A brief history of the Insurance secto1

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A brief history of the Insurance sector

The business of life insurance in India in its existing form started in India in the year 1818 with

the establishment of the Oriental Life Insurance Company in Calcutta.

Some of the important milestones in the life insurance business in India are:

y 1912: The Indian Life Assurance Companies Act enacted as the first statute to

regulate the life insurance business.

y 1928: The Indian Insurance Companies Act enacted to enable the government to

collect statistical information about both life and non-life insurance businesses.

y 1938: Earlier legislation consolidated and amended to by the Insurance Act with

the objective of protecting the interests of the insuring public.

y 1956: 245 Indian and foreign insurers and provident societies taken over by the

central government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act,

1956, with a capital contribution of Rs. 5 crore from the Government of India.



Insurance sector reforms:

In 1993, Malhotra Committee headed by former Finance Secretary and RBI Governor R.N.Malhotra was formed to evaluate the Indian insurance industry and recommend its future

direction.

The Malhotra committee was set up with the objective of complementing the reforms initiated in

the financial sector. The reforms were aimed at "creating a more efficient and competitive

financial system suitable for the requirements of the economy keeping in mind the structural

changes currently underway and recognizing that insurance is an important part of the overall

financial system where it was necessary to address the need for similar reforms«"

In 1994, the committee submitted the report.

MAJOR POLICY CHANGES

Insurance sector has been opened up for competition from Indian private insurance companies

with the enactment of Insurance Regulatory and Development Authority Act, 1999 (IRDA Act).

As per the provisions of IRDA Act, 1999, Insurance Regulatory and Development Authority

(IRDA) was established on 19th April 2000 to protect the interests of holder of insurance policy

and to regulate, promote and ensure orderly growth of the insurance industry. IRDA Act 1999

paved the way for the entry of private players into the insurance market which was hitherto the

exclusive privilege of public sector insurance companies/ corporations. Under the new

dispensation Indian insurance companies in private sector were permitted to operate in India with

the following conditions:



y Company is formed and registered under the Companies Act, 1956;

y The aggregate holdings of equity shares by a foreign company, either by itself or

through its subsidiary companies or its nominees, do not exceed 26%, paid up equity

capital of such Indian insurance company;

y The company's sole purpose is to carry on life insurance business or general

insurance business or reinsurance business.

y The minimum paid up equity capital for life or general insurance business is

Rs.100 crores.

y The minimum paid up equity capital for carrying on reinsurance business has

been prescribed as Rs.200 crores.

The Authority has notified 27 Regulations on various issues which include Registration of

Insurers, Regulation on insurance agents, Solvency Margin, Re-insurance, Obligation of Insurers

to Rural and Social sector, Investment and Accounting Procedure, Protection of policy holders'

interest etc. Applications were invited by the Authority with effect from 15th August, 2000 for

issue of the Certificate of Registration to both life and non-life insurers. The Authority has its

Head Quarter at Hyderabad.

Insurance companies:

IRDA has so far granted registration to 12 private life insurance companies and 9 general

insurance companies. If the existing public sector insurance companies are included, there are

currently 13 insurance companies in the life side and 13 companies operating in general

insurance business. General Insurance Corporation has been approved as the "Indian reinsurer"

for underwriting only reinsurance business. Particulars of the life insurance companies and

general insurance companies including their web address is given below:



LIFE INSURERS Websites

Public Sector

Life Insurance Corporation of India www.licindia.com

Private Sector

Allianz Bajaj Life Insurance Company Limited www.allianzbajaj.co.in

Birla Sun-Life Insurance Company Limited www.birlasunlife.com

HDFC Standard Life Insurance Co. Limited www.hdfcinsurance.com

ICICI Prudential Life Insurance Co. Limited www.iciciprulife.com

ING Vysya Life Insurance Company Limited www.ingvysayalife.com

Max New York Life Insurance Co. Limited www.maxnewyorklife.com

MetLife Insurance Company Limited www.metlife.com

Om Kotak Mahindra Life Insurance Co. Ltd. www.omkotakmahnidra.com

SBI Life Insurance Company Limited www.sbilife.co.in

TATA AIG Life Insurance Company Limited www.tata-aig.com

AMP Sanmar Assurance Company Limited www.ampsanmar.com

Dabur CGU Life Insurance Co. Pvt. Limited www.avivaindia.com

GENERAL INSURERS

Public Sector

National Insurance Company Limited www.nationalinsuranceindia.com

New India Assurance Company Limited www.niacl.com

Oriental Insurance Company Limited www.orientalinsurance.nic.in

United India Insurance Company Limited www.uiic.co.in

Private Sector

Bajaj Allianz General Insurance Co. Limited www.bajajallianz.co.in

ICICI Lombard General Insurance Co. Ltd. www.icicilombard.com

IFFCO-Tokio General Insurance Co. Ltd. www.itgi.co.in

Reliance General Insurance Co. Limited www.ril.com



Royal Sundaram Alliance Insurance Co. Ltd. www.royalsun.com

TATA AIG General Insurance Co. Limited www.tata-aig.com

Cholamandalam General Insurance Co. Ltd. www.cholainsurance.com

Export Credit Guarantee Corporation www.ecgcindia.com

HDFC Chubb General Insurance Co. Ltd.

REINSURER

General Insurance Corporation of India www.gicindia.com

Protection of the interest of policy holders:

IRDA has the responsibility of protecting the interest of insurance policyholders. Towards

achieving this objective, the Authority has taken the following steps:

y IRDA has notified Protection of Policyholders Interest Regulations 2001 to

provide for: policy proposal documents in easily understandable language; claims

procedure in both life and non-life; setting up of grievance redressal machinery; speedy

settlement of claims; and policyholders' servicing. The Regulation also provides for

payment of interest by insurers for the delay in settlement of claim.

y The insurers are required to maintain solvency margins so that they are in a

position to meet their obligations towards policyholders with regard to payment of

claims.



y It is obligatory on the part of the insurance companies to disclose clearly the

benefits, terms and conditions under the policy. The advertisements issued by the insurers

should not mislead the insuring public.

y All insurers are required to set up proper grievance redress machinery in their

head office and at their other offices.

y The Authority takes up with the insurers any complaint received from the

policyholders in connection with services provided by them under the insurance contract.



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It has been found out that:

* 85 percent of the Indians prefer LIC than any other insurance companies.

* 'Prevention of Loss', 'Assured Returns' and 'Long term Investment' are the important factors

influencing Indians in opting for Life Insurance

* Only few of the Indians are aware of private life insurance companies.

* Most of the Indians are of the opinion that private insurance companies would be able to

perform well in the long run.

* Most of the Indians are interested in 'Money back' policies than others

* Most of them are interested in insuring for an amount of Rs. 1- 2 lakhs

* There is significant relationship existing between monthly household income and amount

insured

* Based on the monthly household income, Indians prefer to their investment needs like bank

deposit, post office schemes, real estate, insurance, gold, chit funds, shares etc.

