IC - 38 Chapter - 1: Introduction to Insurance Insurance — in simple language it means to transfer risk to someone who is capable of handling it generally to insurer (Insurance Company). 1. A) Life insurance history and evolution:- The origin of insurance business started from London's Lloyd coffee house. 4st Life insurance company in the world was Amicable society for Perpetual Assurance. 4st life insurance company to be set up in India was The Oriental Life Insurance company Itd. 4st Nonvlife insurance company established in India was Triton Insurance company Itd. 4st Indian insurance company was Bombay Mutual Assurance society Itd found in 1870 in Mumbai National Insurance company Itd. is the oldest insurance company founded in 1906. in 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to regulate the insurance business. ‘The Life Insurance Companies Act 1912 made it compulsory that premiumrate tables and periodical valuation of companies be certified by an actuary. The Insurance Act 1938 was the first legislation enacted to regulate the conduct of insurance companies in India. Life insurance Business was nationalized on Ist September 1956 by merging 170 surance companies and 75 Provident Fund societies and Life Insurance corporation of India ( LIC ) was formed. Non — Life insurance business was nationalized in 1972 by amalgamating 106 insurers, General Insurance Corporation of India (GIC) & its 4 subsidarieswas formed. Malhotra committee and IRDA:- Malhotra committee — setup in 1993 to explore and secommend changes for development & it submitted the report in 1994. IRDA - Insurance regulatory and Development Authority of India was setup by an act IRDA Act 1999 as a statutory regulatory body for both life and nonlife Life insurance industry today: 1. a) Life Insurance Corporation (LIC) of India is a public sector company. 2. b) There are 23 life insurance companies in the private sector 3. c) The postal department, under the Government of India, also transacts life insurance business via Postal Life Insurance, but is exempt from the purview of the regulator How Insurance Works: ‘There must be an asset which has economic value (Car-physical; Goodwill-nonphysical; Eye-personal). These assets may lose value due to uncertain event. This chance of loss/damage is known as risk. The cause of risk is known as peril. Persons having similar risks pool (contribute) money (premium) together. There are 2 types of Risk Burdens — a)Primary burden of risk — losses actually suffered. E.g. Factory getting fire. b)Secondary burden of risk — losses that might happen. Eg. physical/mental Stress strain Scanned with CamSeannerRisk management techniques: — The various types of techniques that can be used to manage risk are: a)Risk avoidance — Controlling risk by avoiding a loss situation b)Risk retention — One tries to manage the impact to risk and divides to bear the risk and its effects by oneself. ©)Risk reduction and Control — This is a more practical and relevant approach than risk avoidance. It means taking steps to lower the chance of occurrence of a loss and / or to reduce severity of its impact if such loss should occur. Insurance is a risk transfer mechanism. Insurance as a tool for managing risk: Don't risk a lot for a litle, E.g. there is no need to insure a ball pen as its cost is not high. Don't risk more than what we can afford to lose. E.g. we cannot afford to not insure our house as its cost is high. Don't insure without considering the likely outcome. E.g. can anyone insure a space satellite? Insurance refers to protection against an event that might happen whereas Assurance refers to protection against an event that will happen Role of surance in Society: 1. Insurance benefits society economically and socially. 2. Italso provides employment 3. The money raised from premium is invested in to the development of infrastructure needs. 4, Removes the fear, worry and anxiety associated with ones future. Govt. Sponsored Insurance Schemes Employees state insurance corporation, Crop Insurance Schemes (RKBY), Rural insurance schemes. Run by insurer and not supported by Govt. schemes Janata Personal Accident, Jan Arogya Chapter — 2: Customer Service Customer Service : Customers provides 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. Because Insurance is a Service. Insurance is a Intangible good. itis necessary for insurance companies and their personnel, which includes their agents, to render high quality service and delight the customer. Customer Service and Insurance: The Secret for success in insurance sales is commitment to serving their Customers. Scanned with CamSeanner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 1, i) Point of sale — the Ist point for service is the point of sale. The agent should be able to understand the needs and suggest products whose benefit features are best suitable. The role of an agent is like a personal financial planner and advisor. 1. ii) Proposal stage — the agent has to help customers in filling the proposal form. It is important that the agent explains and clarifies the proposers doubt while filling the form. ill) Acceptance stage — the promptness of agent in handing over FPR to customer develops surety in customers mind. Delivery of policy bond is another major opportunity. 1. iv) Premium payment - agents can be in continuous touch with their customers through reminder calls for premium due’s in order to avoid lapsation of policy. 