PG - M.com - Finance & Control - 33544 Banking and Insurance

ALAGAPPA UNIVERSITY
[ACCREDITED WITH ‘A+’ Grade by NAAC (CGPA:3.64) in the Third Cycle

and Graded as Category-I University by MHRD-UGC]
(A State University Established by the Government of Tamilnadu)
KARAIKUDI – 630 003
DIRECTORATE OF DISTANCE EDUCATION
M.Com.,
IV SEMESTER
33544 - BANKING AND INSURANCE
Copy Right Reserved For Private use only

Author:
Dr.S.Nasar,
Assistant Professor,
PG and Research Department of Commerce,
Dr.Zakir Hussain College
Illayangudi.
“The Copyright shall be vested with Alagappa University”
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Alagappa University, Karaikudi, Tamil Nadu.
SYLLABI – BOOK MAPPING TABLE
33544 - BANKING AND INSURANCE
Syllabi Mapping in
Book
BLOCK I BANKING THEORY AND PRACTICE
UNIT I Pages 1-32
Banker and Customer – Origin of banking – Banker – Banking and other
business – customer – Relationship between banker and customer –
General relationship- Special relationship – Banker’s lien.
UNIT II Pages 33-51
Deposits – General precautions for opening account – Current
deposit account-Fixed deposit account – Savings deposit account
– Recurring deposit – Other deposits.
UNIT III Pages 52-59
Pass book – Correct entry – Wrong entry – Entries favourable to
the customer – Entries favourable to the bankers.
UNIT IV Pages 60-69
Crossing – General crossing – Special crossing – Double crossing
– Who can cross a cheque – Opening of crossing.
UNIT V Pages 70-90
Paying banker – Circumtances under which a cheque can be
dishonoured – Answers to dishonor cheques – Payment in due
course – Holder in due course – Recovery of money paid by
mistake
UNIT VI Pages 91-102
Collecting banker – Banker as a holder for value – Banker as an
agent – Conversion – Statutory protection – Basis of negligence –
Duties of collecting banker.
UNIT VII Pages 103-127
Subsidiary services – Agency services – Payment and collection –
Purchase and sale of securities – Executor – Administrator and
trustee – Attorney – Miscellaneous services
BLOCK II: INSURANCE
UNIT VIII Pages 128-144
Insurance and Risk - significance of insurance and risk, general
structure of the insurance market, significant aspects of this
industry - Reforms in Indian Insurance Industry - importance of
the privatization of insurance industry, problems associated with
public insurance enterprises, relation between insurance and
economic growth.
UNIT IX Pages 145-169
Regulations Relating to Insurance Accounting and Management -
framework for IRDA rules and regulations regarding general
insurance investment in the country, role of financial reporting in
managing insurance operations, significance of determining
solvency margins.
UNIT X Pages 170-200
Life Insurance - factors influencing the key functioning of
insurance organizations insurable interest, role of riders in
insurance policies - Non-life Insurance - elements of fire insurance
contract and its ancillary features. Significance of marine
insurance and its various policies, the role of rural insurance in
making people’s lives better in rural India.
UNIT XI Pages 201-226
Non-life Insurance - II - types of motor insurance policies, critical
aspects of aviation industry in the country, significance of liability
insurance in India - Functions and Organization of Insurers -
components of the distribution system of life insurance companies
in the country, role of agents in the life insurance sector in India,
important activities carried out in a life insurance organization
BLOCK III: CLAIM MANAGEMENT AND FINANCIAL MANAGEMENT IN
INSURANCE
UNIT XII Pages 227-243
Product Design and Development: Product development in the life
and non- life insurance sectors in India, role of risk evaluation in
the process of insurance product formation, future trends in the
domain of insurance product design and development - Insurance
Underwriting - need for insurance underwriting, factors that affect
the activities performed by the underwriter, steps involved in the
process of insurance underwriting.
UNIT XIII Pages 244-259
Claims Management: factors affecting the insurance claim
management system, types of documents needed in various types
of claims, meaning of ‘Causa Proxima’ in insurance claim
settlement - Insurance Pricing and Marketing - principles of
insurance pricing and marketing, tools and techniques used in
pricing individual life and health insurance
UNIT XIV Pages 260-270
Financial Management in Insurance Companies and Insurance
Ombudsman: importance of financial management in insurance
companies, tools of managing expenses in the insurance companies,
modes used by the insurance companies in channelizing their funds
- Reinsurance: reinsurance in the insurance sector. Areas of the
application of reinsurance - Information Technology in Insurance -
application of information technology in the insurance sector, role
of insurance companies in insurance security, contours of the future
of insurance in rural areas
CONTENTS
BLOCK I BANKING THEORY AND PRACTICE
UNIT- I BANKER AND CUSTOMER 1-32
1.1 Introduction
1.2 Origin of Banking
1.3 Banker
1.4 Banking and other Business
1.5 Customer
1.6 Relationship between Banker and Customer
1.7 General Relationship
1.8 Special Relationship
1.9 Banker’s Lien
1.10 Banker’s Duty to maintain Secrecy of Customer’s Accounts
1.11 Terminologies
1.12 Model Questions
1.13 Reference Books
UNIT- II DEPOSITS 33-51
2.1 Introduction
2.2 General Precautions for opening Account
2.3 Current Deposit Account
2.4 Fixed Deposit Account
2.5 Savings Deposit Account
2.6 Recurring Deposit
2.7 Other Deposit
2.8 New Deposit Scheme for NRI’s (1992)
2.9 Terminologies
UNIT-III PASS BOOK 52-59
3.1 Introduction
3.2 Maintenance of a Pass Book
3.3 Is Passbook an authentic Record
3.4 Situation in America
3.5 Position in India
3.6 Correct Entry
3.7 Entries Favorable to the Customer
3.8 Wrong entry Favorable to a Customer Constitutes a Settlement of
account only when.
3.9 Entries Favorable to the Banker
3.10 Terminologies
UNIT - IV CROSSING 60-69
4.1 Introduction
4.2 Kind of Crossing
4.3 Essentials of General Crossing
4.4 Forms of General Crossing
4.5 Significance of General Crossing
4.6 Special Crossing
4.7 Not negotiable Crossing
4.8 A/c Payee Crossing
4.9 Double Crossing
4.10 Opening of Crossing
4.11 Terminologies
UNIT – V PAYING BANKER 70-90
5.1 Introduction
5.2 Precautions before honouring a Cheque
5.3 Circumstancess under which a can be Dishonoured
5.4 Answers to Dishonoured
5.5 Statutory Protection to Paying Banker
5.6 Payment in due Course
5.7 Holder in due Course
5.8 Rights and privileges of a holder in due Course
5.9 Recovery of money paid mistake
5.10 Terminologies
UNIT- VI COLLECTING BANKER 91-102
6.1 Introduction
6.2 Banker as a holder for value
6.3 Banker as an Agent
6.4 Conversion
6.5 Statutory protection
6.6 Protection extended to Dividend, Warrants, Drafts etc.,
6.7 Basis of negligence
6.8 Duties of a collecting Banker
6.9 Terminologies
UNIT -VII SUBSIDIARY SERVICES 103-127
7.1 Introduction
7.2 Agency Services
7.3 Payment and Collection
7.4 Purchase and sale of Securities
7.5 Banker as Executor, Administrator and Trustee Executor
7.6 Administrator
7.7 Trustee
7.8 Attorney
7.9 Miscellaneous or General utility services
7.10 Terminologies
BLOCK II: INSURANCE
UNIT – VIII INSURANCE AND RISK 128-144
8.1 Introduction
8.2 Methods of Risk Management
8.3 Lack o f Insurance
8.4 Perks( Benefits) Of Insurance To Risk Management
8.5 General Structure of the Insurance Market
8.6 Significant Aspects of an Industry
8.7 Reforms in Insurance Sector in India
8.8 The Future of Insurance Sector In India
8.9 Importance of the Privatization of Insurance Industry
8.10 Problems Faced by Public Enterprises
8.11 Relation Between Insurance and Economic Growth
8.12 Terminologies
UNIT – IX REGULATIONS RELATING TO INSURANCE 145 -169
ACCOUNTING AND MANAGEMENT
9.1 . Introduction
9.2 Systems of Accounting
9.4 Regulations Regarding General Insurance Investment in the
Country(List of Countries by FDI Abroad)
9.5 Role of Financial Reporting in Managing Insurance Operations
9.6 Significance of Determining Solvency Margins
9.7 Understanding of Solvency Ratios
9.8 Importance of Calculating Solvency
9.9 Types of Solvency Ratios
9.10 Terminologies
9.1 . Introduction
UNIT – X LIFE INSURANCE 170-200
10. 1 Introduction
10.2 Types of Life Insurance In India(Role of Riders in Insurance Policies)
10.3 Indian Life Insurance Industry Overview
10.4 General Insurance
10.5 Features of Fire Insurance Contract
10.6 Functions of Insurance Organizations Insurable Interest
10.7 Non –Life Insurance
10.8 Elements of Fire Insurance
10.9 Marine Insurance: Nature, Subject Matter and Principles
10.10 Rural Insurance: Coverage, Claim & Exclusions
10.11 Terminologies
UNIT-XI NON- LIFE INSURANCE 201-226
11.1 Introduction
11.2 Types of Motor Insurance Policies In India
11.3 Indian Insurance Industry Overview ( Market Development Analysis)
11.4 Significance of Liability Insurance In India
11.5 Types of Liability Insurance Plan:
11.6 Companies Providing Liability Insurance Policy
11.7 Components of The Distribution Channels(System) of Life Insurance
Companies in the Country
11.8 Role of Agents In The Life Insurance Sector In India
11.9 Important Activities Carried Out In A Life Insurance Organization:
Marketing, Underwriting, And Administration
11.11 Terminologies
BLOCK III: CLAIM MANAGEMENT AND FINANCIAL
MANAGEMENT IN INSURANCE
UNIT – XII PRODUCT DESIGN AND DEVELOPMENT 227-243
12.1 Product Development in the Life
12.2 Software do Insurance Companies Use- Types, Features, Benefits
12.3 Life Insurance Product Development Process
12.4 Roles and Responsibilities In SDLC
12.5 Launch a New Insurance Product
12.6 Insurance Sector in India
12.7 Role of Risk Evaluation in the Process of Insurance Product Formation
12.8 Future Trends In The Domain of Insurance Product Design And
Development
12.9 Insurance Underwriting
12.10 Factors That Affect The Activities Performed By The Underwriter
12.11 Steps Involved In The Process Of Insurance Underwriting
12.12 Terminologies
UNIT – XIII CLAIMS MANAGEMENT 244-259
13.1 Introduction
13.2Factors affecting the Insurance Claims Management Systems
13.3 Types of documents needed in various types of claim
13.4 Cause Proxima
13.5 Insurance Pricing and marketing
13.6 Principles of Insurance pricing and Marketing
13.7 Insurance Pricing methods
13.8 Seven ways to improve claimsout comes
13.9 Health Insurance
13.10 Terminologies
UNIT – XIV FINANCIAL MANAGEMENT IN INSURANCE 260-270
COMPANIES AND INSURANCE OMBUDSMAN
14.1 Introduction
14.2 Importance of financial management in Insurance companies
14.3 Tools managing expenses in the Insurance companies
14.4 Modes used by the Insurance companies in channelizing their funds
14.5 Reinsurance
14.6 Areas of the application of Reinsurance
14.7 Information Technology in Insurance
14.8 Application of information technology in the Insurance Sector
14.9 Role of Insurance companies in Insurance Security
14.10 Contours of the future of Insurance in rural areas
14.11 Terminologies
Model Question 271
UNIT – I BANKER AND CUSTOMER
Bank and Customer
NOTES
Structure
1.1 Introduction
1.2 Origin of Banking
1.3 Banker
1.4 Banking and other Business
1.5 Customer
1.6 Relationship between Banker and Customer
1.7 General Relationship
1.8 Special Relationship
1.9 Banker‘s Lien
1.10 Banker‘s Duty to maintain Secrecy of Customer‘s Accounts
1.11 Terminologies
1.1 INTRODUCTION
Today banks have become a part and parcel of our life. There was
a time when the dwellers of city alone could enjoy their services. Now
banks offer access to even a common man and their activities extend to
areas hitherto untouched. Apart from their traditional business oriented
functions, they have now come out to fulfil national responsibilities. Banks
cater to the needs of agriculturists, industrialists, traders and to all the other
sections of the society. Thus, they accelerate the economic growth of a
country and steer the wheels of the economy towards its goal of ―self
reliance in all fields.‖ It naturally arouses our interest in knowing more
about the ‗bank‘ and the various men and activities connected with it.
1.2 ORIGIN OF BANKING