Agents are mostly responsible for selling insurance products in India



Collaboration of Indian Companies with Foreign Companies

S.No Indian Companies Foreign partnership

1. Kotak Mahindra Chubb

2. Tata Group AIG

3. Sundram Finance Winterthur

4. Sanmar Group GIO of Australia

5. Spic Metlife

6. ILFS Cigna

7. Alpic Finance Allianz

8. 20th Century Canada Life

9. Vysya Bank ING

10. Cholmandalam Axa



11. SBI Alliance Capital

12. HDFC Standard Life

13. ICICI prudential plc

14. Hindustan Times Commercial union

15. IDBI Principal

16. Max India New York Life



BANKS SUPPORTING THE CONCERNED INSURANCE FIRMS

LIFE INSURANCE CORPORATION

CENTRAL BANK OF INDIA

CENTURIAN BANK

VIJAYA BANK

CORPORATION BANK

JANTA URBAN CO-OPERATIVE BANK

YEOTMAL MAHILA SAHKARI BANK

ICICI PRUDENTIAL LIFE INSURANCE

ICICI BANK

BANK OF INDIA

HDFC STANDARD LIFE INSURANCE

UNION BANK OF INDIAING VYSYA LIFE INSURANCE

URBAN CORPORATIVE BANK {MUMBAI}

ING VYSYA BANK

PLANNING: BHARAT OVERSEAS BANK

FOCUS: MAHARASTRA, GUJRAT, WESTORN PART OF INDIA



AVIVA LIFE INSURANCE

ABN AMRO BANK

AMERICAN EXPRESS

CANARA BANK

LAXMI VILAS BANK

BAJAJ ALLIANZ LIFE INSURANCE

STANDARD CHARTED BANK

SYNDICATE BANK

BIR LA SUNLIFE INSURANCE

CITI BABK, DEUTSCHE BANK

IDBI BANK

DCB

BANK OF RAJASTHAN

BANK OF MUSKAT

TATA AIG LIFE INSURANCE

STATE BANK OF INDIA

ALLAHBAD BANK

LORD KRISHNA BANK

FEDRAL BANK



INSURANCE:-

The term insurance has been defined in both financial and legal sense:

In Financial Sense:

The term insurance may be defined in the financial sense as: A social device providing financial

compensation for the consequences of adversity, the payment being made from the accumulated

contributions of all parties participating the arrangement. The essence of insurance thus, is

collective bearing of risks as it involves pooling of risk.

In Legal Sense

A contract of insurance may be defined as: A contract under which the insurer (insurance

company) in consideration of a sum money paid (premium) by the insured (the person whose

risk is insured) agrees to:

1. make good the loss suffered by the insured against a specific risk ( for which the

insurance is effected), or

2. to pay a prefixed amount to the insured or his/her beneficiaries on the happening

of a specified event.

Thus, insurance is a contract between the insurer and the insured requiring all the

essentials of a valid contract according to the law of contracts. The instrument containing

the contract of insurance is called a policy.



Benefits of insurance :-

o Shifting of risk.

o Providing pecuniary security.

o Assuring expected profit.

o Safeguarding interest of consumers.

o Improving credit standing.

o Providing investment opportunity.

o Encouraging savings.

o Capital formation.

o Generating employment opportunities.

o Promoting social welfare.

o Helps controlling inflation.

CLASSIFICATION OF INSURANCE:-

Everybody faces risks of various kinds. Different risks cause different types of losses. Risksmay be insurable or non-insurable. Insurance companies offer various kinds of insurance

policies to cover various kinds of risks and providing security against various losses.

Depending on the subject-matter, insurance may be classified into two broad categories:

Life insurance: life insurance is a contract whereby the insurer in consideration of a

premium paid either as lump sum or as periodical installments, undertakes to pay, either on

the death of the insured or on the expiry of specified number of years. Whichever is earlier,

an annuity or a specified amount. For example, whole life plans, endowment assurance plans,

pension plane, unit linked plan.



Non-life insurance: Non life insurance is a contract whereby the insurer is consideration of a

premium paid by the insured agrees to indemnify him for the financial loss suffered by him

due to an adverse event which is covered by the terms of the policy.

Non-life insurance may be classified further into general insurance and miscellaneous

insurance. Again, depending on the subject-matter, there are the four kind of general

insurance:

1. Marine insurance. Marine insurance is a contract of insurance under which the

insurer undertakes to indemnify the insured, in the manner and to the extent thereby

agreed, against marine losses incidental to marine adventure. For example, loss or

damages to the ship, cargo, freight, vessels or any other subject of a marine

adventure. Accordingly, there are various types of marine policies like voyage

policies, valued policies, hull insurance, time policies, cargo insurance, freight

insurance etc.

2. Fire insurance. Fire insurance is a contract under which the insurer agrees to

indemnify the insured, in return for payment of a premium in lump sum or by

installments, losses suffered by him due to destruction of or damage to the insured

property, caused by fire during an agreed period of time.

3. Personal accident insurance. personal accident insurance is a contract under

which the insurer undertakes to pay a specified amount of money on the death or

disability of the insured on account of an accident.

4. Motor vehicle insurance. Under this type of insurance a personal or commercial

vehicle is insured against loss or damage to the vehicle due to accident or theft,

personal injury or death of the owner or passenger due to accident or damages

payable to third parties by the owner of the vehicle for accidents.

Non-life insurance, in addition to general insurance includes other miscellaneous

insurance. Some of the types of miscellaneous insurance are discussed here:



1. Fidelity guarantee insurance. This is the type of contract of insurance

and also a contact of guarantee to which general principles of insurance apply.

