustment to, and reduction in future premiums
c. Dividends to purchase of non-forfeitable paid up additions
d. Dividends may be allowed to accumulate, with interest, to the credit of
the policy. It may be either withdrawn at the option of policyholder or
only at the end of the contract.
50. Unit Linked policies involve a different approach to the design of products and
follow a different set of principles.
51. Unitizing: The benefits are wholly or partially determined by the value
of units credited to the policyholder’s account at the date when the claim
payment is due to be made.
52. Transparent Structure: The charges for insurance protection and expenses
component of a unit linked product are clearly specified.

53. Pricing: Under unit linked policies, the insured decides what amount of premium
he/ she can contribute at regular intervals. The premium is divided into three
parts:
a. Premium Allocation Charge (PAC): Agents’ commission, policy

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setup costs, administrative costs and statutory levies.

b. Mortality Charge: Cost of providing risk cover
c. The balance of premiums after meeting the above two are allocated for the
purchase of units.
54. The PAC is a proportion of the premiums. It’s high in the initial years. In traditional
plans its spread over the term. In ULIPs they are deducted upfront.
55. In ULIPs, the initial amount available for investment is low during the initial years
because of the above reason.
56. The bearing of investment risk: The value of units depends on the value of
the life insurer’s investments there is a risk that these units’ values may be lower
than expected. The investment risk, in other words is borne by the policy holder
/ Unit holder. The life insurer may however bear the mortality and expense risk.

Chapter 12 – Documentation - proposal stage

1. Prospectus: A prospectus is a formal legal document used by insurance

companies that provides details about the product.
2. The prospectus used by Life Insurance Company should state the following
under each of plans of insurance:
i. The terms and conditions
ii. Scope of benefits – Guaranteed and Non-Guaranteed
iii. The entitlements
iv. The exceptions
v. Whether the plan is participative or non participative
3. Proposal form: The Proposal Form is a legal contract between insurer and the
policyholder. As per contract requirement it has a proposal and its acceptance.
The application document used for making a proposal is called proposal form.
4. The proposal form or application form is the first document that the proposer
needs to fill in and submit to the insurance company and becomes basis of
principle of utmost good faith.
5. The proposer should fill in the proposal form themselves in their own handwriting.
6. All the facts stated in proposal form become binding on both parties and failures
to appreciate its contents can lead to adverse consequences in case of claim
settlement.
7. “Material” should mean and include all important, relevant information in context
of underwriting the risk to be covered by insurer.
8. The IRDA has issued the IRDA (Standard Proposal Form for Life Insurance)
Regulations, 2013. While the IRDA has prescribed the design and content, it has
provided flexibility to the insurance companies for seeking additional information.
The proposal form carries detailed instructions not only for the proposer and the
proposed life insured but also to the intermediary who solicits the policy and
assists in filling up the form.
9. Agent’s Report:
i. Agents play an important role in the underwriting process as they are in
direct contact with the proposer and hence known as “primary underwriter”.
ii. The agent’s role in the risk selection process is particularly important.
iii. The agent has to ensure that the proposal form submitted is completely
filled out by the proposer.
iv. If the agent is helping to complete the form, they should fill it out honestly and
accurately.
v. The answers provided should not be prejudiced in any case.
vi. If they feel that the proposer’s intentions are not genuine, they should mention
that in their report.
10. Medical Examiner Report:
i. Details pertaining to physical features like height, weight, blood pressure,
cardiac status etc are recorded by the doctor in his report called the
“medical examiner report”.
ii. Medical information in the proposal form contains the information on
t

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he proposer’s past medical history and present medical condition.

iii. A complete medical check-up on the proposer can be carried out by a doctor

empanelled by insurance company.

iv. Proposals written and accepted for insurance without calling for a medical
examination are known as
non medical cases.
v. The Medical Examiner Report is typically required when the proposal
cannot be considered under non medical underwriting because the sum
assure or age of proposer is high or certain characteristics in proposal
form call for medical examination.
11. Moral Hazard Report:
Moral hazard is the likelyhood that a client’s behavior might change as a result of
purchasing a life insurance policy and such a change can increase the chance of
a loss. Moral Hazard is hazard related to the conduct, attitude and/or
intentions of the proposer. The following examples illustrate the nature of
moral hazard in relation to life insurance:
i. Reckless or careless attitude to health and personal safety;
ii. Ending one’s own life or life of another
12. Life insurance company seek to guard against the possibility of individual seeking
to make profit from Life insurance. For this purpose the company can require
moral hazard report to be submitted by official of Insurance Company who
preferably should meet the proposer in person and enquire about habits ,
occupation , income , social background etc before submitting the report.
13. Age Proof:
a. Age is one of the factors that insurer use to determine the risk profile of
the proposer and thus the premium amount to be charged.
b. Age proofs can be classified as standard age proof documents and
nonstandard age proof documents.
c. Standard age proofs are:
i. A certificate from school or college records;
ii. A certified extract from registrar of births and deaths or from
municipal records made at the time of birth;
iii. A passport;
iv. A permanent account number (pan) card;
v. The service register of the employer;
vi. A certified extract from a family bible, if it contains the date of birth;
vii. Certificate of baptism
viii. The identity card of defence personnel, issued by the defence department;
ix. A marriage certificate issued by a roman catholic church
d. Non-standard age proofs are:
i. A horoscope prepared at the time of birth
ii. A ration card
iii. An affidavit by way of self-declaration, elder’s declaration
iv. A certificate by village panchayat
14. Anti Money Laundering (AML):
a. The Government of India launched the PMLA, 2002 to rein in money-laundering
activities.
b. The Prevention of Money Laundering Act (PMLA), 2002 came into effect
from 2005 to control money laundering activities and to provide for
confiscation of property derived from money- laundering. It mentions
money laundering as an offense which is punishable by rigorous
imprisonment from three to seven years and fine up to `5 lakhs.
c. Each insurer is required to have an AML policy and accordingly file a copy
with IRDA. The AML program should include:
i. Internal policies, procedures and controls
ii. Appointment of a principal compliance officer
iii. Recruitment and training of agents on AML measures
iv. Internal audit/control

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15. Know Your Customer (KYC): KYC is the process used by a business to
verify the identity of their clients.
16. For KYC, customers need to submit KYC to an agent with proposal form :
a. Photograph
b. An age proof
c. An identity proof
d. An address proof; and
e. Income proof documents (if required by the insurance company,
depending on the insurance amount asked for)

17. Free Look Period: IRDA regulations allow the proposer to withdraw from the
contract within a period of 15 days from date of receipt of policy document. This
is called the “Free look” or “Cooling off” period.
18. The client can get the policy refunded subject to the following conditions:
a. He/She can exercise this option in 15 days of receiving the policy document.
b. He/She has to communicate in writing.
c. The premium reund will be adjusted for proportionate risk premium
for the period of cover, expenses incurred by insurer on medical
examination and stamp duty charges.

Chapter 13 – Documentation – policy condition I

1. First Premium Receipt: An insurance contract commences when the life

insurance company issues a First Premium Receipt (FPR).
2. Subsequent Premium Receipts issued by insurer to insured on receiving premiums
are known as Renewal Premium Receipt (RPR).
3. Policy document: The standard policy document has typically three parts.
a. Policy Schedule: The Policy schedule forms the first part. It is usually
found on the face page of the policy. The schedules of life insurance
contracts would be generally similar. They would normally contain the
following information.
i. Name of the insurance company
ii. Some specific details of the particular policy like
o Policy owner’s name and address
o Date of birth and age last birthday
o Plan and term of the policy contract
o Sum Assured
o Amount of Premium
o Premium Paying Term
o Date of commencement, date of maturity and due date of last
premium
o Whether policy is with or without profits
o Name of nominee
o Mode of premium payment – yearly; half yearly;
quarterly; monthly via salary deduction
o The policy number, which is the unique identity number of policy
contract.
iii. The insurer’s promise to pay. This forms the heart of the insurance
contract
iv. The signature of the authorized signatory and policy stamp
v. The address of the local insurance ombudsman

b. Standard Provisions: The second component of the policy documents

is made up of standard policy provisions which are normally present in all
life insurance contracts, unless specifically excluded. Some of these
provisions may not be applicable in case of certain kinds of contracts, like
term, single premium or non-participating (in profit) policies. These
standard provisions define the rights and privileges and other conditions,
which are applicable under the contract.

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c. Specific Policy Provisions: The third part of the policy documents

consists of specific policy provisions that are specific to the individual
policy contract. These may be printed on the face of the document or
inserted separately in the form of an attachment.
While standard policy provisions, like days of grace or non-forfeiture in
case of lapse, are often statutorily provided under the contract, specific
provisions generally are linked to the particular contract between the
insurer and insured.