Since the banking activities were started in different periods in
different countries, there is no unanimous view regarding the origin of the
word ‗bank‘. The word, ‗Bank‘ is said to have derived from the French
word ‗Banco‘ or ‗Bancus‘ or ‗Banque‘ which means, a ‗bench‘. In fact
the early Jews in Lombardly transacted their banking business by sitting on
benches. When their business failed, the benches were broken and hence
the word ‗bankrupt‘ came into vogue. But, Macleod in his book, ‗Theory
and Practice of Banking‘ has expressed a different view. According to
him, the money changers were never called ‗Benchieri‘ in the Middle ages.
So, this derivation may be a mere conjecture.
Another common-held view is that the word ‗bank‘ might be
originated from the German word ‗Back‘ which means a joint stock fund.
Self- Instructional Material
1
Bank and Customer Of course, a bank essentially deals with funds. In due course, it was
NOTES Italianised into ―banco‖, Frenchised into ‗bank‘ and finally Anglicised into
‗bank‘. This view is most prevalent even today.
1.3 BANKER
A person Who is doing the banking business is called a banker. But,
it is not at all easy to define the term ‗banker‘ precisely because a banker
performs multifarious functions. First, a banker must be a man of wisdow.
He deals with others‘ money but with his own mental faculties. Secondly, a
banker is not only acting as a depository, agent, but also as a repository of
financial advices. The scope of activities of a banker is ever expanding.
Thus, a banker is dealing with the field of banking which is highly
dynamic, complex and sophisticated and which must cater to the ever
growing requirements of millions of people belonging to different strata of
society. the banks have diversified their activities on an accelerated pace to
cater to the sophistricated needs of corporate clients and other segments of
trade and industry. Hence, the banking terminology seems to be the most
incomprehensible one.
Still, some attempts have been made to define the term‘banker‘
This can be studied under the following heads:
Earlier Views
The early definitions were not positive in the sense, they did not
point out any of the functions performed by a banker. For instance, The
Bill of Exchage Act of 1882 defines the banker thus ― Banker includes a
body of persons whether incorporated or not who carry on the business of
banking‖ So also Sec. 3 of the Negotiable Instruments Act States that ― the
term banker includes a person or a corporation or a company acting as a
banker. ― These definitions are vague. They amount to saying that a person
who acts as a banker is a banker.
Experts’views
Later on, some attempts were made by experts to define the term
‗banker‘ Among them the most important ones are the following
Macleod‘s view According to Macleod ― The essential business of a
banker is to buy money and defts by creating other debts. A banker is
essentially a dealer in debts or credit
2
Dr. Hart‘s view Dr. LHart states in his book ‗ Law of Banking‘ that Bank and Customer
a banker is one who in the ordinary course of his business honours NOTES
Cheques drawn upon him by persons from and for whom he receives
money on current accounts
sir john Paget‘s view Sir john paget in his book ‗ Law of Banking‘
defines the term banker as follows ―That no person or body corporate or
otherwise can be a banker who does not (i) take deposit accounts (ii) take
current accounts(iii) issue and pay cheques and (iv) Collect cheques
crossed and uncrossed for his customers. He embellishes his definition by
adding that one claiming to be a banker must profess himself to be a full
time banker and the public must accept his as such and his main business
must be that of banking from which, generally. he should be able to earn
his living.
All these experts have pointed out some aspects of a banker. They
are the following receiving deposits of various kinds, lending money or
creating credit, issuing cheques. honouring cheques and collecting cheques.
These are the essential funcations of a bank. however, these definitions do
not include any agency and general utility services rendered by modern
bankers.
Indian view
The definition given in India in the banking Regulation Act appears
to be more precise and acceptable. Thus Sec. S(B) of the above mentioned
act defines the term ‗ Banking company‘ as ―a company which transacts
the business of banking, and the term ‗Banking‘ has been defined as
―Accepting for the purpose of lending and investment, of deposits of
money from the public, repayable on demand, order or otherwise and
withdrawable by cheque. draft order or otherwise.‖ This definition also
pinpoints the prinicipal functions of a banker. namely receiving deposits.
lending or investing these deposits and repaying these depostis on demand
by cheque or otherwise. Even this definition does not indicate the
subsidiary services rendered by the bankers, By now, it is quite evident
that no definition of the term ‗banker‘ will be a complete one.
1.4 BANKING AND OTHER BUSINESS

In this connection an interesting question may arise as to whether to
call a moneylender a banker or not. Traditionally money lenders and
3
Bank and Customer indigenous bankers have been advancing loans. But they don‘t receive
NOTES deposits from the public. They rely upon their own resources. In Samyukta
samajan Vs. GoliKalyani, it was held that the firm lending money out of its
own capital was not a bank. moreover their main business in not banking.
They used to combine banking with trading business. In Stafford Vs.
Henry it was held that carrying on banking business as a part of any
business would not entitle a man to be called a banker. Similarly these
money lenders do not issue cheques which is one of the essential functions
of the bankers. Hence, moneylenders and indigenous bankers are not
regarded as bankers in the strict sense of the term.
Some financial institutions like I.F.C., S.F.C., I.D.B.I. Co-operative
Land Development Banks etc., are providing loans to industries and
agriculturists. They are not regarded as banks since they do not accept
deposits from the public regularly. Of late, many business houses and
industries have begun to invite fixed deposits from the public by offering
attractive rates of interest. They can not be strictly called banks because
they don‘t lend and they don‘t issue any cheques.
1.5 CUSTOMER
It is equally difficult to define the term ‗customer‘. Different views
have been expressed at different times. Even under the law, the term
‗customer‘ is not defined. But this term ‗customer‘ is of much significance
to a collecting banker because he can get protection under Sec.131 of the
Negotiable Instruments Act only if he collects a crossed cheque for his
customer in good faith and without negligence. Thus to solve many of the
disputes that may arise in banking transctions, a clear – cut definition of the
term customer is essential. Who is then a customer?
To have a proper understanding of this subject, a study of the term
‗customer‘ as they obtained at different stages can be made.
Early Stage – Some Sort of an Account
In early periods a man who held some sort of an account was
considered to be a customer. In Great Western Railway Co., Vs. London
and county Bank it was held that ―there must be some sort of Account –
either customer of a bank. ― The opening of an account is the only
qualification needed by a man to become a customer. This argument
Self- Instructional Material appears to be logical. However, in those days other different opinions were
4
also prevalent. For instance Lord Brampton was of the view, ―It is not Bank and Customer
necessary to say that the keeping of an ordinary banking account is NOTES
essential to constitute a person customer of bank.‖ It is not prudent to call

a person having no account a customer and so it is totally unacceptable.
Thus, we can say that some sort of an account is necessary for a person to
be called a customer.
Second Stage — Frequency of Transactions
At this stage, some refinements were made to the early definitions.
Since the word customer itself implies a custom, Sir John Paget puts forth a
different view. According to him, ―to constitute a customer there must be
some recognisable course or habit of dealing in the nature of regular
banking business.‖ Hence, a person can not become a customer on mere
opening of an account and so there must be frequent transactions so as to
establish a recognisable course between a banker and his customer. Thus,
Sir John Paget gives importance to the time element and therefore his
theory is popularly known as the ‗duration theory‘. The same view was
expressed in the case of Mathews Vs. Williams Brown & Co. His view
regarding the dealing of banking nature has been universally accepted. But
his view about duration‘ is subject to several criticisms. It is very difficult
to say how many transactions will make a person a customer or how much
time should elapse between two successive transactions to qualify a person
as a customer.
Modern view- Single Transaction