2. y) Claim settlement — agents play crucial role during claim settlement by providing policy holder details required during investigation stage. Communication skills — One of the most important set of skills that an agent needs to possess for effective performance is soft skills. Sift skills relate to one’s ability to interact effectively with other workers, customers. What goes in to making of a good relationship is TRUST that you generate in your customers mind through — Attraction; Being Present; Communication. Communication can take place in several forms - Oral; Ws Language. Elements of effective listening — paying attention, providing feedback, responding appropriately, empathetic listening and not being judgemental. Non Verbal Communication 1. a) Making a great first impression Be on time always fen; Non-Verbal; Body Present yourself appropriately A warm, confident and wining smile. Being open, confident and positive Interest in the other person. b.Body Language - refers to movements, gestures, facial expressions. The Way we talk, walk, sit and stand. Listening ski 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. 1. Paying Attention 2. Demonstrating that you are listening — Use of body language plays an important role here. Provide feedback 1. Not being Judgmental - Such judgmental approach can result in the listener being, unwilling allow the speaker to continue speaking, considering it a waste of time. 2. Responding appropriately 3, Empathetic listening — Being empathetic literally means putting yourself in the other and feeling his or her experience as he or she would feel it. Scanned with CamSeannerChapter -3: Grievance Redressal Mechanism Grievance redressal mechanism — IRDA has various regulations in order to render the consumers grievances/complaints which come under protection of policy holder’s interests" regulation 2002. 1. 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 and as a tool for monitoring grievances in the industry. Policy holders can register on this system with their policy details. Complaints are then forwarded to the respective insurance company. 2. ii) The consumer protection act 1986 — the act was passed “to provide for better protection of the interest of consumers and to make provision for the establishment of consumer" disputes”. Service — any provision made available to potential users such as banking, financing, transport, insurance etc. Consumer — any person who buys any goods for a consideration or hires or avails of any services for a consideration. Defect — it means any fault, imperfection, and shortcoming, inadequacy in quality, nature, manner or performance for any service that is taken by the customer. Complaint — it means any allegation given in writing regarding any unfair trade, defect in goods, deficiency in services hired or availed, excess pricing. Consumer dispute — it means a dispute where the person against whom the complaint is, made, denies and disputes the allegations made on him. Ombudsman : * Total office of ombudsman in India — 12. * The Ombudsman power is restricted to the value not exceeding Rs.20 Lacs + Recommendations should be made within 1 month of the receipt of a complaint The complainant has to accept the recommendation in writing within 15 days of receipt of. such recommendation. ‘+ The insurance companies are required to honor the AWARDS passed by Ombudsman within 15 days. © If the dispute is not settled, the Ombudsman will pass an award to the insured within 3 ‘months/90 days from the date of receipt of the complaint. © The insured should acknowledge within 1 month of receipt of such award. © Complaints can be made to the ombudsman if : + The complainant had made a previous written representation to the insurance ‘company and the insurance company had Rejected the complaint. ‘The complainant had not received any reply within one month from insurer. ‘The complainant is not satisfied with the reply given by the insurer. ‘The complaint is made within one year from the date of rejection by the insurance company. ‘The complaint is not pending in any court or consumer forum. Judicial Channels = NATIONAL COMMISSION * Established by central © Government by notification. Complaints of Claim value exceeding Rs. 1 Crore and * appeals against the order of any state commission. State commission + Established by state govt. by notification. Scanned with CamSeanner+ Complaints of Claim value exceeding Rs.20 Lakhs but does not exceed Rs.000 lakhs and ‘appeals against the order of any district forum within the state. District forum + Established by state govt. in each district. © Complaints of Claim value up to Rs. 20 lakhs Important Days : #10 days ~ Insurer has to communicate the policy holder on any inquery. 15 days ~ Customer can cancel the contract within 15 days of receiving the policy (Free look period/Cooling off period). + 15 days ~ Insurer has to convey the policy holder about acceptance or rejection of proposal. + 15 days — In case of claim insurer can ask for additional documents within 15 days of receiving the claim documents. + 15 days — Insurer has to honor the Award passed by the ombudsman within 15 days. + 15 days ~ Grace period in case of monthly mode of premium payment. 