Chapter 14 – Documentation – policy condition II

Policy conditions and privileges

1. Grace Period
a. The “Grace Period” clause grants the policyholder an additional period of
time to pay the premium after it has become due.
b. The standard length of the grace period is one month or 31 days
c. The provision enables a policy that would otherwise have lapsed for non-
payment of premium, to continue in force during the grace period.
d. The premium however remains due and if the policyholder dies during
this peri
od, the insurer may deduct the premium from the death benefit.
e. If premiums remain unpaid even after the grace period is over, the policy
would then be considered lapsed and the company is not under obligation to
pay the death benefit.
2. Lapse and Reinstatement / Revival
a. Reinstatement is the process by which a life insurance company puts back
into force a policy that has either been terminated because of non-payment
of premiums or has been continued under one of the non-forfeiture
provisions.
b. A revival of the policy cannot however be an unconditional right of the insured.
It can be accomplished only under certain conditions:
i. No increase in risk for insurer: Revival of a policy cannot result in
Increase in risk for the insurance company.
ii. Creation of reserve: The policyholder must pay such amount of
Premiums with interest, as would lead to creation of the same reserve
it would have accumulated if the policy had not lapsed.
iii. Revival application within specific time period: The policy owner
must complete the revival application within the time frame stated in
the provision for such reinstatement. In India revival must be affected
within a specific time period, say five years, from the date of lapse.
iv. Satisfactory evidence of continued insurability: The insured must
present to the insurance company satisfactory evidence of continued
insurability of the insured. Not only must her health be satisfactory but
other factors such as financial income and morals must not have
deteriorated substantially.
v. Payment of overdue premiums with interest: The policy owner is
required to make payment of all overdue premiums with interest from
due date of each premium.
vi. Payment of outstanding loan: The insured must also pay any
outstanding policy loan or reinstate any indebtedness that may have
existed.
c. Revival is often more advantageous because buying a new policy would call
for a higher premium rate based on the age the insured has attained on date
of revival.
d. Policy revival measures: In general one can revive a lapsed policy if the
revival is within a certain period (say 5 years) from the date of first unpaid

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premium.
i. Ordinary revival
• The simplest form of revival is one that involves payment of
arrears of premium with interest.
• It is affected when the policy has acquired surrender value.
• The insurer would also call for a declaration of good health or
some other evidence of insurability like a medical examination.
ii. Special revival
• This is done if the policy has not attained surrender value or
not complete 3 years of premium payment.
• Here it is as though a new policy has been written, whose date of
commencement is within two years of the original date of
commencement of the lapsed policy.
• The maturity date shall not exceed the original stipulated period
as applicable to certain lives at the time of taking the policy.
iii. Loan cum revival
• This is not a revival alone but involves two transactions:
i. The simultaneous granting of a loan and
ii. revival of the policy
• Arrears of premium and interest are calculated as under ordinary
revival and the loan eligible to get under the policy as on date of
revival is also determined.
• This loan may be utilized as consideration amount for revival
purposes. If there is any balance amount subsisting after loan
adjustment towards arrears of premium and interest, it is payable
to the policyholder.
iv. Instalment revival
• Depending on the mode of payment (quarterly or half yearly) the
life assured may be required to pay one half yearly or two
quarterly premiums.
• The balance of arrears to be paid would then be spread so as to
be paid with future premiums on premium due dates, during a
period of two years or more, including the current policy
anniversary year and two full policy anniversaries thereafter.
3. Non-forfeiture provisions
a. One of the important provisions under the Indian Insurance Act (Section 113)
is that which allows for accrual of certain benefits to policyholders even when
they are unable to keep their policies in full force by payment of further
Premiums.
b. The law in India thus provides that if premiums have been paid for at least
three consecutive years there shall be a guaranteed surrender value
4. Surrender values
a. Life insurers normally have a chart that lists the surrender values at
various times and also the method that will be used for calculating the
surrender values
b. The actual amount of cash one gets in hand on surrender may be different
from the surrender value amount prescribed in the policy.
c. Surrender Value is a percentage of paid-up value.
d. Surrender Value arrived as a percentage of premiums paid is called Guaranteed
Surrender Value.
5. Policy loan
a. The policy loan is usually limited to a percentage of the policy’s surrender value (say
90%).
b. A loan provides access to liquid funds while keeping the insurance alive
c. A loan is what you would recommend to a client in need of urgent funds but
you would like to keep him or her as your client.
d. The loan is granted on the policy being kept as security, the policy has to be
assigned in favour of the insurer.
e. Where the policyholder has nominated someone to receive the money in
the event of death of the insured, this nomination shall not be cancelled by

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the subsequent assignment of the policy.

f. The nominee’s right will affected to the extent of the insurer’s interest in the policy.
g. Insurers usually charge interest on policy loans If the interest charges are not
paid they become part of the policy loan and are included in the loan
outstanding
h. But if the policy is in a lapsed condition and no new premiums are forthcoming
a situation can arise where the amount of outstanding loan plus unpaid
interest (the total debt) becomes greater than the amount of policy’s cash
value.
i. Well before such an eventuality, insurers generally take what is termed as
foreclosure action
j. Notice is to be given to the policyholder before the insurance company resorts
to foreclosure.
k. The policy is terminated and subsisting cash value is adjusted to loan and
interest that is outstanding. Any excess amount may be paid to the
policyholder.

Policy Loan Commercial Loan

No legal obligation to repay the loan: A commercial loan creates a

The policy owner is not legally obligated to debtor – creditor relationship in
repay the loan. She can repay all or part Which the borrower is legally
of the loan at any time she chooses. If the obligated to repay the lender.
loan has not been repaid, the insurer
deducts the amount of outstanding
(unpaid) loan and interest from the policy
benefit that is payable.

No credit check is required: The creditor does a thorough

Since the insurer does not really lend its Credit check on the debtor
own funds to the policyholder, it is not
necessary to perform a credit check on
the debtor when the latter applies for the
loan. The insurer needs to only ensure
that the loan does not exceed the
eligible amount (90% of SV as suggested
above).

1. Special policy provisions and endorsement

a. Nomination
i. Nomination is where the life assured proposes the name of the
person(s) to whom the sum assured should be paid by the
insurance company after their death.
ii. The life assured can nominate one or more than one person as
nominees.
iii. Nominees are entitled for valid discharge and have to hold the
money as a trustee on behalf of those entitled to it.
iv. Nomination can be done either at the time the policy is bought or
later.
v. Under Section39 of the Insurance Act 1938, the holder of a policy
on their own life may nominate the person or persons to whom
the money secured by the policy shall be paid in the event of their
death.
vi. Nomination can be changed by making another endorsement in the
policy.
vii. Nomination only gives the nominee the right to receive the policy

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monies in the event of the death of the life assured. A nominee

does not have any right to the whole (or part) of the claim
viii. Where the nominee is a minor, the policy holder needs to appoint an
appointee.
ix. The appointee needs to sign the policy document to show his or
her consent to acting as an appointee
x. The appointees lose their status when the nominee reaches majority
age.
xi. The life assured can change the appointee at any time.
xii. If no appointee is given, and the nominee is a minor, then on the
death of the life assured, the death claim is paid to the legal heirs
of the policyholder.
xiii. Where more than one nominee is appointed, the death claim will
be payable to them jointly, or to the survivor or survivors. No
specific share for each nominee can be made.
b. Assignment
i. The term assignment ordinarily refers to transfer of property by
writing as distinguished from transfer by delivery.
ii. On assignment, nomination is cancelled, except when
assignment is made to insurance company for a policy loan.
iii. The assignment of a life insurance policy implies the act of
transferring the rights right, title and interest in the policy (as
property) from one person to another.
iv. The person who transfers the rights is called assignor and the
person to whom property is transferred is called assignee.
v. In India assignment is governed by Section 38 of Insurance Act.

Conditional Assignment Absolute Assignment

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Conditional assignment provides Absolute assignment provides

that the policy shall revert back that all rights, title and interest
to the life assured on his or her which the assignor has in the
surviving the date of maturity or policy are transferred to the
on death of the assignee. assignee without reversion to
the former or his/her estate in
any event. The policy thus vests
absolutely with the assignee.
The latter can deal with the
policy in whatever manner he or
she likes without the consent of
the assignor.

l. Conditions for valid assignment

i. First of all the person executing it (the assignor) must have
absolute right and title or assignable interest to the policy being
assigned.
ii. Secondly it is necessary that the assignment be supported by
valuable consideration, which may include love and affection.
iii. Thirdly it is imperative that the assignment is not opposed to any
law in force. For example the assignment of a policy to a foreign
national residing in another country may contravene exchange
control regulations.
iv. Assignee can do another assignment, but cannot do nomination
because assignee is not the life assured.
• The assignment has to be in writing and must be signed and
attested by at least one witness.
• The fact of transfer of title has to be specifically set forth in the
form of an endorsement on the policy.
• It is also necessary that the policyholder must give notice of the
assignment to the insurer. Unless such notice in writing is
received by the insurer, the assignee would not have any
right of title to the policy.
• An assignee may reassign interest in the policy to the
policyholder /life assured during the currency of the policy
• In the case of conditional assignment the title to the policy
would revert to the life assured in the event of death of the
assignee.
• On the other hand if the assignment were absolute, the title
would pass to the estate of the deceased assignee.
m. Nomination Vs. Assignment

Basis of Difference Nomination Assignment

What is Nomination or Nomination is the process of Assignment is the process of
Assignment? appointment of a person to transferring the title of the insurance
receive the death claim policy to another person or
institution.
When can the nomination Nomination can be done either Assignment can be done only after
or assignment be done? at the time of proposal or after commencement of the policy.
the commencement of the
policy.
Who can make the Nomination can be made only Assignment can be done by owner of
nomination or by the life assured on the policy the policy either by the life assured if
assignment? of his own life. he is the policyholder or the assignee.