The eminent jurists in recent times have completely exploded the
view expressed by Sir John Paget. According to them even a single
transaction can constitute a person a customer. They have gone to the
extent of saying that the moment a banker has agreed to collect a cheque
for a person, the latter becomes a customer. It means that a person becomes
a customer the moment his banker agrees to admit him as a customer.
Thus, in Ladbroke Vs. Todd Justice Bailhache rightly observed: ―the
relation of banker and customer begins as soon as the first cheque is paid in
and accepted for collection not merely when it is paid.‖ Commenting upon
the case Lord Chorely observed: ―By accepting a request to open an
account, the banker ‘ enters into a contract with the offeror in which it is
considered that such a continuous relationship is implicit.‖ Again, the same
5
Bank and Customer view was expressed in Commissioner of taxation Vs. English Scottish and
NOTES Australian Bank wherein it was confirmed by Lord Dunedin that "the word
customer signifies a relationship in which duration is not of the essence.‖ It
is now beyond doubt that neither the number of transactions nor the period
is material in deciding whether or not a person is a customer. In Savory
&CoVs. Lloyds Bank Ltd. Mr. Smith had instructed the Lloyds Banker to
collect the cheques stolen by him and credit them to his wife‘s account at
the Red Hill Branch. His wife didn‘t have any account at all. But, it was
held that Mrs. Smith became a customer from the moment the banker had
accepted those cheques for collection.
Moreover a person does not become a customer by virtue of the bank
performing a casual service like accepting valuables for safe custody or
giving change for a hundred rupee currency note for him. Hence the
dealing must be of a banking nature.
To sum up, the following are the prerequisites to constitute a person

as a customer:-
(a) He must have some sort of an account.

(b) Even a single transaction may constitute him as a customer.
(c) Frequency of transactions is anticipated but not insisted upon.
(d) The dealings must be of a banking nature.
1.6 RELATIONSHIP BETWEEN BANKER AND
CUSTOMER
Any dispute between two parties can be settled only on the basis of
the nature of the existing relationship between the two. Hence, it is
imperative that one should know the exact relationship between the banker
and the customer. This relationships falls under two broad categories
namely (i) general relationship and (ii) special relationship.
1.7 GENERAL RELATIONSHIP

1.7.1 Is there a Depository Relationship? When a person opens an
account with a banker there arises a contractual relationship by implication.
Once, the banker was thought of a depository. This was the case during the
period of Goldsmiths of London. A depository is one who receives some
valuables and returns the same on demand: But at present, a banker is not
Self- Instructional Material bound to return the same coins and currency notes deposited by a
6
customer. Instead, he is required to give the same amount. So, he is not a Bank and Customer
depository. If a cusotmer insists upon the return of the same coins and NOTES
currency notes, then a banker can not run his main business namely
lending. Moreover, if a banker is acting as a depository, he can not make
use of the money to his best advantage. A banker has to make use of the
money in deposit with him for earning the maximum profit and the whole
income is not returned to the customer. Only a part of it is returned to the
customer. That is why Lord Cottenham rightly observed in Foley Vs. Hill
―the money paid into a bank ceases altogether to be the money of the
principal; it is then the money of the
banker. He is known to deal with it as his own …… He is bound to return
an equivalent by paying a similar sum that deposited with him when he is
asked for it."
A banker as a bailee: A banker becomes a bailee when he receives
gold ornaments and important documents for safe custody. In that case he
can not make use of them to his best advantage because he is bound to
return the identical articles on demand. Moreover, a banker can not acquire
any title in respect of stolen articles. A banker does not allow any interest
on these articles. It is only the customer who has to pay rent for the lockers.
So, a banker acts as a bailee only when he receives articles for safe custody
and not when he receives money on deposit account.
1.7.2 Is there a Trustee Relationship? Prof. Keeton defines a trust
as ‗a relationship which arises wherever a person called trustee is
compelled in equity to hold property, whether real or personal by legal or
equitable title for the benefit of some person.‘ If a banker is regarded as a
trustee, he can| not make use of the money deposited by a customer to his
best advantage. He will be bound by the trust deed and he will have to
render an account for everything he does with the money. For this reason
he is not a trustee when he opens an account for a customer.
A banker as a trustee: A banker becomes a trustee only under
certain circumstances. For instance, when money is deposited for a specific
purpose, till that purpose is fulfilled the banker is regarded as a trustee for
that money. In Official Assignee of Madras Vs. J.W. Irwin a certain sum of
money was deposited with the bank with the specific instruction to buy
shares. When that bank failed, it was held that the banker was a trustee for
7
Bank and Customer that part of the amount which was earmarked for the specific purpose. So
NOTES also, when a cheque is given for collection, till the proceeds are collected,
he holds the cheque as a trustee. But the proceeds are not to be held in
trust. That is why Lord Justice Atkin has rightly observed in Joachinson
Vs. Swiss Banking Corporation, ―The bank undertakes to receive money
and to collect bills for its customer‘s account. The proceeds so received are
not to be held in trust for the customers‘ but the bank borrows the proceeds
and undertakes to repay them.‖
1.7.3 Is there an Agent Relationship? Section 182 of the Indian
Contract Act defines an agent as one employed to do any act for another
or to represent another in dealing with third person.
When a banker receives deposits from the customers, he is not

regarded as an agent of his customers. If he acts as an agent, he should
use the deposit money according to the instructions of his principal
(customer) in return for a remuneration for this agency service. But this is
not the case. The agent is also accountable to the principal and as such
the banker should give a detailed list of how he used the deposit money,
the income earned thereon and so on. The whole income should go to the
customer.
A banker as an agent: The agent - principal relationship is said to

exist between a banker and his customer, when the banker buys and sells
shares, collects cheques, bills, dividend warrants, coupons and pays
insurance premia, subscriptions etc., on behalf of his customer. The
banker is acting as an agent of his customer under such circumstances. So
also when he executes the will of a customer, he is acting as an Executor;
when he administers the estate of a customer he is regarded as an
Administrator. This kind of relationship doesn‘t exist when he receives
deposits from a customer.
1.7.4 What then is the Relationship? At this stage we are curious to know
the exact nature of the relationship that exists between a banker and his
customer. When a banker receives deposits from a customer, he is techni-
cally said to borrow money from the customer. So, he is acting as a debtor
who is bound to return the money on demand to his creditor namely his
customer.
8
Debtor-creditor relationship: According to Sir John Paget ―The re- Bank and Customer
lation of a banker and a customer is primarily that of a debtor and a NOTES
creditor, the respective position being determined by the existing state of

the account. Instead of the money being set apart in a saferoom it is
replaced by a debt due from the banker. The money deposited by a
customer with the banker becomes the latter‘s property and is absolutely at
his disposal.‖ Hence, there exists a relationship of debtor and creditor; the
banker, being the debtor, is bound to repay the deposit as and when the
customer asks for it.
The banker as a privileged debtor: A banker, as a debtor is not the