31 days or one month ~ Grace period in case of Quarterly/half yearly/annual mode. 30 days — ombudsman has to pass recommendation. © 30 days ~ Insurer has to settle the claim within 30 days after receiving the claim document. + 90 days ~ Ombudsman has to pass an award within 90 days. * 180 days — maximum time in case of disputed claims. hapter Regulatory Aspects of Insurance Agents Regulations of Insurance Agents : ‘+ Appointment of Insurance Agent regulations came into force with effect from 1* April 2016. «A letter of appointment issued by an insurer to any person to act as an insurance agent + “Insurance Agent” means an individual appointed by an insurer for the purpose of soliciting or procuring insurance business including business relating to the continuance, renewal or revival of policies of insurance. ‘= “Composite Insurance Agent” means an individual who is appointed as an insurance agent by two or more insurers subject to the condition that he/she shall not act as insurance agent for more than one life insurer, one general insurer, one health insurer and one each of the ‘mono-line insurers. + “Centralised list of Agents” means a list of agents maintained by the Authority, which contains all details of agents appointed by all insurers + “Designated Official” means an officer authorised by the Insurer to make Appointment of an individual as an Insurance Agent + Anapplicant seeking appointment as an insurance agent of an Insurer shall submit an application in Form I-A to the Designated Official of the Insurer + The Designated Official shall communicate the reasons for refusal for appointment as agent to the applicant in writing, within 21 days of receipt of the application Appointment of Composite Insurance Agent by the insurer: * Anapplicant seeking appointment as a Composite Insurance Agent” shall make an application to the Designated Official of respective life, general, health insurer or monocline insurer * Composite Agency Application Form I-B. + Insurance Agency Examination : + Anapplicant shall pass in the Insurance Agency Examination conducted by the Examination Body in the subjects of Life, General, or Health Insurance + Disqualification to act as an Insurance Agent: The conditions for disqualification shall be as stipulated under Section 42 (3) of the Act Scanned with CamSeannerChapter -5: Legal Principle of an Insurance Contract Insurance Contract — an insurance policy is a contract between 2 parties — Insurer (Insurance Company) and Insured (Policy holder) as per Indian Contract act 1872. For any contract to be a valid contract following elements should be there — 1) Offer and Acceptance — out of the 2 parties" one should offer and other party should accept. Usually offer is made by proposer (policy holder) and acceptance is made by insurer. 2) Consideration — premium paid by policy holder and the promise to indemnity by insurer is known as consideration. 3) Agreement between parties — both parties should agree to the same thing, 4) Free consent — there should be no pressure on proposer while taking policy. Consent is free when the policy is taken under no-coercion; undue influence; fraud; misrepresentation; mistake. 5) Capacity of the parties — proposer should be legally competent. I.e. Sound mind, not disqualified by law, should not be minor. 6) Legality — the object of contract must be legal. Special features of Insurance Contract— 1) Uberima Fides (or) Utmost good faith — it means that every party to contract must disclose all material facts relating to the subject matter of insurance whether asked or not. 2) Material facts/Information — proposers family history; medical history; financial details; ‘occupational details; illness if any; habits etc. are known as material facts. Breach of utmost good faith: — Non-disclosure — not informing certain details. Concealment — intentionally not giving details. Misrepresentation — 1. a) Innocent — by mistake giving wrong information 2. b) Fraudulent — intentionally giving wrong information. 3) Insurable Interest — it is the financial interest the proposer has in his belongings. |.e. Self; spouse; parents; house; car ete. is termed as insurable interest. ‘© In Life Insurance — Insurable interest should be present at the start of policy. * In Non-life Insurance — Insurable interest should be present both at the start and during claim. In Marine Insurance — Insurable Interest should be present at the time of claim. 4) Proximate Clause — itis the main reason behind the various activities taking place and there by sesulting into any event. 5) Free Look-In Period (or) Cooling off period — if any proposer after entering into a contract i.e. After taking a policy if he wants to cancel or reject the policy then he or she take this decision within 15days from receiving of policy. 6) Indemnity — It means that the policyholder, who suffers a loss, is compensated so as to put him or her in the same financial position as he or she was before the occurrence of the loss event. 7) Subrogation: It is the process an insurance company uses to recover claim amounts paid to a policy holder from a negligent third party. Scanned with CamSeannerChapter What Life Insurance Involves Life Insurance Business Components Assets — any physical or non-physical thing which has value i.e. Can measured in terms of money is known as Asset. Every human being has a value which can be determined and is termed as Human Life Value (HLV). HLV helps to determine how much insurance one should have for full protection. E.g. Mr. Mahesh earns Rs.120000 per annum and spends Rs.24000 on himself. Therefore net earnings for family in case of Mr. Mahesh’s death is Rs.96000 per annum. ‘Suppose rate of interest is 8% then HLV = 96000/ 0.08 = 12,00,000. 2. Risk — there are various types of risk involved for a human being such as dying too early; living too long; living with Disability. 