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Where is it applicable? It is applicable only It is applicable all over the world,

where the Insurance according to the law of the respective
Act, 1938 is country relating to transfer of
Applicable. property.
Does the The policyholder retains title The policyholder loses the right, title
policyholder retain and control over the and interest under the policy until a
control over the policy? policy and the nominee has no re-assignment is executed and the
right to sue under the Policy assignee has a right to sue under the
policy.
Is a witness required? Witness is not required. Witness is mandatory.

Do they get any rights? Nominee has no rights over Assignee gets full rights
the policy. over the policy, and can even sue
under the policy.

Can it be revoked? Nomination can be The assignment once

revoked or cancelled done cannot be cancelled, but can be
at any time during the policy reassigned.
term.

In case of minor: In case the nominee is a In case the assignee is a minor, a

minor, appointee has to be guardian has to be appointed.
appointed.
What happens in case of In case of nominee’s death, In case of conditional assignee’s
the nominee’s or the rights of the policy revert death, the rights on the policy revert
assignee’s death? to the policyholder or to his back to the life assured, based on the
legal heirs. terms of assignment. In case of the
absolute assignee’s death, his legal
heirs are entitled to the policy.
What happens in In case the nominee dies In case the assignee dies before the
case of death of before the settlement of death settlement, the policy money is
the nominee or claim, the death claim will be payable to the legal heirs of the
assignee after the payable to the legal heirs of the assignee and not the life-assured who
death of the life assured life assured. is the assignor.
and before
the payment of the Creditors can attach the Creditors cannot attach the policy
death claim insurance policy which has a unless the assignment is shown to
Can creditors attach the nomination in it. have been made to defraud the
policy? creditors.

a. Duplicate policy
i. A life insurance policy document is only an evidence of a promise.
ii. Loss or destruction of the policy document and does not in any
way absolve the company of its liability under the contract.
iii. Satisfactory proof may require to be produced that the policy has
been lost and not been dealt with in any manner.
iv. Generally the claim may be settled on the claimant furnishing an
indemnity bond with or without surety.
v. If payment is shortly due and the amount to be paid is high, the
office may also insist that an advertisement be placed in a
national paper with wide circulation, reporting the loss.
vi. A duplicate policy may be issued on being sure that there is
no objection from anyone else.
b. Alteration
vii. Policyholders may seek to effect alterations in policy terms and
conditions.
viii. There is provision to make such changes subject to consent

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of both the insurer and assured

ix. Alteration in the first year of policy are Change in mode of
premium, change in name or address, readmission of age,
request for riders,
x. Alterations may be permitted in subsequent years. Some of
these alterations may be affected by placing a suitable
endorsement on the policy or on a separate paper.
xi. Some of the main types of alterations that are permitted are:
• Change in certain classes of insurance or term [where risk is not
increased]
• Reduction in the sum assured
• Change in the mode of payment of premium
xii. Change in the date of commencement of the policy
xiii. Splitting up of the policy into two or more policies
xiv. Removal of an extra premium or restrictive clause
xv. Change from without profits to with profits plan
xvi. Correction in name
Settlement option for payment of claim and grant of double accident Benefit

Chapter 15 – Underwriting

Underwriting: Basic Concepts

1. Underwriting purpose: There are two purposes

i. To prevent anti-selection or selection against the insurer
ii. To classify risks and ensure equity among risks
2. Selection of risks refers to the process of evaluating each proposal for life
insurance in terms of the degree of risk it represents and then deciding whether
or not to grant insurance and on what terms.
3. Anti-selection is the tendency of people, who suspect or know that their chance
of experiencing a loss is high, to seek out insurance eagerly and to gain in the
process.
4. Equity among risks: Applicants who are exposed to similar degree of risk
must be placed in same premium class.
5. Risk classification: Individual lines are categorised and assigned to different
risk classes depending on the degree of risk they impose. Four classifications:
i. Standard lives: Anticipated mortality corresponds to standard,
lives represented by mortality table.
ii. Preferred lives: Anticipated mortality is significantly low than
standard lives and could be charged a low premium
iii. Sub standard lives: Anticipated mortality is higher than average
or standard lives.
Accepted with extra premium or subjected t certain restrictions
iv. Declined lives: Anticipated extra mortality are more and it is a
question whether it can be accepted at an affordable cost.
6. Selection Process: Underwriting or selection process takes place in two levels
a. At Field Level
b. At Underwriting Level
7. Field or Primary Level
• Known as Primary Underwriting
• Agent plays a critical role as Primary underwriter and can monitor if any
wilful non- disclosure or misrepresentation has been made with intent, by
the proposer.
• Many Insurance companies require that agent complete a statement or a
confidential report.
• A Moral Hazard report may also be sought from an official of the life insurance
company.

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8. Underwriting department level

• It involves specialists and persons who are proficient in such work.
• They consider all relevant data to decide whether to accept a proposal and in
what terms.
9. Methods of underwriting:
a. Judgement method: Subjective judgement used when a decision on a
case that is complex. Eg: Acute diabetes, Expert opinion obtained from
medical referee.
b. Numerical Method: Underwriting assign positive rating points for
negative or adverse / factors (negative points for any positive or
favourable factors).
10. EMR: Extra mortality rating is total number of points assigned. If it is higher the
life is sub standard. If it is very high, insurance may be declined.
11. Underwriting Decisions:
a. Acceptance at ordinary rates (OR): most common decision
b. Acceptance with an extra: most common way of dealing with the large
majority of sub standard risks.
c. Acceptance with a lien on the same sum assured
d.Acceptance with a restrictive clause: limits death benefit in the event
of death under certain circumstances.
e.Decline or postpone
Non- Medical Underwriting

12. Non Medical Underwriting: A large number of proposals are accepted

without conducting a medical examination.
13. Conditions for Non Medical Underwriting:
i. Only certain categories of females, like working women are eligible.
ii. Upper limits on sum assured are imposed.
iii. Age at entry limit may be imposed
iv. Restriction with regards to certain plans of insurance
v. Maximum term is limited to 20years/upto age 60
vi. Class of lives
14. Rating factors in underwriting:
a. Refers to various aspects related to financial situation, life style, habits,
family history, personal history of health and other personal
circumstances in the prospective insured’s life that may pose a hazard
and increase the risk.
b. Moral Hazard: Assessed as financial underwriting.
c. Medical / physical hazard: Appraised as part of medical underwriting.
i. Female Insurance: Full insurance granted for those female who have
earned income of their own and may impose limits on other categories
of woman. Some conditions may levied on pregnant women and
women in general have greater longevity than men.
ii. Minors: It is necessary to have ascertained the need of insurance,
since minors usually no earned income of their own. Three conditions
generally be sought when considering insurance for minors are:
a. Whether they have a properly developed physique
b. Proper family history and personal history
c. Whether the family is adequately insured
iii. Large SA: SA may be assumed to be around ten to twelve times on
one’s annual income, if the ratio is much higher than this, it raises the
possibility of selection against the insurer. Reasons could be
anticipated of suicide or a result of expected deterioration in health.
The other reason could be excessive misspelling by sales person. And
it also imply whether payment of such premiums would be continued

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might be a question. Prudent to limit the amount of insurance so that

the premium payable is a maximum of say one third of an individual’s
annual income.
iv. Age: Mortality risk is closely related to age. Some special reports when
proposals are submitted for high SA / advanced ages or a combination
of both. An important part of underwriting process is admission of age,
after verifying the proof of age.
Standard age proofs: Standard age proofs are issued by a public
authority – birth certificate, school leaving certificate, passport, and
employer’s certificate.

Non standard age proofs: Horoscope or a self declaration when

standard age proof is not available.

v. Moral Hazard: Exist when certain circumstances or characteristics of

an individual financial situation, life style and habits, reputation and
mental health indicates that he or she may intentionally engage in
actions that increase the risk. E.g: Proposal submitted at a branch
located far away from place of residence.
a. Medical examination is done elsewhere even when a
medical examiner is available near one’s place of residence.
b. Proposal is made on the life of another without having clear
insurable interest, or when the nominee is not the near
dependant of life proposed.
c. If agent is related to life assured a moral hazard report
may be called from agency manager or development officer.
vi. Occupation: Occupational hazards estimated from three sources.
a. Accident Hazards: Risks jobs expose to risk of accident.
E.g.: circus artist, stunt artist, scaffolding workers.
b. Health Hazard: Job gives rise to possibility of medical
impairment. E.g.: Rickshaw pullers, toxic substances, high
pressure environment, over exposure to chemicals / nuclear
radiation, acute decompression sickness
c. Moral Hazard: Job involves proximity or can cause pre
disposition towards criminal elements or to drugs and alcohol.
E.g.: sitting cramped in a KPO can impair functioning of
certain body parts in longer run.
vii. Life style and habits:
a. Smoking & tobacco use: Contributes to increasing other medical
risks.
b. Alcohol: Long term can impair liver functioning & affect the
digestive system.
c. Substance abuse: Substance abuse refers to the use of
various kinds of substances like drugs or narcotics, sedatives
and other similar stimulants.