same as an ordinary commercial debtor. An ordinary commercial debtor‘s
duty is to seek out the creditor and pay the money. But a banker as a debtor
enjoys many privileges and hence he is called a privileged debtor. The
privileges enjoyed by a banker have been listed below: (1) The creditor i.e.
the customer must come to the banker and make an express demand in
writing for repayment of the money. According to the decision given in
Joachinson Vs. Swiss Banking Corporation an express demand by a cus-
tomer in writing is essential to get back the deposit money. But for this
privilege, the banker will have to go to the very doors of thousands of his
customers and find out whether or not they are in need of money. This will
be detrimental to the very business of banking. (2) In the case of an
ordinary commercial debt the debtor can pay the money to the creditor at
any place. But, in the case of a banking debt, die demand by the creditor
must be made only at the particular branch where the account is kept. It
was held in Clare & Co. Vs. Dresdner Bank, that locality is an essential
element in a hanking debt and the banker should pay the money only when
the demand is made at the branch where the account is kept. (3) Time is not
an essential element in the case of an ordinary commercial debt whereas
the demand for repayment of a banking debt should be made only during
the specified banking hours of business which are statutorily laid down. In
Arab Banks Vs. Barclays Bank it was held that a banker is liable to honour
a cheque provided it is presented during the banking hours. (4) The banker
is able to get the deposit money without giving any security to the
customer while it is not possible in the case of an ordinary debtor. Thus the
customer is acting only as an unsecured creditor. It is really an enviable
9
Bank and Customer privilege given to the banker. (5) The Law of Limitation which is
NOTES applicable to all debts lays down that a debt will become a bad one after
the expiry of three years from the date of the loan. But this Law is not
applicable to a banking debt. According to Article 22 of the Law of
Limitation Act, the period of 3 years will be calculated from the date of
demand for repayment of the banking debt and not from the date of the
deposit. Practically, when the demand is made, the banker will return the
money immediately and so this Law does not apply to a banking debt.
Otherwise, the customers will be deprived of their deposits on the ground
that they have become bad debts by being not withdrawn within 3 years
from the date of the deposit. This will not be conducive to the smooth
running of the banking business. Thus, a banker is a highly privileged
debtor who is not bound to repay the debt unless an express demand by the
customer in writing is made at the branch where the account is kept and
during the banking hours. (6) A banker as a debtor has the right to combine
the accounts of a customer provided he has two or more accounts in his
name and in the same capacity. This is another of his privilege. In early
days, a banker was allowed to combine the accounts of a customer even
without obtaining the permission of the customer as was decided in the
case of Garnett Vs. Mckervan. However, prudence demands the banker
getting the consent beforehand for exercising his right to combine the
accounts. Now it has been clearly established in Greenhalgh Vs. Union
Bank of Manchester that a banker can combine the accounts of a customer
only after getting the consent of his customer. It is advisable on the part of
a banker to get a letter of set-off duly signed by a customer at the time of
his opening two or more accounts. This will avert many complications.
This letter of set-off permits the banker to exercise the right to set-off even
without giving any prior notice to his customer. (7) Similarly, an ordinary
debtor can close the account of his creditor at any time. But a banker
cannot close the account of his creditor at any time without getting his
prior approval.
A banker as a creditor: The debtor-creditor relationship holds good

in the case of a deposit account. But in the cases of loan, cash credit and
overdraft, the banker becomes a creditor and the customer assumes the role
of a debtor. Here again, the banker is a privileged person because he is
10
acting as a secured creditor He insists upon the submission of adequate Bank and Customer
securities by the customer to avail of the loan or cash credit facilities. NOTES
Moreover, the Law of Limitation will operate in such cases from the date
of the loan unless it is renewed.
1.8 SPECIAL RELATIONSHIP

Apart from these general features of the relationship, there exists some
special features which are discussed hereunder:
Statutory Obligation to Honour Cheques
When a customer opens an account there arises a contractual relation-
ship between the banker and the customer by virtue of which the banker
undertakes an obligation to honour his customer‘s cheques. This obligation
is a statutory obligation since Sec. 31 of the Negotiable Instruments Act
compels a banker to do so. Sec. 31 runs as follows:
―The drawee of a cheque having sufficient funds of the drawer in his

hands, properly applicable to the payment of such cheque, must pay the
cheque when duly required so to do, and in default of such payment, must
compensate the drawer for any loss or damage caused by such default.‖
Limited Obligation
Eventhough law compels a banker to honour all cheques, he can not
blindly honour all cheques. Thus this obligation is not an absolute but only
a qualified one. The statutory obligation to honour cheque is limited in the
following ways:
(a) The availability of money in the account of the Customer: A

banker‘s obligation to pay a cheque is subject to the amount
available in the deposit account. If there is no sufficient, balance,
the banker is justified in overriding his obligation. At times, this
obligation may be extended to the extent of the overdraft or cash
credit sanctioned by the banker. If there is a prior arrangement for
O.D., the banker is bound to honour the cheque as was decided in
the case of Rayner & Co. Vs. Hambros Bank.fi a banker, by
mistake, honours a cheque in the absence of sufficient balances, it
will be taken as a precedent and he will be expected to pay cheques
in future also in the absence of sufficient balance.
(b) The correctness of the cheque: The obligation to pay a cheque
11
Bank and Customer depends upon the correctness of the cheque. All the required
NOTES particulars like the date, name of the payee, amount in words and
figures and the signature of the drawer ought to have been
correctly filled in.
(c) Proper drawing of the cheque: The cheque will be honoured only
when it is drawn according to the requirements of law. It must be
drawn on aprintedform supplied by the banker and it should not
contain any ‗request‘ to pay the amount.
(d) Proper application of the Funds: The banker will honour a cheque
only when the funds are meant for its payment. For instance, if
trust funds are withdrawn by a cheque for private use, the banker
will not honour it.
(e) Proper presentation: The banker will undertake to honour cheques
provided they are presented at the branch where the account is kept
and during the banking hours. If the cheques are presented after six
months from the ostensible date of issue, they will be regarded as
Stale cheques and they will not be honoured. So this obligation of
the banker to honour cheques is conditioned by the proper
presentation of cheques.
(f) Reasonable time for collection: A customer can not impose on the
banker a condition that the latter should pay his cheques blindly
even when they are drawn against cheques sent for collection
before they are collected. In Underwood Vs. Barclays Bank, it was
held that in the absence of an express or implied agreement giving
the customer a right to draw cheques against uncleared items, a
banker is entitled to return such cheques with tire remarks ―Effects
not Cleared.‖
(g) Existence of legal bar: A banker is relieved from his statutory duty
of honouring his customers‘ cheques if there is any legal bar like
Garnishee Order attaching the customer‘s account.
Overriding the Obligation
When a banker overrides his statutory obligation and dishonours a

cheque on reasonable grounds discussed above, the banker is justified in
Self- Instructional Material doing so. However, if he dishonours a cheque by mistake, it amounts to a
12
wrongful dishonour. In such a case, the banker is violating the provisions Bank and Customer
of law and hence he should be penalised for his offence. Thus a banker NOTES
may fail to honour a cheque by over-sight. It amounts to saying that the

banker is negligent in his duty of paying cheques and there is a breach of
contract between the banker and die customer. To err is human and so
inspite of all his careful observation of the procedures laid down, a banker
may, by chance, dishonour a cheque even though it is good for payment.
When a banker does so, he brings injury to his customer‘s credit for which
he is liable to compensate the customer for any loss or damage caused to
him.
In Marzetti Vs. Williams,
Lord Teterden rightly observed ―It is discredit to a person and there-

fore injurious, fact, to have payment refused of a cheque!draft ……………
it is an act particularly injurious to a person in trade.‖
Liability to the Customer Only
When a cheque is wrongfully dishonoured, a banker is liable only to

his customer who happens to be the drawer of the cheque in question and
he is not at all liable to any other parties.
In Jagjivan Manji Vs. Ranchhod das Meghji, it was held that the
liability of the banker for wrongful dishonour is only towards the drawer or
the customer and not towards the payee or the holder of the cheque.
Assessment of Damages
As per Sec. 31 of the Negotiable Instruments Act, if a banker
wrongfully dishonours a cheque, he has to compensate for any loss or
damage suffered by the customer. The word ‗loss‘ or ‗damage‘ as men-
tioned in Sec. 31 of the N. I, Act does not depend upon the actual amount
of the cheque but upon the loss to one‘s credit or reputation. That is why
―the smaller the amount of the cheque, the greater the damage‖ principle is
adopted. In fact, the customer suffers more loss of credit when a cheque for
a small amount is dishonoured.
Ordinary Damage Vs. Special Damage
A banker is always liable to pay damages for wrongful dishonour of

cheques. The damage may be of two kinds: (i) ordinary damage or nominal
damage and (ii) special damage or substantial damage. As a general rule, a
13
Bank and Customer customer must always prove and plead for his loss. He will get only
NOTES nominal damages. But there are two exceptions to this. Under the
following two circumstances, a special damage can be claimed:
(i) an action brought forth for breach of marriage.
(ii) an action brought forth by a businessman having sufficient funds for

the wrongful dishonouring of his cheque.
A banker is primarily concerned with the second case and he has

nothing to do with the first one. In assessing damages, the loss to one‘s
credit or reputation is mainly taken into account. A trader-customer is
supposed to suffer more in credit if his cheque is dishonoured. Non-traders
are generally allowed only ordinary damages for wrongful dishonour,
because, it will not affect their credit much. If the dishonour of the cheque
is wilful, the banker is liable to pay vindictive damages. Thus, a customer
can proceed against the banker for wrongful dishonour on the following
grounds:
(i) Breach of contract, (ii) Negligence and (iii) Libel.
Hence, the words ‗loss or damage‘ as appearing in Sec. 31 imply the
following:
a) damage for the breach of the contract to pay cheques,
b) damage to the drawer‘s general business,
c) damage to his general reputation and credit, and
d) damage for the negligence of the banker.
Case Law Illustration

