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8/4/2019 Chapter 03 - Principles & Practice of Life Insurance
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PRACTICE
OF
LIFE INSURANCE
CHAPTER 03
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SOME DIFFERENCESDIFFERENTIATING
POINTS
LIFE INSURANCE GENERAL INSURANCE
Riskcovered
Duration of
contract
SumAssured
Indemnity
clause
Premium
Time of death -uncertain
Long term
Human LifeValue
Not a contract of
indemnity
Charged per
Mortality Table
Happening of`Event`
Short term (usually
12 m)
Assets` financialvalue
Contract of
indemnity
Calculated on past
loss experience,
probable risk
factors and fixed
Tariff plan2
Dr. S N Ghosh
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ECONOMIC BASIS OF LIFE ANDHEALTH INSURANCE
Human Life Value concept propounded by S.S.
Huebner is the economic foundation of LI Human Life Value - actual future earnings of anindividual. It is capitalised value of a persons netfuture earnings reduced by cost of mans ownmaintenance expenses
Functions of LI - protection to family, by ensuringcontinuity in income after death of the breadwinner
o A savings instrument, collateral security, old agebenefits, annuities or a lump sum after retirement,post death - higher education of children, theirmarriages, etc
o Protection against - uncertainty of non-paymentby debtors/partners, Keyman upon death
o Welfare measure on the lives of employees as a
whole Dr. S N Ghosh
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HOW MUCH INSURANCE DOES A
MAN NEED?
1.Immediate funds requirements uponafter death- medical expenses for
terminal illness, expenses for
performance of last rites and religiousceremonies etc
2.Children's Education and Marriage
expenses3.Recurring dependant spouse and
children
4.Funds for paying off debts. Dr. S N Ghosh
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ORGANISATIONAL STRUCTURE -LIC
CENTRAL OFFICE
MUMBAI
ZONAL OFFICES (8)Bhopal, Chennai, Hyderabad,
Kanpur, Kolkata, Mumbai,New Delhi, Patna
FOREIGN OFFICES
UK, Mauritius, Fiji
DIVISIONAL OFFICES(108)
BRANCH OFFICES(2048)
SATELLITE OFFICESDr. S N Ghosh
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ORGANIZATIONAL STRUCTURE-CENTRAL OFFICE
CHAIRMANMANAGING DIRECTORS (3) C. V. O
ACTUARIAL AUDIT BOARD SECRETARIAT
BANK ASSURANCE & ALTERNATE CHANNEL
CORPORATE COMMUNICATION CORP. PLANG.CRM ENGINEERING
FINANCE & ACCOUNTS MARKETING
INVESTMENT INSPECTION
HRD/OD PERSONNEL
LEGAL & HOUSING PROPERTY FIN. SCHM. SBUMANAGEMENT DEVELOPMENT CENTRE IT/BPR
HEALTH INSURANCE
MICROINSURANCE REINSURANCE
Dr. S N Ghosh
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CLASSIFICATION OF LIFE ANDHEALTH INSURANCE
Group Insurance - A group of persons, who usually
have a business or professional relationship tocontract owner, are provided insurance coverage
under a single contract. [Ex Employees, Savings
account depositors, poorer sections of society,
landless agricultural workers] Ordinaryindividually issued policies majority of
policies fall within the ordinary category
Industrial Insuranceincludes life and health
insurance policies issued to individuals in smallamounts, premiums payable on a weekly or monthly
basis. Not popular in India.
Credit insuranceThis is issued through lending
institutions to cover debtors obligations if they die orbecome disabledDr. S N Ghosh
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LIFE INSURANCE PLANS
Historically, Life Insurance benefit patterns
fit into one or a combination of :
1) Term life insurance (popular in the United
States)
2) Whole life insurance3) Endowment insurance (popular in India,
Asian many African, European and Latin
American Countries)
4) Annuity contracts - promise to pay insured
a periodic payment.Dr. S N Ghosh
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1) TERM INSURANCE Protection - limited number of years or age
such as 65 or 70 years Terminates with - no maturity value.
Upon survival - nothing paid
More comparable to property and liabilityinsurance contracts than to other LI contract
Initial premium rates low compared to otherLI products - period of protection is limited
Useful for - persons with low income and highinsurance needs
Supplementary to - an existing life insuranceprogram during the child rearing period
Dr. S N Ghosh
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2) WHOLE LIFE INSURANCE Protection - over ones entire lifetime.
Upon death of insured - payment of the faceamount regardless of when death occurs.
Face amounts payable remain at same level
throughout policy duration, althoughdividends are often used to increase total
amount paid on death.
Gross premium also remains at the samelevel through out premium payment period
with some exceptions.