Medical underwriting

15. Call for medical examiner’s report due to certain factors – family history / personal
history/ personal characteristics
a. Family History: Heredity, Average longevity of family, Family environment.
b. Personal History: Past impairments of various system of human body

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which the life to be insured has suffered from. Eg: Cardio, respiratory,
ailments of renal, endocrine system, digestive, nervous system.
c. Personal characteristics: Significant indicates of the tendency to disease.
16. Build
17. Blood pressure: Systolic (115 +2/5 of age), Diastolic (75 + 1/5 of age)
18. Pulse rate: 50 to 90 beats per min. Average 72 per minute
19. Urine: Specific gravity
Specific gravity of one’s urine indicates balance among various salts in
the urinary system and malfunctioning of the system.

Chapter 16 – Payments under a life insurance policy

1. Claim: A claim is a demand that the insurer should make good the promise
specified in the contract. A claim under a life insurance contract is triggered by
the happening of one or more of the events covered under the insurance contract.
While in some claims, the contract continues, in others, the contract is terminated.
2. Types of Claims:
a. Survival claims payable even when the life assured is alive and
b. Death claim
3. Examples of events triggering survival claims:
a. Maturity of the policy
b. An installment payable upon reaching the milestone under a money-back policy
c. Critical illnesses covered under the policy as a rider benefit
d. Surrender of the policy either by the policyholder or assignee
4. Ascertaining whether a claim event has occurred
a. For payment of a survival claim, the insurer has to ascertain that the
event has occurred as per the conditions stipulated in the policy.
b. Maturity claims and money-back installment claims are easily established
as they are based on dates which are determined at the beginning of
the contract itself.
c. Surrender value payments are different from other claim payments.
Unlike other claims, here the event is triggered by the decision of the
policy holder or assignee to cancel the contract and withdraw what is due
to him or her under the contract.
d. Critical illness claims are ascertained based on the medical and other
records provided by the policyholder in support of his claim.
5. Surrender of Policy:
a. The policyholder opts for a premature closure of his policy. This is a
voluntary termination of the policy contract.
b. A policy can be surrendered only if it has acquired paid-up value.
c. The amount payable to the insured is the surrender value which is usually
a percentage of the premiums paid. There is also a minimum guaranteed
surrender value (GSV), but the actual surrender value paid to the insured
is more than the GSV.
6. Maturity Claim Payment:
a. Participating Plan: The amount payable under a maturity claim, if
participating, is the sum assured plus accumulated bonuses less dues
such as outstanding premium and policy loans and interests thereon.
b. Return of Premium (ROP) Plan: In some cases premiums paid over
the term period are returned when the policy matures.
c. Unit Linked Insurance Plan (ULIP): In case of ULIPs, the insurer pays
the fund value as the maturity claim.
d. Money-back Plan: In case of money-back policy, the insurer pays the
maturity claim minus the survival benefits received during the term of the
policy.
7. Repudiation of death claim: The death claim may be paid or repudiated. While
processing the claim, if it is detected by the insurer that the proposer had made
any incorrect statements or had suppressed material facts relevant to the policy,
the contract becomes void. All benefits under the policy are forfeited.

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8. Role of an agent:
a.An agent shall render all possible service to the nominee/legal heir or the
beneficiary in filling up of claim forms accurately and assisting in
submission of these at the insurer’s office.
b.Apart from discharging obligations, goodwill is generated from such a
situation whereby there exists ample opportunity for the agent to procure
business or referrals in future from the family of the deceased.

Chapter 17 – Introduction to health insurance

1. What is Health Insurance?

World Health Organization (WHO): Health is a state of complete physical, mental and
social wellbeing and not merely the absence of disease.
a. Determinants of Health:
b. Lifestyle Factors
c. Environmental Factors
d. Genetic Factors

2. Levels of Healthcare:
Health care to be effective must be
a. Appropriate to the needs of the people
b. Comprehensive
c. Adequate
d. Easily Available
e. Affordable

3. Types of Healthcare:
a. Primary Healthcare: Refers to services offered by doctors, nurses and other
small clinics which are contacted for sickness i.e first point of contact for all
patients within a health system.
b. Secondary Healthcare: Refers to Healthcare services provided by Medical
specialist and other health professionals who generally do not have first
contact with patients. It included acute care requiring treatment for short
period for a serious illness, often as an in-patient, including Intensive Care
Services, Ambulance facilities, pathology, diagnostic and other relevant
services.
c. Tertiary Healthcare: It is specialized consultative Healthcare, usually for
inpatients and on referral from primary/Secondary care providers. Examples
are advanced medical professionals like Oncology (cancer treatment), organ
transplant facilities, High risk pregnancy specialist etc.
4. Factors affecting the health systems in India
a. Demographic or population related trends
b. Social Trends
c. Life Expectancy

5. Evolution of Health Insurance in India

a. Employee State Insurance Scheme: ESI Act 1948: ESIC (Employee State
Insurance Corporation) is the implementing agency which runs it’s own
hospitals and dispensaries and also contracts public/private providers
wherever it’s own facilities are inadequate.
All workers earning wages up to Rs 15000 are covered under the contributory
scheme wherein employee and employer contribute 1.75% and 4.75% of pay
roll respectively; state governments contribute 12.5% of the medical
expenses.
The benefits covered include:
• Free comprehensive Healthcare at ESIS Facilities
• Maternity Benefit
• Disability benefit

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• Cash compensation for loss of wages due to sickness and survivorship

• Funeral Expenses in case of death of worker.
b. Central Government Health Scheme: ESIC was soon followed by CGHS
for central government employees including pensioners and their family
members working in Civilian jobs.
c. Commercial Health Insurance: First standardized health insurance product
for individual and their families was launched in 1986 by all four nationalized
non-life insurance companies. This product mediclaim was introduced to
provide coverage for the hospitalization expenses up to a certain annual limits
of indemnity with certain exclusions. It underwent several rounds of revisions
as the market evolved.
6. Health Insurance Market
a. Infrastructure :
i. Public Health Sector: This includes implementing national health
policies in villages through Anganwadi workers, Trained birth
attendants (TBA) & Accredited Social Health Activist (ASHA).
ii. Government has established Sub centres, Primary Health Centres &
Community Health Centres for that.
iii. Rural hospitals (estimated to be 2000 in country), Specialty and
teaching hospitals (about 300 in number) & other agencies belonging
to the government such as hospitals and dispenceries of railways,
defence and similar large departments also play an important role in
providing health services.
iv. Private Sector Providers: This ranges from voluntary, not for profit
organization and individual to for profit corporate, trusts, solo
practitioners, standalone specialist services, diagnostic laboratories,
pharmacy shops & also unqualified providers. India has also the
largest number of qualified practitioners in other systems of Medicine
(Ayurveda/Homeopathy/Unani/Siddha).
v. Pharmaceutical Industry: It’s now an industry worth 50000 crore
employing almost 5 million people with manufacturing taking place in
over 6000 units.The price regulator for the industry is the National
Pharmaceuticals Price Authority (NPPA).

b. Insurance providers: Insurance companies especially in the general

insurance sector provide the bulk of Health Insurance services. Also we have
5 standalone Health Insurance companies.
c. Intermediaries: A number of people and organizations (Governed by
IRDA) providing services as part of Insurance industry and also form part of
the health insurance market.
i. Insurance Brokers
ii. Insurance Agents
iii. Third Party Administrators
iv. Insurance Web Aggregators
v. Insurance Marketing Firms
Newest Entrant. They can perform the following activities by employing individual
licensed to market, distribute and service such products: Insurance Selling
activities, Financial Products Distribution.
d. Other Important Organizations :
i. IRDAI
ii. General & Life Insurance Councils
iii. Insurance Information Bureau of India
iv. Educational Institutions
v. Medical Practitioners
vi. Legal Entities.