Fidelity guarantee does not mean the guarantee of the employee¶s honesty. But it

guarantees the employer for any damages or loss resulting from the employee¶s

dishonesty or disloyalty.

2. Crop insurance. A contact of crop insurance is a contract to provide a

measure of financial support to farmers in the event of a crop failure due to

drought or floods.

3. Burglary insurance. A burglary policy provides protection against loss or

damage caused by theft, larceny, burglary, housebreaking and acts of such nature.

4. Cattle insurance. Cattle insurance is a contract of insurance whereby a

sum of money is secured to the insured in the event of death of animals like bulls,

buffaloes, cows and heifers.

5. Cash in transit insurance. This type of insurance compensates the

insured against loss of money or cash stolen from his business premises or while

it is being carried from or to the bank.



Life Insurance Non-life Insurance

General Insurance

y Marine insurancey Fire Insurance

y Personal accident insurance

y Motor vehicle Insurance

Miscellaneous Insurance

y Fidelity guarantee insurancey Crop insurance

y Burglary insurance

y Cattle insurance

y Cash in transit insurance

Types of Insurance



TYPES OF LIFE INSURACE PLANS:-

Life insurance is a contract providing for payment of a sum of money to the person assured or to

his nominee, on the happening of certain events. Various insurance companies offer a large

number of life insurance policies. This is because of the fact that everyone of us has different

aspiration in life.

The leading life insurance plans/policies offered by Life Insurance Corporation of India can

be classified into the following categories:

y Whole Life Plans

y Endowment Assurance Plans

y Term Assurance Plans

y Children Plans

y Plans for Handicapped Dependents

y Plans for High Worth Individuals

y Money Back Plans

y Other Special Plans

y Group-insurance Schemes

y Social Security Schemes

y Pension Plans

y Unit Plans



1. Whole Life Plans:

The plans is mainly devised to create an estate for the heirs of the policyholder as the plan

basically provides for payment of sum assured plus bonuses on the death of the policyholder.

It providing for payment of sum assured plus bonuses in the form of maturity claim on

completion of 80 years age or on expiry of term of 40 years from the date commencement of

the policy whichever is later. The premiums under the policy are payable up to age 80 years

of the policyholder or for a term of 35 years whichever is later. If the payment of sum

assured will be automatically secured provided the reduced sum assured exclusive of any

attached bonus is not less than Rs. 250.

The main plans under this are as follow.

I.The whole life policy-limited payment.

II. The whole life policy-single premium

III.Jeevan Rekha (closed for sale)

IV. Jeevan Anand: An unique with-profit plan which combines the features of endowment

and whole life plans.

V. Jeevan Tarang: A with-profits whole life money-back plan which provides for annual

survival benift ata a rate of 51/2% of the sum assured after the chosen accumulation

period.



2. Endowment Assurance Plans:

The endowment assurance policy includes Moderate premiums, high bonus, high liquidity and

being savings oriented are some of the important features of the policy. This policy not onlymakes provision for the family of the life assured in event of his early death but also assures a

lump sum at a desired age. The lump sum can be reinvested to provide and annuity during the

remainder of his life or in any other way considered suitable at that time. Premiums are usually

payable for the selected term of years or until death if it occurs during the term period. In case of

the policyholder becomes totally and permanently disabled due to an accident before reaching

the age of 70 and the policy is in full force, he will not be required to pay further premiums, and

the policy will continue to be in force. The policies under this are:

I.The endowment assurance policy- limited payment

II.Jeevan mitra (double and triple cover endowment plans)

III.Jeevan Anand

IV.New janaraksha Plans

V.Jeevan Saathi ( a joint life Plan)

3. Term Assurance Plans:

The payment of the sum assured is dependent on the life assured dying within a stated period of

time (the term of the policy).

If at the end of the term of the policy the life assured is still alive, the contract ceased and no

payment is made. In its most straightforward form the sum assured does not vary during the term

of the policy. This is known as level term assurance, but sophistications can be introduced.