3, Indemnity — in the occurrence of an event, the procedure to assess the loss and pay the compensation for this loss is known as Indemnity. 4, Level Premium js a premium fixed in such a manner that it does not increase with age but remains constant throughout the contact period 5. Principle of Risk Pooling — it works on the principle of mutuality. Here premium collected from various people is collected in same pool for same risk and used for same kind of risk- claim. Under no circumstances money collected under one risk pool is used for another pool. Mutuality is one of the important ways to reduce risk in financial markets, the other being diversification, The two are fundamentally different. Contract — taking insurance involves getting into a contract. Here the contract is between the Insurer (Insurance company) and Insured (Policy holder). Chapter -7: Financial Planning Financial planning is a process to identify his goals; assess net worth; estimating future financial needs; and working towards meeting those needs. Goals ‘+ Short term — buying LCD Television; family vacation. + -Medium term buying a house Long term — Childrens education/ marriage; post-retirement provision. ‘A) Economic Life Cycle :— + Student Phase ~ this is pre-job phase. One is getting ready for earning phase. = Working Phase ~ this phase starts around 20-25yrs of age and lasts for 35-40yrs. + Retirement Phase — this phase is where-in one has stopped working, B) Individual life eycle — Learner [till age 25] - this is the learning phase of an individual, Earner [25 onwards] — this is the phase when one starts earning. Partner [28- 30yrs] ~ this is the phase when one gets married. Parent (30-35yrs] — this is the phase when one move towards parenting. Provider [35-55yrs] ~ this is the phase when parents have to fulfil childrens needs, Empty Nester [55-65yrs] — this is the phase when children get married. Retirement [60 onwards] — this is the phase when one gets retired and theres no regular source of income. Health also gets deteriorating, ©) Individual Needs - * Enabling future transactions ~ making provision for future transactions such as education, marriage. © Meeting contingencies ~ keeping money for unforeseen events like unemployment, hospitalization, death etc © Wealth accumulation ~ this is to be done for increasing your money value. Scanned with CamSeannerD) Financial products — for above needs to be fulfilled following products can be used + Transactional product ~ bank deposits can be used for cash requirements. + Contingency product — Insurance can be used to protect against unforeseen events * Wealth accumulation product — shares; bonds can be used to invest for wealth creation. Role of Financial Planning: — It is a process in which clients current and future needs are considered and evaluated along with his risk profile and income assessment. Financial planning includes — Investing, Risk management, Estate planning, Retirement planning, ‘Tax planning and financing daily and regular requirements. The right time to start financial planning is when one starts receiving his 1* salary. ‘Need for Financial Planning: — Disintegration of joint family; multiple investment choices; changing lifestyles; inflation; other contingency needs. Financial planning — Types : + Cash planning Investment Planning Insurance planning Retirement planning Estate planning Tax Planning Chapter -8: Life Insurance Products 1 What is a product? © From a marketing standpoint, a product is a bundle of attributes. + The difference between a product (as used in a marketing sense) and a commodity is that a product can be differentiated. A commodity cannot. Products may be + Tangible + Intangible Life insurance is a product that is intangible. Traditional Life Insurance Products Term Insurance Plans © Whole Life Insurance Plans Endowment Insurance Plans Variants of Term Assurance + Decreasing term assurance © Increasing term assurance + Term assurance with return of premiums 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. Term insurance policy + A term insurance policy comes handy as an income replacement plan. Endowment Assurance: Combination of 2 plans: A term assurance plan Pays the full sum assured in case of a death of the insured during the term A pure endowment plan Pays this amount if the insured survives at the end of the term Money back plan itis 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 Scanned with CamSeannerof the term .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. Decreasing term assurance These plans provide a death benefit that decreases in amount with term of coverage e.q. 10 years decreasing term policy may offer a benefit of Rs. 1, 00,000 for death in first year with amount decreasing by Rs. 10,000 on each policy anniversary, top finally come to zero at the end of the ten years: Mortgage redemption: Plan is of decreasing term insurance designed to provide death amount that related to the decreasing amount owned on mortgage loan in such loans, each equated monthly Installment (EMD payment leads to a reduction of outstanding principal amount. IRDA’s new guidelines for traditional products. New traditional products will give a higher death cover. 1. For single premium policies it will be 125% or the single premium for those below 45 Years and 110% of single premium for those above 45 years. 