Dr. S N Ghosh
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3) ENDOWMENT INSURANCE PROMISE TO PAY - Policy amount on death
of insured during a fixed term of years (+)Full-face amount at the end of the term if
insured survives term
ENDOWMENT INSURANCE =
Term life insurance
(+) Pure endowment
[to pay face amount if insured dies during theperiod + to pay maturity amount only ifinsured is living at the end of a specificperiod, with nothing paid in case of priordeath] Dr. S N Ghosh
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COMBINATION PLANS
Sometimes traditional policies like Whole Life
and Endowment needs to be combined,
including annuity to meet requirements of
certain policyholders for maximum risk
coverage
LIC TRIPLE COVER JEEVAN MITRA
POLICY
o On maturity - basic sum becomes payable
o On death - 3 times the basic sum assured.
o Accidental death - four times of the basic sum
assured becomes payableDr. S N Ghosh
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SOME OTHER POPULAR LIFEINSURANCE CONTRACTS
HEALTH INSURANCE - contingent claimcontract on insured incurring additional
expenses or losing income because of
incapacity or loss of good health. DISABILITY INCOME INSURANCEPayment
upon loss of earning loss of earning capacity
LONG TERM CARE INSURANCEloss of
earning capacity for a substantial period
reimbursement of hospital, physician, or other
health care expensesDr. S N Ghosh
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Some other popular life insurancecontracts (Contd.)
CONVERTIBLE PLANSprovides that terms and
conditions of policy to another policy within certain
period
WITHOUT PROFIT POLICIESnot entitled to
bonuses, declared after actuarial valuations
WITH PROFIT POLICIESpay a slightly higher
premium for bonuses
JOINT LIFE POLICES- two or more lives covered
CHILDREN PLANS- made by parent or guardian; risk
on the life of child begins after specified period
RIDERSa clause or conditions added on basic
policy providing additional benefit at choice of
proposer
ANNUTIESpractically same as pensions; reverse of
life insurance Dr. S N Ghosh
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PRINCIPLES ANDPRACTICE OFREINSURANCE
Dr. S N Ghosh
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REINSURANCE PRACTICE WHEREBY a reinsurer,
o in return of a premium paid to it
o indemnifies another person/company
for a portion or all of liability
taken up by the latter (reinsured) due to a policy
of insurance that it has issued SPECIFIC REASONnature of risk insured
or business strategies of IC
REINSURANCE PRIMARILY DEALS WITH
CATASTROPHE RISKS - predictable andcause greatest exposure for the insurancecompany (9/11 attacks)
Business hinges on successful PRUDENT
PARTNERSHIPS by use of technologyDr. S N Ghosh
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Reinsurance (Contd.) RISK MANAGEMENT - involving transfer of
risk from IC to Reinsurer
CONTRACT OF INDEMNITY
basis forproviding insurance to IC
REINSURANCE AGREEMENTentered intobetween IC and Reinsurer
GLOBAL SPREAD OF RISKSlocal marketbad losses do not impact local businesses;there are tie-ups with global reinsurers
HOW IT WORKS
o IC insurer gives reinsurer a portion of the premiumit collects from the insured and
o in return IC is covered for losses above a particular
limit.Dr. S N Ghosh
T
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PRINCIPLES AND ADVANTAGESOF REINSURANCE
PRINCIPLE OF UTMOST GOOD FAITH
PRINCIPLE OF INDEMNITY NO REINSURANCE WITHOUT RETENTION:
o IC must retain a part of Risk beforereinsuring.
o No reinsurance of complete risko Those risks that are within retention
capacity of IC must be retained completely
ADVANTAGES
o Safeguards capital and reinforces stability
o Helps IC to upgrade itself
o Also helps a company to withdraw from
businessDr. S N Ghosh
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TYPES OF REINSURANCE TREATY REINSURANCEcovers entire
category of risk or line of business in
advance.
Capacity + Coverage of all prerils withadequate limits + confidence on security of
reinsurers + continuity of reinsurance aftera loss
FACULTATIVE REINSURANCE -reinsurance of
o current single risk and options are open forboth reinsured and reinsurers
o reinsurer retains the faculty or power to
either accept or reject each individual risk
offered to it by IC Dr. S N Ghosh
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IRDA REGULATIONS OBJECTIVE - to expand retention within
India, ensure best protection for reinsurance
costs incurred and simplify administration. RETENTION OF RISK - proportionate tofinancial strength and business volumes.
REINSURANCE WITH NATIONALREINSURER - 10% of sum assured (only innon-life sector)
REINSURANCE PROGRAMME - beginningF/Y and submitted to IRDA, 45 days` before
EXCESS OF REINSURANCE BUSINESS- to be
placed outside India with reinsurers having at
least BBB (S&P) rating for the preceding 5
years. (India's own sovereign rating)
LIC can continue to reinsure its policies withGIC rivate IC cannotDr. S N Ghosh
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UNDERWRITING Selection of a policyholder after recognisingand evaluating hazard, fixing a premium anddeciding all other terms and conditions
Safeguards - against any moral, morale orgeneral hazard
Limiting factorscapacity, skilled humanresources, compliance of regulatoryprovisions,availability of reinsurance
Line underwriting Where daily underwritingcarried out; underwriters usually located inoffices of insurer
Staff underwriting Where underwriter helpsmanagement in formulating and implementingunderwriting policy. They are usually locatedat H.O.
Dr. S N Ghosh