A renewable term assurance gives the option at the end of the term to effect a further term

assurance to be offered at normal premium rates with no evidence of health requirements.Normally such an option would stipulate the same sum assured for the further term, and it may

restrict the length of the further term to a maximum age of 55 or 60.



I. Two-year temporary assurance policy

II. Anmol Jeevan-1

III. Amulya Jeevan

IV.Decreasing term assurance to cover home loan payment-mortgage redemption

4. Children Plans:

I. Jeevan Anurag.

II. Komal Jeevan

III. CDA endowment (vesting at 18 and at 21)

IV. Marriage endowment or educational annuity plan

V. Jeevan Kishore

VI. Jevan Chhaya

5. Plans for Handicapped Dependents:

I.Jeevan Aadhar

II.Jeevan Vishwas

6. Plans for high worth individuals:

I.Jeevan Shree-1

II.Jeevan Pramukh

7. Money Back Plans:

I.The money back policy-20 years

II.The money back policy- 25 years

III.Jeevan Surabhi-15 years; 20 years; 25 years

IV.Jeevan Rekha ( closed for sale)

V.Bima Bachat

VI.Special money back plan for women: jeevan Bharati



8. Other Special Plans:

I.Bima Gold (closed for sale) II.New Bima Gold

III.Bima Nivesh 2005

IV.Jeevan Saral

V.Jeevan Madhur

9. Group-Insurance Schemes:

I. Group Term Insurance Schemes

II. Group insurance scheme in lieu of EDLI

III. Group gratuity scheme

IV. Group superannuation scheme

V. Voluntary retirement scheme

VI. Group leave encashment scheme

VII. Social security schemes

VIII. LALGI scheme

IX.Rural group life insurance schemes ( RGLIS)

X.Group insurance scheme for students

10. Social Security Schemes:

I. Janashree Bima Yojana

II. Krishi Shramik Samajik Suraksha Yojana

III. Shiksha Sahayog Yojana



11. Pension Plans:

I. Jeevan Nidhi- A with-profit deferred pension plan which provides death cover

during the deferment period.

II. Jeevan Akshay-V

III. New Jeevan Dhara-1- deferred annuity plan. The annuitant has five options of

annuity payment to choose from.

IV. New Jeevan Suraksha-1- deferred annuity plan. The annuitant has five options

of annuity payment to choose from.

12. Unit Plans:

I. Market Plus

II. Money Plus

.



UNDERWRITING PRACTICES BY INSURANCE COMPANIES

Underwriting

Underwriting is the function of evaluating the subject of insurance, which may be a

person, property, profession, business or other entity, and determining, on the basis of

company¶s predetermined standards, whether to insure it or not.

Underwriting thus, is the insurance function that is responsible for assessing and

classifying the degree of risk a proposed insured or group represents and making a

decision concerning coverage of the risk.

The success of insurance business depends on the precision with which the company¶s

underwriter take decisions to accept or reject applications and to determine the terms on

which the risk is to be offered. Underwriter is the person who reviews and selects risks

to be insured by the insurance company.

Purposes and Principles of Underwriting

The underlying underwriting policy of the insurance company is the basis of the

underwriting decisions involving selection of risks. The rate of premium charged

should be based on a careful evaluation of the basic risks in each case and must be

affordable by the consumer.

The purpose of underwriting function are:



1. Underwriting must ensure reasonably accurate estimation of the risk in

any insurance proposal. It should be based on cautious investigation of the factors

which cause that risk, so they the premium charged is adequate from the point of

view of view of the insurance company and at the same time, affordable to the

consumer.

2. Another purpose of underwriting is to investigate and determine the

factors responsible for any gap between the consumer¶s expectations and

company¶s analysis affecting the demand for the insurance company¶s product.

3. Though underwriters are not directly responsible for the pricing of

insurance products, but they make a significant contribution in the determination

of insurance prices by appraising the degree of the risk, taking decisions whether

to accept or reject the risk and then computing the price at which the risk would

be acceptable.

The task of the underwrite is to manage this pool as effectively and profitably as he can.

Thinking the role of underwriter in this way, we could say they he has to:

y Asses the risk which people bring to the pool

y Decide whether or not to accept the risk, or how much to accept.

y Determine the terms, conditions and scope of cover to be offered

y Calculate a suitable premium.