2. For regular premium policies, the cover will be 10 times the annualized premium paid for those below 45 and seven times for others. A rider is a provision typically added through an endorsement, which then becomes a part of the contract. Chapter — 9: Life Insurance Products 2 Cash value component ‘The savings or cash value component in traditional life insurance policies is not well defined Rate of return It is not easy to ascertain what would be rate of return on traditional life insurance policies Surrender value The cash and surrender values (at any point of time), under these contracts depend on certain values (amount of actuarial reserve and the pro-rata asset share of the policy) Yield Finally there is the issue of the yield on these policies Appeal : Major sources of appeal of the new genre of products that emerged worldwide are : Direct linkage with the investment gains Inflation beating returns Flexibility Surrender value Non-traditional life insurance products Universal Life Insurance © Universal Life Policy was first introduced in the USA. Scanned with CamSeanner‘© Universal life insurance is a form of permanent life insurance characterised by its flexible premiums, flexible face amount and death benefit amounts, and the unbundling of its pricing factors. Non-traditional life insurance products 1, a) Variable insurance plans 2. b) Unit linked insurance plans Break-up of ULIP Premium + Expenses = Mortality © Investment Investment fund options offered by ULIP Equity Fund : This fund invests major portion of the money in equity and equity related instruments. VARIABLE LIFE INSURANCE : This policy was first introduced in the United States in 1977. 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. Theoretically the cash value ‘can go down to zero, in which case the policy would terminate. Unit linked insurance Unit linked plans, also known as ULIP"s emerged as one of the most popular and significant products, displacing traditional plans in many markets. These 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. Unit linked policies thus provide the means for directly and immediately “cashing on the benefits of a life insurer’s investment performance. Equity Fund : Invests major portion of the money in equity and equity related instruments. Debt Fund : Invests major portion of the money in Goverment Bonds,corporate Bonds , Fixed deposits etc. Balanced Fund : Invests in a mix of equity and debt instruments Money Marker Fund: Invests money mainly in instruments such as treasury bills, certificates of deposit, commercial paper etc. Chapter -10: Applications of Life Insurance Married Women’s Property Act : Section 6 of the Married Women's Property Act, 1874 provides for security of benefits under a life insurance policy to the wife and children. Section 6 of the Married Women's Property Act, 1874 also provides for creation of a Trust. Beneficiaries under Section 6 of MWP Act : + Wife alone + Wife and one or more children jointly © One or more children Features of a policy under the MWP Act : 1. Each policy will remain a separate Trust. Either the wife or child (over 18 years of age) can be a trustee. 2. The policy shall be beyond the control of court attachment and even the life assured. ili. The claim money shall be paid to the trustees. Scanned with CamSeanner1. The policy cannot be surrendered and neither nomination nor assignment is allowed. . iv If the policyholder does not appoint a special trustee to receive and administer the benefits under the policy, the sum secured under the policy becomes payable to the official trustee of the State in which the office at which the insurance was effected is. situated. Key Man Insurance : It can be described as an insurance policy taken out by a business to compensate that business for financial losses that would arise from the death or extended incapacity of an important member of the business. Keyrnan is a term insurance policy where the sum assured is linked to the profitability of the company rather than the key person's own income. The premium is paid by the ‘company. This is tax efficient as the entire premium is treated as business expense. In case the key person dies, the benefit is paid to the company. Unlike individual insurance policies, the death benefit in keyman insurance is taxed as income. a) Who can be a KEYMAN? A key person can be anyone directly associated with the business whose loss can cause financial strain to the business. For example, the person could be a director of the company, a pariner, a key sales person, key project manager, or someone with specific skills or knowledge which is especially valuable to the company. Mortgage Redemption Insurance (MRI) : Itis an insurance policy that provides financial protection for home loan borrowers. It is basically a decreasing term life insurance policy taken by a mortgagor to repay the balance on a mortgage loan if he / she dies before its full repayment. Chapter -11: Pricing and Valuation in Life Insurance Premium : Price for insurance. Pricing refers to the process of calculating the rate of the premium that will be charged on insurance policy. It is normally expressed as a rate of premium per thousand of Sum Assured The policyholder can pay the premium in a number of ways: 1. Single Premium Plan 2. Level Premium Plan 3. Flexible Premium Plan ‘Types of Premiums :Arriving at the rate is performed by an Actuary 1. Office Premium : This rates printed in the tables of insurance companies. These are typically level premiums which need to be paid every year. 2. Risk Premium : Premium is charged to meet the claim for the year. Risk Premium = Mortality rate X Sum assured. Scanned with CamSeanner