Chapter 18 – Insurance documentation

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1. Proposal Form:

a.Document is required for the purpose of bringing understanding and clarity

between the insured and insurer.
b. The first stage of the document is basically the proposal form.
c. Proposal form is to be filled in by the proposer.
d. The principal of utmost good faith and the duty of disclosure of material
information begin with the proposal form for insurance.
e. Proposal form are printed by insurer. There is no standard format or practice.
f. Non-discloser of material facts, providing misleading information, fraud or
non-co-operation by the insured will nullify the cover under the policy issued.
g. Declaration at the end of the proposal form to be signed by the proposer.
h. IRDA has specified the format of the standard declaration in the health insurance
proposal.
i. Elements of proposal – Proposer’s name in full, Proposer’s address and contact
details, Proposer’s profession, occupation or business, details and identity of
the subject matter of insurance, Bank details, PAN etc.
j. Previous & present insurance – Proposer is required to inform the details of
previous insurance. Detail of the current insurance with any other insurer
including the name of the insurer need to be disclosed.
k. Where a proposal form is not used, the insurer shall record the information
obtained orally or in writing and confirm it within a period of 15 days and
incorporate the information in its policy.
l. There are questions related to the medical condition of the insured person
if he suffers from any specific diseases.
m. The intermediary has the responsibility towards both parties – insured & insurer
n. An insurer or its agent or other intermediator shall provide all material
information in respect of proposed cover to the prospect to enable the prospect
to decide on the best cover that would be in his/her interest.
o. As per IRDA guideline the insurer has to process the proposal form within 15 days
of time.
p. The entire process of scrutinizing the proposal and deciding about
acceptance is known as underwriting.
q. Prospectus – Prospectus is a document issued by the insurer or on its behalf
to the prospective buyer of insurance.
r. Issue of prospectus is governed by the insurance act 1938 as well as by the
protection of policy holder’s interest regulation 2002 and the health insurance
regulation 2003 of IRDA.
s. The premium related to all the riders put together should not exceed 30% of
the premium of the main product.
t. The prospectus of any insurance product should clearly state the scope of
benefits, the extent of insurance cover and explain in a clear manner the
warranties, exceptions and conditions of the insurance cover.
2. Premium Receipt:
a. Premium is a consideration or amount paid by the insured to the insurer for
insurance cover as per the insurance contract.
b. Sec 64 VB of the Insurance Act of 1938 (a special feature of Non- Life
insurance) states that no insurer can assume the insured risk unless the
premium is received in advance.
c. If an agent collects the premium from the insured on behalf of the insurer,
the amount has to be deposited with the insurer within 24 hrs. excluding
bank and postal holidays.
d. The risk will commence only from the date on which the premium has been paid in
cash or cheque.
e. If the Premium is sent by postal or money order or cheque sent by post, the
risk is assumed on the date on which the money order or cheque is booked

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or posted.
f. Any refund of premium to the insured is credited directly to the insured’s
bank account. There are exceptions (Insurance Rule 58 & 59) to the pre-
condition payment of premium.
i. Payment in instalments in case of Life insurance policies which are for more than
12 months.
ii. Payment through bank guarantee in specified cases where the exact
premium cannot be ascertained in advance.
g. Payment of premium can be done through methods approved by the IRDA
from time to time eg.by cash, cheque, DD, postal money order, credit or debit
card etc.
h. Credit or Debit card payments must be made only through the net banking
account or credit or debit card issued in the name of the proposer /
policyholder.
3. Policy Document
a. It is a formal document which is the evidence of the contract of insurance.
b. The document has to be stamped as per the provisions of the Indian Stamp Act,
1899.
c. A Health insurance Policy should contain - Name and address of the insured,
full description of the insured, Sum insured, Premium payable, Details of
Riders if any, Period of insurance, Perils covered and exclusions, Terms,
conditions and special conditions.
d. Action to be taken by the insured for raising of claim, obligations of the
insured and rights of the insurer, Provisions for cancellation of the policy,
Address of the insurer and details of grievance redressal mechanism and the
address of the Ombudsman.
4. Conditions and Warranties
a. A condition is a provision in an insurance contract which forms the basis of the
contract.
b. -Standard condition – any false or fraudulent declaration will result in forfeiture of
the policy benefits.
a. Health policy states that the claim has to be filed within certain
number of days from the day of discharge from the hospital. There
may be exceptions.
c. Warranties are used to limit liabilities of the insurer. It has to be complied
with strictly and literally for validity of the contract.
d. In practice, insurers at their discretion may process the claims according
to the guidelines of the company policy. In such cases claims settlement will
not be 100 %.
e. In a personal accident policy, it is warranted that no more than 5 insured
persons should travel together in the same air conveyance at one time.
5. Endorsements
a. If any change needs to be done to the policy at the time of issuance or during
the course of the policy term, it can be done through endorsement. It forms
part of the insurance contract.
b. Normally endorsements are required when there is a change in Sum
assured, name, address, insurable interest by way of loan, transfer of
property to another location, cancellation of policy.
6. Interpretation of Policies
a. The policy interpretation has to be well defined. If it is ambiguous, the courts
will interpret in favour of the insured.
b. A written condition overrides an implied condition. A hand written or typed
part of the policy form overrides the meaning of a standard printed policy
form.
c. If an endorsement contradicts the contract, the endorsement prevails.
d. Clauses in Italic words override ordinary printed wordings.

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e. Clauses attached override clauses printed in the margin or clauses printed in the
body of the policy.
7. Important
a. Construction of policies -An insurance contract is an evidence of a commercial
contract enforceable in a court of law. The intention and interpretation of the
contract must be gathered from the policy document itself and the proposal
form.
b. Meaning of wordings of the contract should be in lay man language. Technical
terms should be given their meaning for easy understanding.
8. Renewal Notice
a. Most of the non-life insurance policies are issued on an annual basis.
b. It is not a necessity but out of courtesy that insurers inform well in advance
for the renewal of the policy.
c. No risk can be assumed unless the premium is paid in advance.
9. Anti- Money Laundering and Know Your Customer Guidelines.
a. Money laundering is the process of converting illegally obtained funds into
legal funds by concealing their true origin.
b. The legislation of Prevention of Money Laundering Act 2002 was enacted by
the government.
c. As per KYC guidelines, every customer needs to submit their address
proof, Recent Photograph, Financial status and purpose of insurance
contract.
d. Agents are required to collect the following documents:
i. Individual – full name, address, contact number of insured with ID
and address proof, PAN number, Bank details for NEFT purposes.
ii. Corporate – Certificate of Incorporation, Memorandum and Articles
of Association, Power of Attorney to transact business and PAN card.
iii. Partnership firms – Registration certificate if registered,
Partnership deed, and Power of Attorney granted to a partner or
employee on behalf of the firm, proof of ID of such person.
iv. Trust and Charitable institutions (Foundations) – similar to a
Partnership.

Chapter 19 – Health insurance products

1. The Health Insurance Regulations of IRDA define health cover as

2. “Health insurance business” or “health cover” means the effecting of insurance
contracts which provide for sickness benefits or medical, surgical or hospital expense
benefits, including assured benefits and long term care, travel insurance and personal
accident cover.
3. Health insurance products available in Indian market are mostly in the nature of
hospitalisation products. These products cover the expenses incurred by an individual
during hospitalisation.
4. Health Insurance is important for 2 main reasons:
a. Providing financial assistance to pay for medical facilities in case of illness
b. Preserving the savings of an individual which may otherwise be wiped out in case of
any illness.
5. The first retail health insurance products covering hospitalisation costs –MEDICLAIM
- was introduced by the 4 public sector insurers in 1986.

As per IRDA health Insurance Regulations, 2013:

6. Life insurance companies may offer long term health insurance products but the
premium of such products shall remain unchanged for at least a block of every 3
years, there after the premium may be reviewed and modified as deemed necessary.
7. Non-life and standalone health insurance companies may offer individual health
products with a minimum tenure of 1 year and a maximum tenure of 3 years provided
that the premium will remain unchanged for the said period.

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Features of health insurance products

8. Health insurance basically deals with sickness and expenses incurred due to sickness.
Sometimes the disease contracted by the individual may be chronic or long term, life
long, critical in terms of day to day living activities. Expenses can also be incurred
due to accidental injuries or due to disablement due to accidents.

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Classification of Health Insurance Products

INDEMNITY COVERS – they CRITICAL ILLNESS COVER – this is

constitute the bulk of health a fixed benefit plan for pay out on
insurance market and pay for occurrence of predefined illness like
actual medical expenses heart attack, stroke, cancer etc.
incurred due to hospitalisation.

FIXED BENEFIT COVERS – also

called “hospital cash”, they pay a
fixed sum for the period of
hospitalisation. Some products also
have fixed graded surgical benefits
incorporated.

Classification Based On Customer

Segment

INDIVIDUAL COVER – offered MASS POLICIES - for Government

to retail customers and their schemes like RSBY covering very
family members. poor segments of the populations

GROUP COVER – offered to

corporate clients, covering
employees and groups covering
their members.

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IRDA issued guidelines on standardization of Health Insurance, 2013

9. Definition of commonly used insurance terms
10. Definitions of critical illnesses
11. List of excluded items of expenses in hospitalisation indemnity policies
12. Claim forms and pre authorisation forms
13. Billing formats
14. Discharge summary of hospitals
15. Standard contracts between TPAs, hospitals and insurers
16. Standard File and Use format for getting IRDAI for new policies

Hospitalisation Indemnity Products

17. An indemnity based health insurance policy is the most common and highest sold
health insurance product in India. They protect the individuals they may need to incur
in the event of hospitalisation. Such a cover is provided on an indemnity basis by
making good part or all of the expenses incurred or amount spent in hospitalisation.
This may be contrasted with the insurance coverage on ‘benefit basis’ where the
amount that will be paid on the occurrence of certain event as stated in the insurance
policy and is not related in actual expenditure covered.
The main features of indemnity based Mediclaim policy are as follows:
a. Inpatient hospitalisation benefits
i. Room, boarding, nursing expenses
ii. ICU expenses
iii. Surgeon, consultant, specialist fees
iv. Blood, oxygen OT charges
v. Medicine & drugs
vi. Dialysis, chemotherapy, radiotherapy
vii. Cost of prosthetic devices like pacemaker, vascular stents
viii. Laboratory, diagnostic test expenses
ix. Hospitalisation expenses of donor in case of organ transplant

b. Pre and post hospitalization expenses: Pre and post-hospitalization

expenses form part of the overall sum insured for which cover is granted
under the policy.