In New CenlralHall Vs. United Commercial Bank Ltd., it was held
that a trader could get special damage as the dishonour of a cheque would
affect his major asset namely his credit and a non-trader could claim only
nominal damages. In Gibbons Vs. Westminister Bank, Mrs. Gibbons, a
non-trader, had issued a cheque for a sum of £ 9 16sh in favour of her
landlord towards the rent. Owing to a mistake, it was dishonoured. The
court awarded only a nominal damage of sh 40 since, she happened to be a
non-trader. In Sterling Vs. Barclays Bank Ltd., the banker had wrongfully
dishonoured Mrs. Sterling‘s cheque. Though Mrs. Sterling was a trader, the
court awarded only nominal damages since she had two cheques
dishonoured previously and also people of that trade did not worry about
14
their cheques being dishonoured as they led a hand-to-mouth existence. In Bank and Customer
Davidson Vs. Barclays Bank Ltd., the banker of a bookmaker had NOTES
dishonoured a cheque for a small sum of £ 2-15sh by mistake. Taking into

account his business and the amount of the cheque, he was awarded a
special damage of £ 250. Hence, in assessing damages, the courts of law
give due weight to factors like the financial position, business reputation
and the custom of trade.
In Canara Bank Vs. I. V. Rajagopal, the banker had dishonoured by

mistake a cheque for Rs. 294.40 drawn by a non-trader customer Mr. I. V.
Rajagopal. It was proved in the court that this erroneous dishonour led to
the termination of his employment. The court found that the customer had
suffered much damage and so a special damage of Rs. 14,000/- was
awarded to the customer.
Thus, generally a non-trader customer is not entitled to recover sub-

stantial damages. However, the damages which he has suffered is alleged
and proved, he can claim special damages.
It is evident from the above case law illustrations that the damage will
be assessed on the basis of the loss to one‘s credit or reputation,
irrespective of the fact whether he is a trader or non-trader, though non-
traders are not generally entitled to claim special damages.
Is there any obligation to pay bills? Eventhough there is no statutory

obligation on the part of a banker to honour the bill of a customer, modem
bankers undertake the duty of paying the bills on behalf of their customers.
When a customer accepts a bill and makes it payable at his bank, it is
called domiciliation of a bill. If a bill is so domiciled, the banker should
pay it on the due date.
Prior Arrangement
Bankers generally do not render this service unless they are
appointed to do so by their customers. A customer should have made prior
arrange-ments with his banker to honour such domiciled bills. Otherwise, it
will be taken as a precedent and he will be expected to do so in future also.
Indemnity Bonds
In the absence of any compulsion from outside, a banker voluntarily
15
Bank and Customer takes up the duty of honouring a bill just to please his customer and thus to
NOTES render him some service. But he should keep in mind that the statutory
protection extended to cheques under Sec. 85 of the Negotiable
Instruments Act is not extended to the payment of bills. So, in his own
interest, he should demand an indemnity bond from his customer for whom
he renders this service. This bond safeguards the banker against possible
losses that may arise on account of the payment of a bill.
Precautions
Inspite of the above mentioned safeguards, a banker should observe
the following additional precautions. He must see:
a) whether all the particulars in the bill are correctly filled in.
b) whether it is adequately stamped.
c) whether it is due for payment.
d) whether the signature of his customer on the bill is genuine.
1.9 BANKER’S LIEN

Another special feature of the relationship existing between a banker
and his customer is that a banker can exercise the right of lien on all goods
and securities entrusted to him as a banker.
Right to Retain the Goods
A lien is the right of a person to retain the goods in his possession
until the debt due to him has been settled. For instance, a creditor who has
in his possession, goods of his debtor, may have a lien over the goods in
respect of the money due by the debtor. This right to retain goods as
security is known as lien. According to Sec.71 of the Indian Contract Act
―Bankers …… may in the absence of a contract to the contrary, retain as
security for a general balance of account, any goods bailed to them .....‖
Kinds of Lien
Lien is of two kinds - particular lien and general lien. A particular lien
is so called because it confers a right to retain the goods in connection with
which a particular debt arose. In other words, a particular lien applies to
one transaction or certain transactions only. For example, a watchmaker
has a lien over the watch till the repair charges due from the owner of the
watch are paid to him. General lien, on the other hand, gives a right to a
banker to retain the goods not only in respect of a particular debt but also
16
in respect of the general balance due from the owner of the goods to the Bank and Customer
person exercising the right of lien. It extends to all transactions and dins it NOTES
is more extensive than that of a particular lien.
A Banker's Lien
A Banker‘s lien is always a general lien. A banker has a right to

exercise both kinds of lien. His general lien confers upon him the right to
retain the securities in respect of the general balance due from the
customer. In Brandao Vs. Barnett it was held, ―Bankers most undoubtedly
have a general lien on all securities deposited with them as bankers by a
customer unless there is an express contract or circumstances that show an
implied contract inconsistent with lien.‖
Circumstances for Exercising Lien
If the following conditions are fulfilled, a banker can exercise his right of
lien:
a) There must not be any agreement inconsistent with the right of lien.
b) The property must come into the hands of a banker in his capacity
as a banker (qua banker).
c) The possession should be lawfully obtained in his capacity as a

banker.
d) The property should not be entrusted to the banker for a specific

purpose.
These are the four vital factors of a banker‘s lien.
Lien can not go beyond the agreement
In C. R. Narasimha Setty Vs. Conor a Bank (1990) the plaintiff Mr.

C. R. Narasimha Setty had purchased a vehicle under a hire purchase
finance by executing a hypothecation deed. Subsequently, the banker
exercised a lien on the vehicle by seizing it for the amount still due Rs.
3594.90 (ground rent charges, seizure charges etc.) and also for the open
cash credit limit of Rs. 50,000/- sanctioned to a firm in which he was a
partner and for which the vehicle was offered as a collateral security only.
The plaintiff contended that no right of lien was available to die banker in
respect of the debt due by the firm.

17
Bank and Customer Decision
NOTES
It was held that the banker could not exercise his lien on the vehicle
in respect of the cash credit dues of the firm since the hypothecation deed
did not give any right to the bank to seize the vehicle for the dues of the
firm. The bank was directed to return the vehicle subject to the recovery of
It Rs.1694.90 only. Thus, it is evident that a lien can not go beyond the
terms MI ibr loan agreement.
Agiun. in K Jagdishwar Reddy Vs. Andhra Bank,(1988) it was

held that the banker has no right of lien on the gold ornaments deposited
for a loan in respect of another debt due by him as a guarantor, since, there
is no contract by the customer offering the gold ornaments as a pledge for
the debt due by him as a guarantor. In another case, Vysya Bank Ltd., Vsv
Akkem Mallikarjuna Reddy, the customer had obtained two gold loans and
one crop loan. When the gold loans were repaid, the banker refused to give
the jewels, exercising lien on them for the amount due under the crop
loom. But, the customer pleaded that the banker couldn‘t exercise his
general lien on the jewels, since, the crop loan, loan had been already
waived under the waiver scheme of the Government. Moreover, the jewels
were deposited specifically for the gold loans only. It was held that the
bank can exercise his general lien on the jewels because:
(i) the waiver scheme is not applicable to private banks, and (ii) there
is an agreement "to retain the gold ornaments for all the monies now
owing, or which shall, at any time thereafter he owing, to the bank is any
capacity whatsoever."
Again, In Syndicate Bank Vs. Vijayakumar (1992), it was held that

the bank has a general lien on the FDRs which were given along with a
special agreement giving power to the bank the liberty of adjusting the
proceeds to any loan or O.D.
A Banker’s Lien as an Implied Pledge
It must be noted that a banker‘s lien is generally described as an

implied pledge. It means that a lien not only gives a right to retain the
goods but also gives a right to sell the securities and goods of the customer
after giving a reasonable notice to him, when the customer does not take
any steps to clear his arrears. In Deverges Vs. Sandeman, a month‘s notice
18
was considered as a reasonable one. That is why Sir John Paget rightly says Bank and Customer
in his book ‗Law of Banking‘ that ―It has been generally understood that NOTES
the banker‘s lien conferred rights more extensive than ordinary liens ……‖
This right of sale
is normally available only in the case of pledge. That is why lien is
regarded as an implied pledge. This right of sale is available only in
exceptional circumstances in the case of lien.
Lien on Negotiable and Quasi Negotiable Securities
A banker has a lien on all securities entrusted to him in the capacity

of a banker. In Miia Vs. Currie, it was ruled that a banker‘s general lien
applies to bills, cheques and money paid to bankers in the capacity of
bankers. A banker‘s lien over negotiable securities applies even to
instruments which are not the property of the customer. It is so because the
banker becomes a holder in due course provided he has acted in good faith.
Hence, his title will be superior to that of his customer. The lien also
extends to quasi negotiable securities like a policy of insurance, share
certificate, documents of title to goods, deposit receipt etc.
No General Lien on Safe Custody Deposits
Bankers have no general lien on safe custody deposits. The bankers
receive valuables such as sealed boxes, parcels, documents and jewellery
for safe custody. Such articles are left with the bankers for a specific
purpose. In Pollock Vs. Mulla, it was held that the general lien of a banker
does not extend to securities deposited for safe custody or for special
purpose. Moreover, the banker becomes a bailee in such cases and as such
he cannot acquire a better title than that of his customer from whom he got
them. Hence, a banker‘s lien does not cover safe custody deposits. To
quote Sir John Paget again ―a banker's lien only attaches to such securities
as a banker ordinarily deals with for his customer otherwise than for safe
custody, when there is no question or contemplation of indebtedness on the
part of the customer.‖ But, Heber Harot in the Gilbert Lectures has
expressed a different view which does not hold good. However, the banker
can exercise his particular lien on them for the locker charges due.
No Lien on Documents Entrusted for a Specific Purpose