Types of Underwriters

Most underwriters perform their responsibilities as experts, specializing in one or few types of

insurance, that is, property or personal or professional, and so on. Thus the different types of

underwriters are:

1. Property and casualty underwriters

Property and casualty underwriters normally specialized in a particular type of property or

casualty coverage rather than the complete domain concerned with property and casualty. Within

this domain there may be fire underwriters, homeowners underwriters, automobile insurance

underwriters, marine underwriters, commercial property underwriters, personal property

underwriters, commercial general liability underwriters, professional liability underwriters, etc.

2. Personal Line and Commercial Lines

Property and casualty underwriters may further be classified depending on whether they

underwrite personal lines or commercial lines. Different risks affect individuals and businesses

differently. Accordingly, the insurance needs of an individual are very different form the needs

of a business. Of course, both need protection in the form of property and liability insurance.

Moreover, there are several types of businesses, each involving different types of risk associated

with the business. Hence, there may be many specialized underwriting functions even within the

domain of commercial lines and accordingly a commercial property and casualty underwriter

may even specialized in underwriting specific types of businesses.

3. Life and Health Underwriters

Life and health insurance is yet another domain in which the underwriters may specialize. A lifer

and health insurance underwriter is acquainted with the effect of medical history, personal habits,lifestyle and other health related issues on insurability. The health or life underwriter is capable

of analyzing and comprehends medical reports and information collected from the Medical

Information Bureau. Health insurance being closely regulated, health insurance underwriters are

also well conversant in regulations governing health coverage.



4. Liability Underwriters

Liability insurance underwriters must understand the liability risks affecting commercial

businesses, professionals or individuals. They should be capable of evaluating past losses,

judgments and settlements in terms of the probability of re-emergence in order to ascertain

relative future risk.

5. Group Underwriters

Many types of insurance, including health insurance, are underwritten on group basis.

Underwriting of group insurance is different form underwriting of individual policies. In such

cases, a common rate, established after due analysis of the characteristics of the whole group, as

well as individuals within the group, is applied to the entire group to be insured. The rate is

normally reviewed and revised on an annual basis.

Role of Agents In Underwriting

The agent plays a significant role in the selection of risks. The agent establishes the bond

between the insurer and the insured. He is an agent of the insurer and hence, he has to first and

foremost look to the interests of the insurer. On the other hand, he is the guide of the insured whohas no or very little knowledge of the insurance. Form the insurer¶s viewpoint, the agent¶s

contribution in appraising the risk is so crucial that he is also called the first line or primary

underwriter. The complete knowledge of the insured that is the prerequisite to deciding the

degree of the risk is made available to the insurer through the field force, in particular the agent.

The agent manages to get all the information about the insured as required by the underwriter

either through his personal knowledge or through careful enquiries and investigations.



The Underwriting Process

The underwriting process generally involves the following steps:

y Receiving Applications

y Reviewing Applications

y Assessing the Risk and Taking Underwriting Decision

y Policy Writing

y Issue of Acceptance Letter and First Premium Receipt

1. Receiving Applications:

The first step in the underwriting process is the appraisal of information by the life insurance

company¶s underwriter. Most of the information required for the purpose is obtainable from

the insurance application, collected usually by the agents working for insurance application,

collected usually by the agents working for the life insurance company. The information is

categorized into

A. The general information which includes particulars such as name, age, address,

date of birth, sex income, marital status and occupation of the insured along with detailsabout the insurance coverage such as type of policy, amount of insurance, name and

relationship with the beneficiary.

B. Personal information, which includes information about family and personal

history of the proposed insured.



C. The medical information, i.e., extensive information regarding present health of

the insured as well as medical history of his/her family. Medical examination of the

assured may also be sought by the insurance company in certain cases depending upon

the age of the insured and the coverage amount of the policy.

D. The agent¶s report contains information about the proposer, his income and

financial status, where the insured is and individual; financial of the business where the

insured is a business organization and both personal and financial statement in case of

insured being a professional.

E. A moral hazard report completed by a responsible officer of the insurer. The

insurance companies generally have specified levels of officials whose report are

acceptable to appraise moral hazard.