Pre hospitalization expenses would be relevant medical expenses incurred

during period up to the defined number of days (generally 30 days) prior to
hospitalization and will be considered as part of claim.

18. Post hospitalization expenses would be relevant medical expenses incurred during
period up to the defined number of days (generally 60 days) after hospitalization and
will be considered as part of claim.

a. Domiciliary hospitalization

b. Common exclusions -Pre-existing diseases the exclusion is: Any pre-

existing condition(s) as defined in the policy, until 48 months of continuous
coverage of such insured person have elapsed, since inception of his / her
first policy with the company.
i. Waiting periods: This is applicable for diseases for which typically
treatment can be delayed & planned depending on the product,
waiting periods of 1-4yrs

c. Coverage options available

i. Individual coverage
ii. Family floater
iii. Value added covers

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• Few indemnity products include value added covers as listed below.

i. Outpatient cover: As we know health insurance products in India
mostly cover only in- patient hospitalization expenses. Few
companies now offer limited cover for out-patient expenses under
some othe high-end plans.

i. Hospital cash: This provides for fixed lump sum payment for each
day of hospitalization for a specified period. Normally the period is
granted for 7 days excluding the policies deductible of 2/3 days.

ii. Recovery benefit: Lump sum benefit is paid if the total period of
stay in hospital due to sickness and/or accident is not less than 10
days.

iii. Donor’s expenses: The policy provides for reimbursement of

expenses towards donor in case of major organ transplant as per the
terms and condition defined in the policy.

iv. Reimbursement of ambulance: Expenses incurred towards

ambulance by Insured/insured person are reimbursed up to a certain
limit specified in the schedule of the policy.

d. Top-up covers

Example
An individual is covered for a sum insured of Rs. 3 lacs by his employer. He
could opt for a top-up policy of Rs. 10 lacs in excess of Rs. three lacs.
If the cost of a single hospitalization is Rs. 5 lacs, the basic policy would
cover up to Rs. three lacs only. With the top-up cover, the balance sum of
Rs. two lacs would be paid out by the top-up policy.
Top-up policies come cheap and the cost of a single Rs. 10 lacs policy would
be far higher than the top-up policy of Rs. 10 lacs in excess of Rs. three lacs.

19. Critical illness policy: a benefit policy with a provision to pay a lump sum amount
on diagnosis of certain named critical illness.

It is sold as
• As a standalone policy or
• As an add-on cover to a few health policies or
• As an add-on cover in some life insurance policies

20. Key terms in health policies

Network provider refers to a hospital/nursing home/day care centre which is under
tie-up with an insurer/TPA for providing cashless treatment to insured patients.

21. Preferred provider network (PPN)

An insurer has the option to create a preferred network of hospitals to ensure quality
treatment and at best rates.
A cashless service enables the insured to avail of the treatment up to the limit of
cover without any payment to the hospitals.
22. TPA is engaged by an insurer for provision of health services which includes among other
things:
I. Providing an identity card to the policyholder which is proof of his insurance policy
and can be used for admission into a hospital
ii. Providing a cashless service at network hospitals
iii. Processing of claims
23. A hospital means any institution established for in-patient care and day care
treatment of sickness and / or injuries and which has been registered as a hospital
with the local authorities, AND must comply with all minimum criteria as under:

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a. Has at least 10 inpatient beds in those towns having a population of less

than 10, 00,000 and 15 inpatient beds in all other places;
b. Has qualified nursing staff under its employment round the clock;
c. Has qualified medical practitioner(s) in charge round the clock;
d. Has a fully equipped operation theatre of its own where surgical procedures
are carried out

Chapter 20 – Health insurance underwriting

1. Health Insurance is based on the concept of morbidity which is defined as the risk of a person
falling sick.
2. Underwriting is done to strike a proper balance between risk and business thereby
ensuring competitiveness and profitability for the organisation.
3. Factors which affects person’s morbidity are age, gender, habits, occupation, build,
family history, past illness or surgery, current health status and place of residence.
4. The purpose of underwriting is to prevent adverse selection against the insurer
and also ensure proper classification and equity among risks.
5. The agent is the first level underwriter as he is in the best position to know the client to be
insured.
6. The key tools for underwriting are proposal form, age group, financial documents,
medical reports and sales reports.
7. Medical underwriting is a process which is used by the insurance companies to
determine the health status of an individual applying for health insurance.
8. Non-medical underwriting is a process where the proposer is not required to undergo any
medical test.
9. Numerical rating method is a process adopted in underwriting wherein percentage
assessments are made on each aspect of risk.
10. Group insurance is underwritten based on law of averages, implying that when all
members of a standard group are covered under a group health insurance policy, the
individuals constituting the group cannot anti- select against the insurer.

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Chapter 21 – Health insurance claims

Claims management in insurance

1. It is very well understood that insurance is a ‘promise’ and the policy is a ‘witness’
to that promise. The occurrence of an insured event leading to a claim under the
policy is the true test of that promise.
a. Stakeholders in claim process
Customer-The person who buys insurance is the first stakeholder and ‘receiver of the
claim’.
Owners-Owners of the insurance company have a big stake as the ‘payers of the
claims’. Even if the claims are met from the policy holders’ funds, in most cases,
it is they who are liable to keep the promise.
Underwriters- Underwriters within an insurance company and across all insurers
have the responsibility to understand the claims and design the products, decide
policy terms, conditions and pricing etc.
Regulator- The regulator (Insurance Regulatory and Development Authority of
India) is a key stakeholder in its objective to: Maintain order in the insurance
environment, Protect policy holders’ interest and Ensure long term financial health
of insurers.
Third Party Administrators (TPA) - Service intermediaries known as Third Party
Administrators, who process health insurance claims.
Insurance agents/brokers- Insurance agents / brokers not only sell policies but
are also expected to service the customers in the event of a claim.
Providers/Hospitals- They ensure that the customer gets a smooth claim
experience, especially when the hospital is on the panel of the TPA the Insurer to
provide cashless hospitalization.
b. Role of claims management in insurance company
As per industry data- “the health insurance loss ratio of various insurers ranges
from 65% to above 120%, with major part of the market operating at above
100% loss ratio”. Most companies are making losses in health insurance
business. This means that there is a great need to adopt sound underwriting
practices and efficient management of claims to bring better results to the
company and the policyholders.

Management of health insurance claims

1. Challenges in health insurance
a. Majority of the policies are for hospitalization indemnity where the subject
matter covered is a human being.
b. India presents very peculiar patterns of illnesses, approach to treatment and follow up.
c. Health insurance can be purchased by an individual, a group such as a
corporate organization or through a retail selling channel like a bank.
d. Health insurance depends on the act of being hospitalized, to trigger a claim under the
policy.
e. e) The discipline of healthcare is the fastest developing one. New diseases and
conditions keep occurring resulting in development of new treatment methods.
Examples of this are key-hole surgeries, laser treatments, etc.
f. More than all these factors, the fact that a human body cannot be
standardised adds a completely new dimension. Two people could respond
differently to the same treatment.
2. Claim process in health insurance
The claim under an indemnity policy could be a:

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a. Cashless claim
b. The customer does not pay the expenses at the time of admission or treatment.
The network hospital provides the services based on a pre-approval from the
insurer/TPA and later submits the documents to the insurer/TPA for settlement
of the claim.
c. Reimbursement claim
The customer pays the hospital from his own resources and then files his claim
with Insurer/TPA for payment of the admissible claim.

a. Intimation-It is required before hospitalization in case of planned admission, and

within 24 hours of hospitalization in case of an emergency.
b. Registration- It is the process of entering the claim in the system and creating a
reference number using which the claim can be traced any time. This number
is called Claim number, Claim reference number or Claim control number. The
claim number could be numeric or alpha-numeric based on the system and