In Greenhalgh Vs. Union Bank of Manchester it has been clearly
19
Bank and Customer established that if a bill of exchange or any other document or money is
NOTES entrusted for a special purpose, a banker‘s lien cannot be extended to them.
It is so because when they are entrusted for a specific purpose, the banker
becomes a trustee till that purpose is fulfilled. Hence, he cannot avail of his
right of lien. In K. JagadeshwarReddy Vs. Andhra Bank, Nizamabad
(1988) it was held that in the absence of any agreement to the contrary, the
bank has no general lien in respect of those securities which were given
specifically for a particular loan.
No Lien on Articles Left by Mistake
A banker cannot exercise any lien in respect of the property which
comes into his hands by mistake. It amounts to unlawful possession. In
Lucas Vs. Dorrien, the banker had refused to grant an advance against
certain securities. The customer by mistake forgot to take back the
securities while leaving the bank premises. It was held that the banker
could not exercise his right of lien over those securities because they came
into his possession in an unlawful manner.
Lien on Securities Not Taken Back After the Repayment of the Loan
The banker can exercise the right of lien on securities which are
allowed to remain with him even after the repayment of the loan. This is so
because the securities are supposed to be redeposited with him. This view
was held in Re-London and Globe Finance Corporation.
Lien on Bonds and Coupons

Lien applies to bonds and coupons that are deposited for the purpose
of collection. The reason is that the banker is acting merely as a collecting
agent. But Lord Chorley has questioned the validity of this view. However,
if the coupons and bonds are left in safe custody, a banker‘s lien cannot
cover them. The court will therefore apply ―Collection/Safe Custody Test‖.
If bonds are deposited with the condition that the banker can cut off the
interest coupons for collection, then lien would attach both to coupons and
bonds. On the other hand, if the customer himself cuts off the coupons,
then, lien does not apply to coupons since the customer‘s intention is to
provide for the ‗safety‘ of the coupons. In the case of bonds, however, lien
applies.
20
No Lien Until the Due Date of a Loan Bank and Customer
NOTES
When a specific amount is given as loan for a definite period, no lien
arises until the due date. The reason is that no debt arises till that date. In
the same way, a banker cannot retain any money belonging to the customer
against the discounted bills which have not yet matured. The reason is that
no liability arises till the date of maturity. Moreover, even on the date of
maturity, this liability may or may not arise.
No Lien on Deposits
Generally speaking a banker has no lien upon the deposit account of a
customer in respect of a loan account due from the same customer.
However, he has a right to set off one account against the other. Set off is
an accounting situation which is always available to the banker and it
should not be confused with lien. Sec. 171 gives a right of lien only in
respect of goods bailed as security. Under bailment, the same goods should
be returned to the borrower. But, in the case of a deposit, the money
deposited into any account ceases to be the property of the customer and it
need not be repaid in identical coins and currency notes. Hence, a deposit
does not come within the meaning of bailment and hence a banker‘s
general lien is not available in respect of a deposit account. In Official
Liquidator, Hanuman Bank Ltd., Vs. K.P.T. Nadar A others, it was held
that when moneys are deposited into a bank, the i iwncrship of the money
passes on to the bank. So, the right of the bank over i lie money deposited
with it cannot be a lien at all. In the same way, a banker cannot exercise the
right of lien on the deposit account of a partner in respect ol a debt due
from the partnership firm. Also, no lien arises on trust account in respect of
the debt due from the person operating that trust account.
A banker has no lien on a stolen bond given for sale if the true owner
claims it before the sale is effected.
A Banker‘s lien is not barred by the Law of Limitation Act.
A banker has no lien on the security of fixed deposit receipt which has
mil been endorsed and discharged on maturity. In Union Bank of India Vs.
Venugopalan, it was held that the banker cannot exercise his lien on the
fixed deposit account of the defendent‘s brother (Venugopalan‘s brother)
unless the F.D.R. is duly discharged and given to the bank as a collateral
21
Bank and Customer cover to I In- loan given to the defendant.
NOTES When a Bill of Exchange is handed over to the banker for the purpose
of safety till maturity and thereafter for collection, then the banker‘s lien
does not extend to that bill till maturity since that bill has been entrusted to
him for a specific purpose. On the date of maturity there is no objection to
the exercising of the right of lien on that bill since it is given for collection
which is a routine business of a banker.
Negative Lien: It is otherwise called non-possessory lien. In the case

of a negative lien, the securities are not in the possession of the creditor.
But, the debtor gives an undertaking that he will not create any charge on
those securities in question without the prior written permission of the
creditor. Such a letter of undertaking must be duly stamped. Thus, in the
case of a negative lien, the possession of the security is with the debtor
himself, who promises not to create any charge over them until the loan is
repaid.
1.10 BANKER’S DUTY TO MAINTAIN SECRECY OF

CUSTOMER’S ACCOUNTS
A banker is expected to maintain secrecy of his customer‘s account.
The word ‗Secrecy‘ is like a Damocle‘s Sword hanging on the head of the
banker and every employee of a bank has to take an oath of secrecy
regarding the customer‘s accounts. The banker should not disclose his
customer‘s financial position and the nature and the details of his account.
Even though this practice came into vogue as early as in 1868 in Hardy Vs.
Veasey, it was firmly rooted only in 1924 in a leading, case, popularly
known as Tournier‘s case. (Tournier Vs. National Provincial and Union
Bank of England Ltd.). In the above case the banker had disclosed to a
third party the customer‘s connection with book-makers. It resulted in the
loss of employment to the customer. It was held by Justice Bankes that
there is a qualified contractual duty which has been acquired by the bank in
the character of banker not to disclose information concerning the
depositor. In this case, it was not done and hence, the bank was held liable
to compensate for the loss suffered by the customer.
Of course, the duty of secrecy is not a statutory one. Only the
nationalised banks in India are compelled, under Sec. 13 of the Banking
Self- Instructional Material Companies (Acquisition and transfer of undertakings) Act, 1970, to main-
22
tain secrecy of their customers‘ accounts‘. However, professional etiquette Bank and Customer
demands that a banker should not reveal the nature of his customer‘s NOTES
account to third persons.

Sir John Paget goes to the extent of saying that this secrecy should be
maintained even after the account is closed and even after the death of the
customer. It is immaterial whether the account is in debit or credit. This
duty of secrecy goes beyond the state of the account. It extends to all
transactions that go through the account.
The disclosure of the financial position of a customer may affect his

reputation and bring considerable loss. If a customer suffers any loss on
account of the unwanted disclosure of his account, the banker will be
compelled to compensate for the loss suffered by his customer.
At the same time, a banker must remember that he cannot maintain
cent per cent secrecy at all times. There may be certain reasonable grounds
under which he can justifiably disclose his customer‘s account. In the
words of Judge Banks ―... the duty is an legal one arising out of contract,
and the duty is not absolute but qualified... on principle. I think that the
qualifications can beelassified under four heads: (a) Where disclosure is
under compulsion by law: (b) Where there is a duty to the public to
disclose: (c) Where the interests ol the bank require disclosure: (d) Where
the disclosure is made by the express or implied consent of the customer.‖
(A) Disclosure Under the Compulsion of Law
When law requires the disclosure of the state of a customer's account,

lie cannot override it. His duty to his customer is subject to his duty to the
law of the country. The following are the examples of this category:
i. Under Sec. 4 of the Bankers Book Evidence Act, 1891, a banker

may be asked to produce a certified copy of his customer's account
in his ledger.
ii. Under Sec, 285 of the Indian Income Tax Act. 1961, a banker is
asked to advise the Income Tax Officer the names of those who
have earned Rs. 10.000 or over as interest on deposits during any
financial year. Moreover, the officials have free access-to the books
of accounts kept by bankers.
In Sankarlal Agarwalla V.s. Stare Bank of India and Another, it was
23
Bank and Customer held that the bankercannot be made liable for having disclosed the
NOTES deposit of high denomination Notes as per law to the Income Tax
Department.
iii. Under Sec. 45 B of the Reserve Bank of India Act. the Reserve
Bank is empowered to collect credit information from banking
companies relating to their customers.
iv. Under Sec. 26 of the Banking Regulation Act. 1949,every bank is
compelled to submit an annual return of deposits which remain
unclaimed for 10 years.
v. Under Sec. 36 of the Gift Tax Act, the Gift Tax Officercan
examine a banker on oath and compel him to produce the books of
account.
vi. Under the Exchange Control Act, 1947, the government has the
power to gather information about the financial position of a
customer w ho is suspected of violating the provisions of the above-
mentioned Act.
vii. When a Garnishee order nisi is received, the banker must disclose
the nature of the account of a customer to the court.
In Kattabomman Transport Corporation Ltd. Vs. State Bank of
Travancore (1992) it was held that banks are justified in disclosing the
account of a customer without his consent under the compulsion of law.
(B) Disclosure in the Interest of the Public
As between individual interest and public interest, public interest is

more important and so the individual interest should be sacrificed for the
sake of public interest. Hence, a banker is justified in disclosing the state of
his customer‘s account in the interest of the public. It is not easy to give an
example of this type. The following grounds generally fall under this
category:
i. Disclosure of the account where money is kept for extreme political

purposes.
ii. Disclosure of the account of an unlawful association.
iii. Disclosure of the account of a revolutionary body to avert danger to
the state.
iv. Disclosure of the account of an enemy in times of war.
24
(C) Disclosure in the Interest of the Bank Bank and Customer
NOTES
When his own position is at stake, a banker may be compelled to
ignore his oath of secrecy. Any prudent banker will safeguard his position
before fulfilling his obligations. The following are the instances of this
kind:
i. Disclosure of the account of the customer who has failed to repay

the loan to the guarantor.
ii. Disclosure to a fellow banker. Bankers amongst themselves have

the practice of exchanging information about customers for the sake
of common courtesy. When an enquiry of this type comes to a
banker, he should in his own interest answer the enquiry because
later on he may also be in need of such information for which he
has to approach his fellow banker. Usually, when a piece of
information about a customer who happens to be an acceptor of a
bill under discount is required, the banker will make a courtesy call
on his fellow banker. This is called common courtesy.
iii. As a defence of past action disclosure can be made'. In Sunderland