2. Reviewing Application

The application in order to be acceptable must be duly executed and must also meet the

insurance company¶s underwriting principle. At this point the company¶s underwriter would also

determine whether any supplementary documentation is required and then take steps to procure

the required additional information through appropriate source. Where the information is not

received within the specified time, the application may even be rejected. The most important

aspect related to reviewing of the application involves determining whether the risk display

suitable insurable interest, essential for a valid contract of insurance or not. It is equally essential

to ensure the insurability of the risk applied.



Assessing the Risk and Taking Underwriting Decision

After collecting the relevant information the underwriters appraise and categorize the risks, so

that the premium for the policy is decided on the basis of primary and secondary factors in

conjunction with the rate of premium set for a particular risk profile by the actuaries working for

the company. The primary and secondary factors applied in an underwriting process depend to a

great extent on the type of insurance being underwritten. For instance, in the case of life, health

and disability insurance, the key factors would be age, sex health, health history, nature of

occupation, financial condition, personal habits and size of the policy, in the case of property

insurance type of the property, its value and other property features would be important factors in

the underwriting decision. Similarly, in case of business operations related underwriting, type of

business, its size, financial condition, etc. help the underwriter in taking underwriting decision.

On the basis of the above factors the underwriter may take any of the following decisions:

I.Reject an application for insurance when it represents a risk that is unacceptable to the

insurance company. A risk is unacceptable when it does not conform to the company¶s

underwriting standards.

II.Issue a policy on substandard basis when it involves a high risk as per the company¶s

underwriting standards but is still not deemed to be completely outside its underwriting

norms for that type of policy. In such a case the company may issue the policy with

certain prohibitions, that is, excluding certain provisions from the policy.

III.Issue a policy on a standard basis when it involves a risk that is within the normal,

acceptable boundaries of the company¶s underwriting standards for that type of policy.

IV.Issue a policy on a preferred basis when it involves the lowest category of risk as per the

company¶s underwriting standards. The insurance company offers lowest possible rate of premium, within the limitation of the relevant insurance regulations, for covering such a

risk.



Assessing of Risk

Hazard and Peril:-

The first task of the underwriter is to assess the risk which each person brings to the common

pool. One of the terms we examined was hazard. We differentiated hazard from peril by saying

that peril was the event giving rise to the loss itself, such as collision, fire or theft. Hazard was

the factor that might alter the frequency or severity of the peril.

we could say that the underwriter has the task of assessing the hazard which is associated with

the various perils brought to the common pool.

There are two aspect of hazard, physical and moral, with the underwriter is concerned.

Physical hazard:

Physical hazard is hazard attaching to the physical characteristics of the subject matter of

insurance. For example

Property loss or damage

The construction of a building would be an aspect of physical hazard, as would the provision of

fire-fighting apparatus; buildings of wooden construction would represent a much higher level of

physical hazard than once built of brick.

Liability

The presence of dangerous chemicals in workplace would be a high physical hazard, as would

the absence of suitable guard on machinery, or excessive noise or dust.



M otor

People who aggregate a very high mileage, such as salesmen, represent a higher physical hazardthan someone who does a very low mileage. The place where the car is garaged or normally used

also has some impact on the physical hazard.

Life assurance

People with certain, potentially dangerous occupations may present a high physical hazard, as

would a person who has a recurring illness.

All of these examples attach to the physical nature of the subject matter of insurance. Even in

those examples that mentioned people, the emphasis was on the hazard attaching to the subject

matter of insurance. We were not commenting on the personal attitude of the insured,

This is where moral hazard comes in.

Moral Hazard

This is the hazard that attaches to the attitude insured or proposer, rather than what is being

insured.

In insurance underwriting the prime source of moral hazard is the insured and the underwriter

almost attempt to identify this aspect of hazard when risks are being assessed.

Example of moral hazard

One of the most common examples of moral hazard is lack of care on the part of the insured.

There are people who believe that because the risk is insured, they can forget any form of

vigilance concerning the particular perils insured.



Selection of risk

The function of the selection process is to determine whether the degree of risk presented by an

applicant for insurance is commensurate with the premium established for persons in his

category or some additional premium should be charged or the applicant should be rejected the

insurance.

Documents

A brief history of the Insurance secto1