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processes used by the processing organization

c. Verification of documents-It must be appreciated that for a claim to be processed
following are the most important requirements:
i. The documentary evidence of the illness
ii. Treatment provided
iii. In-patient duration
iv. Investigation Reports
v. Payment made to the hospital
vi. Further advice for treatment
vii. Payment proofs for implants etc.
d. Capturing the billing information-Billing is an important part of the claim
processing cycle. Typical health insurance policies provide for indemnifying
expenses incurred in the treatment with specific limits under various heads.
The standard practice is to classify the treatment charges.
Where the billing is not clear, the processor seeks the break up or additional
information, so that the doubts on the classification and admissibility are
resolved.
To address this issue, IRDAI issued Health Insurance Standardization
Guidelines which have standardized the format of such bills and the list of non-
payable items.
Package rates-Many hospitals have agreed package rates for treatment of certain
diseases. This is based on the ability of the hospital to standardize the treatment
procedure and use of resources. In recent times, for treatment at Preferred
Provider Network and also in case of RSBY, package cost of many procedures has
been pre-fixed.
e. Coding of claims-The most important code set used is the World Health
Organization (WHO) developed International Classification of Diseases (ICD)
codes.
While ICD is used to capture the disease in a standardized format, procedure
codes such as Current Procedure Terminology (CPT) codes capture the procedures
performed to treat the illness.
f. Processing of claim-A reading of the health insurance policy shows that while it
is a commercial contract, it involves medical terms that define when a claim is
payable and to what extent. The heart of claims processing in any insurance
policy, is in answering two key questions:
• Is the claim payable under the policy?
• If yes, what is the net payable amount?
Admissibility of a claim- For a health claim to be admissible the following
conditions must be satisfied.
i. The member hospitalized must be covered under the insurance policy
ii. Admission of the patient within the period of insurance
iii. Hospital definition-The hospital where the person was admitted should be
as per the definition of “hospital or nursing home” under the policy
otherwise the claim is not payable.
iv. Domiciliary hospitalization-Some policies cover domiciliary hospitalization
i.e. treatment taken at home in India for a period exceeding 3 days for
an ailment which normally requires treatment at hospital/nursing home.
Domiciliary hospitalization, if covered in a policy, is payable only if:
• The condition of the patient is such that he/she cannot be removed
to the Hospital/Nursing Home
• The patient cannot be removed to Hospital/Nursing Home for lack of
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v. Duration of hospitalization-Health insurance policies normally cover

hospitalization exceeding 24 hours as an in-patient.
• Day-care treatments-There are a number of procedures carried out
on day care basis without need for hospitalization exceeding 24 hours.
vi. OPD-The coverage under OPD varies from policy to policy. For such
reimbursements, the clause for 24 hours hospitalization is not applicable.
vii. Treatment procedure/line of treatment-Hospitalization is typically
associated with Allopathic method of treatment. However, the patient
could undergo other modes of treatment such as: Unani, Siddha,
Homeopathy, Ayurveda, Naturopathy etc. Most policies exclude these
treatments while some policies cover one or more of these treatments
with sub-limits.
viii. Pre-existing illnesses- Pre-existing illnesses refer to “Any condition,
ailment or injury or related condition(s) for which insured person had
signs or symptoms and/or was diagnosed and/or received medical
advice/treatment within 48 months prior to his/her health policy with the
company whether explicitly known to him or not.”
ix. Initial waiting period-A typical health insurance policy covers illnesses
only after an initial 30 days (except accident related hospitalization).
x. Exclusions-The policy lists out a set of exclusions which in general can be
classified as:
• Benefits such as maternity (though this is covered in some policies).
• Outpatient and Dental treatments.
• Illnesses which are not intended to be covered such as HIV,
Hormone therapy, obesity treatment, fertility treatment, cosmetic
surgeries, etc.
• Diseases caused by alcohol/drug abuse.
• Medical treatment outside India.
• High hazard activities, suicide attempt, radioactive contamination.
• Admission for tests/investigation purpose only.
xi. Compliance with conditions with respect to the claims-In general, these relate
to:
• Intimation of claim within certain period
• Submission of claim documents within a certain period.
• Not being involved in misrepresentation,
misdescription or non-disclosure of material facts.
g. Arriving at the final claim payable- Once the claim is admissible, the next
step is to decide the the amount of claim payable on these factors:
i. Sum insured available for the member under the policy
ii. Balance sum insured available under the policy for the
member after taking into account any claim made
already.
iii. Sub-Limits-Most policies specify room rent limitation,
nursing charges etc. either as a percentage of sum
insured or as a limit per day.
iv. Check for any limits specific to illness
v. Check whether the insured is entitled to any no-claim bonus.
vi. Other expenses covered with limitation: e.g. if
treatment is undertaken under Ayurvedic system of
medicine, usually the same has a much lower limit.
vii. Co-payment

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h. Payment of claim-The approved claim amount is advised to the Finance/Accounts

function and the payment may be made either by cheque or by transferring the
claim money to the customer’s bank account. Where the payment is handled
by the Third Party Administrator, the payment process may vary from insurer
to insurer.
i. Denial claims-The experience in health claims show that 10% to 15% of the
claims submitted do not fall within the terms of the policy. Denial or
repudiation of a claim (due to whatever reason) has to be informed to
the customer in writing with the reason for denial.
Apart from the representation to the insurer, the customer has the option,
to approach the following in case of denial of claim:
1). Insurance Ombudsman or 2). The consumer forums or 3). IRDAI or 4). Law
courts.

j. Suspect claims for more detailed investigation-Examples of frauds committed in health

insurance are:
i. Impersonation, the person insured is different from person treated.
ii. Fabrication of documents to make a claim where there is no
hospitalization.
iii. Inflation of expenses, either with the help of the hospital or by
addition of external bills fraudulently created.
iv. Outpatient treatment converted to in-patient/hospitalization to cover
cost of diagnosis, which could be high in some conditions.
k. Cashless settlement process by TPA

Documentation in health insurance claims

1. Discharge summary-As per IRDAI Standardization Guidelines the contents of
a standard Discharge Summary are as follows:
a. Patient’s Name
b. Telephone No / Mobile No
c. IPD No
d. Admission No
e. Treating Consultant/s Name, contact numbers and Department/Specialty
f. Date of Admission with Time
g. Date of Discharge with Time
h. MLC No / FIR No
i. Provisional Diagnosis at the time of Admission
j. Final Diagnosis at the time of Discharge
k. ICD-10 code(s) or any other codes, as recommended by the Authority, for Final
diagnosis
l. Presenting Complaints with Duration and Reason for Admission
m. Summary of Presenting Illness
n. Key findings on physical examination at the time of admission
o. History of alcoholism, tobacco or substance abuse, if any
p. Significant Past Medical and Surgical History, if any
q. Family History if significant/relevant to diagnosis or treatment
r. Summary of key investigations during Hospitalization
s. Course in the Hospital including complications if any
t. Advice on Discharge
u. Name & Signature of treating Consultant/Authorized Team Doctor
v. Name & Signature of Patient / Attendant
Where the patient unfortunately does not survive, the discharge summary is

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termed Death Summary in many hospitals. The discharge summary is always

sought in original.
2. Investigation reports- Investigation reports usually consist of:
a. Blood test reports; b. X-ray reports; c. Scan reports and d. Biopsy reports
3. Consolidated and detailed bills: IRDAI Standardization Guidelines provide format
for consolidated and detailed bills. The student is advised to understand the details
available on the IRDAI website.
4. While the consolidated bill presents the overall picture, the detailed bill will
provide the break up, with reference codes. The bills have to be received in original.
Receipt for payment- The receipt should be numbered and or stamped and be presented in
original.
5. Claim form-Claim form is the formal and legal request for processing the claim
and is submitted in original signed by the customer. The claim form has now been
standardized by IRDAI and broadly consists of:
a. Details of the primary insured and the policy number under which the claim is made.
b. Details of the insurance history
c. Details of the insured person hospitalized.
d. Details of the hospitalization such as hospital, room category, date and
time of admission and discharge, whether reported to police in case of accident,
system of medicine etc.
e. Details of the claim for which the hospitalization was done including breakdown
of the costs, pre and post-hospitalization period, details of lump-sum/cash
benefit claimed etc.
f. Details of bills enclosed
g. Details of bank account of primary insured for remittance of sanctioned claim
h. Declaration from the insured.
Besides information on disease, treatment etc., the declaration from the insured
person makes the claim form the most important document in the legal sense.
It is this declaration which applies the “doctrine of utmost good faith” into the claim,
breach of which attracts the misrepresentation clause under the policy.
6. Identity proof-Usually identification document which is sought could be:
a. Voters identity card, b.Driving license, c.PAN card, d. Aadhaar card etc.
7. Documents contingent to specific claims-There are certain types of claims that require
additional documents apart from what has been stated above. These are:
a. Accident claims, where FIR or Medico-legal certificate issued by the hospital to
the registered police station, may be required. It states the cause of accident and
if the person was under the influence of alcohol, in case of traffic accidents.
b. Case indoor papers in case of complicated or high value claims. Indoor case paper
or case sheet is a document which is maintained at the hospital end, detailing
all treatment given to patient on day to day basis for entire duration of
hospitalization.
c. Dialysis / Chemotherapy / Physiotherapy charts where applicable.
d. Hospital registration certificate, where the compliance with the definition of hospital
needs to be checked.