Vs. Barclays Bank the banker had dishonoured the cheque of Mrs.
Sunderland drawn in favour of a tailor. In fact, she had asked the
banker to give proper reasons for the dishonour of that cheque to
her husband. To defend his past action (i.e., dishonour) the banker
had in reveal the fact of her having drawn cheques in favour of
bookmakers without the knowledge of her husband. After having
hooured the last cheque drawn in favour of a bookmaker, the
banker had to dishonour the cheque in question for want of funds.
Mrs. Sunderland could not tolerate this disclosure to her husband
and so she sued the banker for unwarranted disclosure. It was held
that the banker was not liable because the banker had to disclose the
fact in his own interest. Besides, there were supposed to be no
secrets between a husband and a wife. Moreover, she had permitted
the banker to give proper reason for the dishonour of her cheque to
her husband.
(D) Disclosure Under the Express or Implied Consent of Customer
It is implied in the contract between a banker and his customer that the
25
Bank and Customer banker would not reveal anything about the state of the bank balance
NOTES without the customer‘s express or implied consent.
i. If a customer has given the name of his banker for trade reference,
then the banker would be justified in answering the same.
ii. So also when a proposed guarantor puts questions to the banker

regarding the account of the customer, the banker is expected to
reveal the exact position. This is so because any guarantor who has
assumed great responsibility would be anxious to know about the
monetary position of the person whose position is being guaranteed.
In all cases, it would be advisable to get the consent of the customer
in writing.
General Precautions
In disclosing the state of the account to a customer, great care should
be exercised. If the banker is careless, he is liable to pay damages:
i. to his customer who suffers damage because of unreasonable

disclosure,
ii. to a third party who incurs loss relying upon the information which
is untrue and misleading.
Hence a banker should have certain norms about disclosing the state of his
customer‘s account. They are :
i. The banker should not be negligent in giving information.
ii. He should strictly give bare facts. That is, only a general
information must be given. He should not disclose the actual state
of the account.
iii. Information should be given only after getting the express consent
of his customer.
iv. He should not speak too favourably or too unfavourably of a

customer. Such misleading informations may put the parties in
difficulties and the banker will have to compensate for the conse-
quent loss.
v. The information should be given in such a way that he may avoid

any liability in future. That is why, while supplying credit informa-
tion, bankers add a clause stating, ―This information has been given
26
in strict confidence and without any liability on our part‖. In Bank and Customer
Banbury Vs. Bank of Montreal it was established that the bank was NOTES
not liable for the statement made by the manager and the manager
himself was not liable if he did not sign the letter. Further it was
expressly stated that the information was given ―without prejudice‖
and in ―strict confidence.‖
vi. As far as possible the banker should supply the information only to
a fellow banker.
vii. On no account should he disclose to the holder of a cheque the

exact balance in a customer‘s account.
Right to claim incidental charges
Another special feature of the relationship that exists between a

banker and a customer is that the banker may claim incidental charges on
unremunerative accounts. This practice is much more in vogue in England.
In India, in order to encourage people to open more accounts, such charges
are not levied. However, of late, banks in India resort to this practice of
claiming incidental charges on an increasing scale. Perhaps, it is due to the
fact that their profitability has been very much affected in recent times.
These incidental charges take the form of ‗service charges‘, ‗process-

ing charges,‘ ledger folio charges,‘ ‗appraisal charges,‘ ‗penal charges,‘
‗handling/collection charges‘ and so on.
The charges which have come into effect from 1 st April, 2002
onwards in public sector banks have been listed below:*
i. Ledger folio charges of Rs. 500/- p.a. in computerised branches

Other branches Rs. 200 p.a.
ii. Collection charges for cheques:
Upto Rs. 1,000 - Rs. 30

Above Rs. 1,001 – 10,000 - Rs. 40
Rs. 10,001 – - Rs. 4 per thousand of
1,00,000 part there of
Above Rs. 10,00,000 - Rs. 3.50 per thousand
subject to a minimum
of Rs.450.
27
Bank and Customer
NOTES iii. Remittance charges for drafts, M.T. and T.T. are as follows:
Upto Rs. 1,000 - Rs. 20

1,001 to 10,000 - Rs. 25
10,001 to 1,00,000 - Rs. 3 per thousand or part there
of
1,00,001 to 10,00,000 - Rs. 2 per 1,000 subject to a
minimum of Rs.300
Issue of duplicate DD - Rs. 30 per instrument
iv. Handling charges for cheques dishonoured of 50% the collection

charges subject to a minimum of Rs. 20/- per cheque for outstation
cheques and Rs. 50/- for each bill.
v. Processing charges for all types of loans above Rs. 2 lakhs at the
rate of Rs. 75 per lakh subject to a maximum of Rs. 7,500/-.
vi. Standing instructions charges of Rs. 20/- per instruction involving

credit to other than customers‘ own accounts within the branch and
if it involves an upcountry centre, Rs. 3 plus postal charges.
vii. A charge of Rs. 2/- per cheque leaf to be levied at the time of issue
of cheque books in the four metropolitan cities where MICR
cheques are processed.
viii. A penal charge of Rs. 50/- if that operation has the effect of
bringing down the balance in the current account below the
minimum balance.
ix. Stop payment instructions charge Rs. 25 per cheque.
However, in practice, the above service charge regulations are not

lliclly followed by all banks. They have a tendency to manipulate the
service charge regulations so as to attract more and more
customers.Customers do not hesitate to shift from one bank to another
depending upon the personalised services available in a particular bank and
also at the cost at which they are available. Thus, there is a shift from
‗relationship banking‘ (opening an account in a bank and patronising it for
ever) to ‗transaction banking.‘ It is not a healthy trend.
28
Right to charge compound interest Bank and Customer
As per general law, levying of compound interest is strictly NOTES
prohibited. But a banker is given a special privilege of charging compound

interest. Usually bankers charge interest on the money lent at the end of
every quarter. The same practice of crediting the customer‘s account with
interest at the end of every half year is followed.
In National Bank of Greece Vs. Pinios Shipping Co., (1990) the house
of Lords has categorically established the banker‘s right to capitalise
interest, if unpaid, by the borrower on yearly or half-yearly basis,
irrespective of the fact, whether it is a secured or unsecured loan. This
judgement is very useful in Indian context where the existence of this right
has been doubted in D.S. Gowda Vv. Corporation Bank. However, in
Syndicate Bank Vs. M/s West Bengal Cement Ltd., (1989), the method of
dealing with loan accounts in bank transactions by adding interest unpaid
when due, to the amount advanced and treating the merged amount as the
principal loan has been recognised. In re: Bank of India case, the Supreme
Court has very recently ruled that banks cannot charge compound, interest
with periodic rests, for agricultural loans. It is so because, agriculturists do
not have any regular sources of income other than the sale of crops, which
narbrnally takes place only once in a year.
Again, in M/s. Kharvela Industries Private Ltd. Vs. Orissa State

financial Corporation & Others, it was held that the payments made by a
debtor is in the first instance to be applied towards interest and thereafter
towards the principal unless there is an agreement to the contrary.
Exemption from the law of limitation act
Another distinguishing feature is that the banker is exempted from the
I ,aw of Limitation Act. As per the provisions of this law, a debt will
become a bad one after the expiry of .3 years from the date of the debt.
But, according to Article 22 of the Law of Limitation Act, 1963, for a
banking debt, the period ol 3 years will be calculated from the date on
which an express demand is made for the repayment of the debt. It follows
that a banker‘s debt i urinot be made time barred. However, in practice, a
reasonable period has been fixed for the banker‘s debt also. Sec. 26 of the
Banking Regulation Act pi escribes a period of 10 years to consider a
banking debt as a bad one. In the case of fixed deposit, this period of 3 Self- Instructional Material
29
Bank and Customer years/10 years will be calculated from the dale on which the F.D.R. is
NOTES surrendered. In the case of a safe custody deposit, this period commences
from the date of demand. In the case of an overdraft, the period of these
years will be counted from the date on which n is ntade use of.
In the actual banking practice no banker would wait for the expiry of
10 years. If there is no operation in an account for one year, it will be
marked as a 'dormanPaccount.‘ After two years of marking, it will be
transferred to an account called ‗Inoperative account‘ and it will be
thereafter transferred to the Central Office after 5 years.
30
RELATIONSHIP IN A NUTSHELL Bank and Customer
NOTES
Chart showing the Relationship Between a Banker and a Customer
General Relationship
a Not a Not Debtor Obilgation Banker‘s Duty to Right to Right to Exemption

ositor Trustee an and to honour lien maintain claim charge from the
Agent Creditor cheque secrecy of incidental compound Law of
his charges interest Limitation
customer‘s Act
account
Special Relationship
Privileged Debtor Privileged Creditor
(1) Express demand by the When the customer acts as a creditor

creditor necessary. he acts as an unsecured creditor.
(2) Demand only at a particular But the banker acts as a secured
branch. creditor.
(3) Only during banking hours.
(4) Get money from customers
without security.
(5) Law of Limitation does not
apply.
(6) Can combine accounts with
the consent of the customer.