Claims reserving

Reserving-This refers to the amount of provision made for all claims in the books of the
insurer based on the status of the claims. Any mistake in reserving affects the insurer’s
profits and solvency margin calculation.
E. Role of third party administrators (TPA)
1. Introduction of TPAs in India-The Insurance Regulatory and Development Authority

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allowed TPAs to be introduced into the market under license from IRDAI, provided
they complied with The IRDAI (Third Party Administrators - Health Insurance)
Regulations, 2001 notified on 17th Sept 2001.
As per Regulations, "Third Party Administrators or TPA means any person who
is licensed under the IRDAI (Third Party Administrators - Health Services)
Regulations, 2001 by the Authority, and is engaged, for a fee or remuneration
by an insurance company, for the purposes of providing health services.
2. Post sale service of health insurance
a. Once the proposal (and the premium) is accepted, the coverage commences.
b. If a TPA is to be used for servicing the policy, the insurer passes on the
information about the customer and the policy to the TPA.
c. The TPA enrolls the members (while the proposer is the person taking the policy,
members are those
covered under the policy) and may issue a membership identification in the form
of a card, either physical or electronic.
d. The membership with the TPA is used for availing cashless facility as well as
processing of claims when the member requires the support of the policy for a
hospitalization or treatment that is covered.
e. TPA processes the claim or cashless request and provides the services within
the time agreed with the insurer.
3. Objectives of third party administration (TPA)
a. To facilitate service to a customer of health insurance in all possible manners at the
time of need.
b. To organise cashless treatment for the insured patient at network hospitals.
c. To provide fair and fast settlement of claims to the customers based on the claim
documents submitted and as per procedure and guidelines of the insurance
company.
d. To create functional expertise in handling health insurance claims and related services.
e. To respond to customers in a timely and proper manner.
f. To create an environment where the market objective of an insured person being
able to access quality healthcare at a reasonable cost is achieved and
g. To help generate/collate relevant data pertaining to morbidity, costs, procedures, length
of stay etc.
4. Relationship between insurer and TPA- The relationship between an insurer and the
TPA is contractual with a host of requirements and process steps built into the
contract. IRDAI Health Insurance Standardization guidelines now lay down
guidelines and provide a set of suggested standard clauses for contract between
TPA and insurance company, which are follows:
a. Provider networking services
b. Call centre services
c. Cashless access services
d. Customer relationship and contact management
e. Billing services
f. Claim processing and payment services
g. Management Information Services
h. TPA Remuneration

Claims management - personal accident

1. Personal accident- Personal accident is a benefit policy and covers accidental death,
accidental disability (permanent / partial), Temporary total disability and may also
have add-on coverage of accidental medical expenses, funeral expenses, educational
expenses etc. depending on particular product.

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Accident is defined as anything sudden, unforeseen, unintentional, external, and

violent and by visible means.
2. Claims investigation- Examples of red alerts for personal accident claims (for
purpose of further
investigation, but does not indicate positive indication of fraud or claim being fraudulent):
• Close proximity claims (claim within a short time of start of insurance)
• High weekly benefit amount with longer period of disability
• Discrepancy in the claim documents
• Multiple claims by same insured
• Indication of alcohol
• Suspected suicide
• Late night Road Traffic Accident while vehicle was being driven by insured
• Snake bite
• Drowning
• Fall from height
• Suspected sickness related cases
• Poisoning
• Murder
• Bullet injury
• Frost bite disappearance
• Homicide etc.
3. Claim documentation-
Death claim
a. Duly completed Personal Accident claim form signed by the claimant’s nominee/family
member
b. Original or Attested copy of First Information Report (Attested copy of FIR /
Panchnama / Inquest Panchnama)
c. Original or Attested copy of Death certificate.
d. Attested copy of Post Mortem Report if conducted.
e. Attested copy of AML documents (Anti-money laundering)-for name verification
(passport / PAN card / Voter's ID/Driving license) for address verification
(Telephone bill/Bank account statement/Electricity bill/Ration card).
f. Legal heir certificate containing affidavit and indemnity bond both
duly signed by all legal heirs and notarized
Permanent Total Disability (PTD) and Permanent Partial Disability (PPD) Claim
a. Duly completed Personal Accident claim form signed by the claimant.
b. Attested copy of First Information Report if applicable.
c. Permanent disability certificate from a civil surgeon or any equivalent competent
doctors certifying the disability of the insured.
d. Temporary Total Disability (TTD) Claim
e. Medical certificate from treating doctor mentioning the type of disability and
disability period. Leave certificate from employer giving details of exact leave
period, duly signed and sealed by the employer.
f. Fitness certificate from the treating doctor certifying that the
insured is fit to perform his normal duties.

Claims management- Overseas travel insurance

1. Overseas travel insurance policy- The covers under the policy can be
broadly divided into following sections. A specific product may cover all or
few of the below mentioned benefits:
a. Medical and sickness section,
b. Repatriation and evacuation,
c. Personal accident cover

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d. Personal liability
e. Other non-medical covers:
i. Trip Cancellation
ii. Trip Delay
iii. Trip interruption
iv. Missed Connection
v. Delay of Checked Baggage
vi. Loss of Checked Baggage
vii. Loss of Passport
viii. Emergency Cash Advance
ix. Hijack Allowance
x. Bail Bond insurance
xi. Hijack cover
xii. Sponsor Protection
xiii. Compassionate Visit
xiv. Study Interruption
xv. Home burglary
2. Assistance companies (Third Party Service Provider) - Role in overseas claims
a. Medical assistance services:
i. Medical service provider referrals
ii. Arrangement of hospital admission
iii. Arrangement of Emergency Medical Evacuation
iv. Arrangement of Emergency Medical Repatriation
v. Mortal remains repatriation
vi. Compassionate visit arrangements
vii. Minor children assistance/escort

b. Monitoring of Medical Condition during and after hospitalization

c. Delivery of Essential Medicines
d. Guarantee of Medical Expenses Incurred during hospitalization subject to
terms and condition of the policy and approval of insurance company.
e. Pre-trip information services and other services:
i. Visas and inoculation requirements
ii. Embassy referral services
iii. Lost passport and lost luggage assistance services iv. Emergency message
transmission services
iv. Bail bond arrangement
v. Financial Emergency Assistance
vi. Interpreter Referral
vii. Legal Referral
viii. Appointment with lawyer
3. Claims management for cashless medical cases
a. Claim notification
b. Case management steps
i. Assistance Company case manager verifies the benefits, sum insured, policy
period, name of the policy holder.
ii. Case manager then gets in touch with the hospital to obtain
clinical/medical notes for an update on the patient’s medical condition,
billing information, estimates of cost.
iii. Admissibility of the claim is determined and Guarantee of payment is placed
to hospital subject to approval from Insurance Company.
iv. There can be scenario where investigation may be necessary in India

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(local place of insured) and/or in loss location. Investigator abroad is

selected with the help of Assistance Company or through direct contact of
insurance company.
v. Assistance Company’s case manager continues to monitor the case on a
daily basis to provide Insurer with a clinical and cost update, progress notes,
etc.
vi. Once the patient is discharged, case manager works diligently with the
hospital to confirm final charges.
vii. Assistance Company ensures that the bill is properly scrutinized,
scrubbed and audited. Any error found is notified to the billing department
of the hospital for rectification.
viii. Final bill is then re-priced as per the rates agreed between the provider and
Assistance Company or its associate reprising agent. The earlier the payment
assurance made to hospital, better discount through re-pricing is possible.
c. Claims processing Steps
i. The claims assessor receives the re-priced/original bill, verifies and
ensures that coverage was in place for the dates of service and
treatment rendered. The bill received by the Assistance Company is audited
by the claims department to ensure the charges are in line and as per the
treatment protocol. The discount is re-confirmed and the bill is processed.
ii. ii. The bill is then sent to Insurer for payment accompanied by re-pricing
notification sheet and explanation of benefits (EOB).
iii. Insurance company receives the bill and authorizes immediate payment to
Assistance Company.
d. Payment process steps
i. Assistance Company receives authorization from Insurer to release payment
to the hospital via local office.
ii. ii. The finance department releases the payment
e. Hospitalization Procedures
i. The system in overseas countries, especially US and Europe are
quite different from the hospitals in India since majority of population has
universal health coverage either through private insurance or through
government schemes. Most hospitals accept Guarantee of Payments from all
international insurance companies once the insured provides them with a
valid health or overseas travel insurance policy.
ii. Information regarding network hospitals and the procedures is available
to the insured on the toll free numbers provided by the assistance
companies.
iii. In event of the necessity of a hospitalization the insured needs to intimate
the same at the call centre and proceed to a specified hospital with the
valid travel insurance policy.
iv. Hospitals usually contact the assistance companies/insurers on the call centre
numbers to check the validity of the policy and verify coverage’s.
v. Once the policy is accepted by the hospital the insured would undergo
treatment in the hospital on a cashless basis.
vi. Some basic information required by the insurer/assistance provider to determine
admissibility are
1. Details of ailment
2. In case of any previous history, details of hospital, local medical officer in
India.
f. Reimbursement of medical expenses and other non-medical claims
i. Personal accident claims are processed in similar fashion as explained in

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personal accident claims section.

ii. Bail bond cases and financial emergency cases are paid upfront by
Assistance Company and later claimed from insurance company.
iii. Claims repudiation of untenable claims follows the same process as for all other
claims.

g. Claim documentation for Medical Accident and Sickness Expenses

i. Claim form
ii. Doctor’s report
iii. Original Admission/discharge card
iv. Original Bills/Receipts/Prescription
v. Original X-ray reports/ Pathological/Investigative reports vi. Copy of
passport/Visa with Entry and exit stamp

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