31
Bank and Customer How long the relationship would continue?
NOTES As long as there is some sort of an account either a deposit or a loan
account, the relationship would continue. The relationship would be
terminated on the happening of events like death, insolvency or insanity of
a customer or closing of the account either on the initiative of the customer
or the banker. This relationship would not come to an end just because the
banker has demanded the repayment of the loan outstanding as was
decided in the case of National Bank of Greece Vs. Pinios Shipping Co.,
(1990).
Since banking is a service industry, it is all the more essential that
good relationship is not only created but also maintained by means of
offering excellent personalised services.
1.11 TERMINOLOGIES
1) Banker 2) Customer 3) Banking 4) Business 5) Interest 6) Public
1.12 MODEL QUESTIONS

1) Define the terms ‗banker‘ and ‗customer‘ and bring out the
relationship that exists between
them.
2) What is Banker‘s lien? When can he exercise such a lien?

3) Is a banker obliged to maintain the secrecy of his customer‘s
account? Under what
circumstances can he disclose the account and what precautions
should he take in such cases?
4) State and explain the banker‘s obligation to honour cheques. What
risks he has to face in the
case of wrongful dishonour of a cheque?
5) How will you assess damages in the case of a wrongful dishonour
of a cheque?
1.13 REFERENCE BOOKS

1) Gordon E and Natarajan K, (2010). ― Banking Theory, Law and
Practice‖, Himalaya Publishing House, Mumbai.
2) Dr. Sunilkumar (2016), ―Insurance and Risk Management‖,
Galgotia Publishing Company.
3) Dr. P. Periasamy (2011), ―Principles and Practice of Insurance‖,
Himalaya Publishing House, Mumbai.
32
UNIT – II DEPOSITS
Deposits
NOTES
2.1 Introduction
2.2 General Precautions for opening Account
2.3 Current Deposit Account
2.4 Fixed Deposit Account
2.5 Savings Deposit Account
2.6 Recurring Deposit
2.7 Other Deposit
2.8 New Deposit Scheme for NRI‘s (1992)
2.9 Terminologies
2.1 INTRODUCTION
This is an era of keen competition among banks. Most of the commer-
cial banks vie with one another in tapping the savings of the public by
means of different kinds of deposits. It is not an exaggeration to say that
almost every day a new kind of deposit is being introduced. At the same
time, a bunker should be very careful in opening deposit accounts. Some of
the deposit accounts are operated very often. He should safeguard his
position m such a way that he may not be victimised by unscrupulous
persons. When a banker accepts deposits, technically speaking, he is said to
borrow money. As a borrower, he should safeguard his position so as to
avoid untoward happenings. As such, before opening a deposit account, the
banker should iib a ive certain general precautions.
2.2 GENERAL PRECAUTIONS FOR OPENING

ACCOUNT
(1) Application Form
The prospective customer is first of all asked to sign an application
form prescribed for that purpose after furnishing all particulars. Different
bankers have different printed application forms. They also vary with
classes of customers and for kinds of deposits. These application forms
contain the rules and regulations of the bank along with the terms and
conditions of the deposit.
SPECIMEN OF AN APPLICATION FORM FOR OPENING AN

ACCOUNT
…..2002
To
The Manager,
Modern Bank Of India
Madurai
Self-Insrtuctional Material
33
Deposits Dear Sir,
NOTES
Please open Savings Deposit Account in my/our name (s)
____________________________________________________________
____________________________________________________________
____________________________________________________________
(Name and Address in Block Letters)
I/we agree to comply with and to be bound by the bank‘s rules for the
time being for the conduct of such accounts.
The account be operated upon*
**Date of birth 19
Yours faithfully,
___________________
Introduced by
If in joint names, State [1] either or survivor,
[2] both of survivor,
[3] any one of us or any one of the
survivors of us or
the last survivors
In the case of minors.
On the back of the application form itself there is a provision for giving
specimen signatures.
BACK PORTION OF THE APPLICATION FORM
Specimen Signature Card for Savings Account
Name of Date
Account ____________
__________
A/c No.
NAME (IN BLOCK LETTERS) SIGNATURE
1. __________________________
_______________________
2. __________________________
_______________________
3. __________________________
_______________________
4. __________________________
_______________________
5. __________________________
_______________________
Self-Insrtuctional Material VERIFIED BY
34
However, the application form for opening a current account contains Deposits
many conditions which are not normally found in other cases. NOTES
(2) Specimen Signature

Every new customer is expected to give three or more specimen
signatures. Usually they are obtained on cards which are filed alphabeti-
cally for ready reference. Each bank maintains a Signature Book for this
purpose. Now-a-days, banks obtain specimen signatures right on the appli-
cation forms.
(3) Letter of Introduction

It is always advisable on the part of the banker to allow the
prospective customer to open an account only with a proper introduction.
The usual practice for the banker is to demand a letter of introduction from
a responsible person known to both the parties. Failure to get a letter of
introduction may land him in trouble and affect his credit. For instance, as
soon as a new party opens a current account, he should be supplied with a
cheque book which may be misused to his best advantage, if he happens to
be an unscrupulous person. The responsible person who issues the letter
must also be cautious because if he supplies any false information about a
party, he would be held liable to compensate for the loss, if any, suffered
by the banker: (Bloodnok & Sons VS. United Kingdom Bank). If the
introduction turns out to be a forged one, the account is treated as having
not been introduced at all.
A letter of introduction or a letter of reference always protects a

banker in the following ways:
(a) Protection against fraud'. A letter of introduction serves as a

precaution against fraud. It protects a banker against issuing a cheque book
to an undesirable and dishonest person. But for such a letter, he could have
given a cheque book to an undesirable person who might have made use of
i hose cheque leaves to his best advantage even in the absence of sufficient
funds. In such a case, the goodwill of the bank would suffer. If the
customer is a man of good character, he will not do such things. The
banker can find out the character of a new party only through this letter.
Thus, the purpose of introduction is to identify the depositor and to find out
whether he is a genuine party or an impersonator or a fraudulent person as
35
Deposits was decided in the case of Union of India Vs. National Overseas &
NOTES Grindlays Bank Ltd. (1978).
(b) Protection against inadvertant overdraft'. It may so happen that a

bank clerk may misread the balance of a customer and pay a cheque. The
result will be the emergence of an overdraft. The banker can recover the
money only if the customer is a man of good character.
(c) Protection against an undischarged bankrupt: If a new party
happens to be an undischarged bankrupt, the fact of which is not known to
the banker and if the properties deposited by him are not acquired by him,
the banker is answerable to the Official Assignee for the transactions. A
letter of introduction prevents the occurence of such events. Moreover, it is
the duty of a banker to inform the existence of an account in the name of an
undischarged bankrupt and get his consent for the operation of such an
account.
(d) Protection against negligence under Sec. 131 of the Negotiable

Instrument Act: If a banker fails to obtain a letter of introduction at the
time of opening a new account, it constitutes a negligence on the part of the
collecting banker under Sec. 131 of the Negotiable Instruments Act and so
he will lose the statutory protection (Ladbroke Vs. Todd, Commissioner of
Taxation Vs. English Scottish and Australian Bank).
(e) Protection against giving incorrect information to fellow bankers.

It is a courtesy among bankers to give reference about the financial
position of their customers to fellow bankers. In the absence of a reference
letter, a bankers may not be able to supply correct informations
(4) Interview
At the time of opening of new accounts, it is always advisable to
have an interview invariably with the prospective cu stomer so as to
abviate the chances of perpetration of any fraud at a later stage.
(5) Account in cash
It is a common practive among bankers to allow a new party to
open an account only in cash. In the absence of an express notice, a banker
need to worry about neither the source of money, nor the customer‘s title
over the money. On the other hand, if the account is opened by depositing a
cheque, the risks are greater, For instance, if the customer‘s title to the
36
cheque is defective, the banker is answerale for it (Ladbroke Vs.Todd) Deposits
NOTES
(6) Mandate in Writing
If a new party wants its account to be operated by somebody else,
the banker should demand a mandate from his coustomer in writing, The
mandate contains the agreement between the two regarding the operation
of the account, the specimen signatures of the authorized person and the
powers delegated to the authorized person.
(7) Verification of Documents

If the new party happens to be a corporate body, it is essential that
the banker should versify some of the important documents like
Memorandum of Association, Articles of Associations, Bye-law copy etc.
In other cases, the verification of certain other documents like Trust Deed,
Probate, Letter of Administration etc., may be necessary.
InLumsden & Co., London Trusty Saving Bank, one of the grounds
for banker‘s negligence was the failure to verify the passport of the
customer who had recently arrived from Australia.
(8) Conversant with the Provisions of Special Acts

Since a banker has to deal with different classes of customers, he
has to be thoroughly conversant with certain laws like Indian Companies
Act, Indian Partnership Act, Insolvency Act, the various Trust Acts, the
Co-operative Societies Act etc.
(9) Pay - in – Slip Book, Cheque Book and Pass Book

Then, the Customer is supplied with a pay-in-slip book. The pay-in-
slip is a document which is used for depositing cash or cheque or bill into
the account. It has a counterfoil which is returned to the customer for
making necessary entries in his books.
SPECIMEN COPY OF A PAY-IN-SLIP

C.O.S. 14 X
CASH
Modern Bank of India
Current Account Pay-in-Slip
For Notes and Coins Only
Ledger Folio.....
......2002
Particulars
37
Deposits Paid into the Credit
NOTES Notes ... Rs. P. of
.......................
Rupees ...
...........................
Smaller Coin ...
Copper ...
Rupees..............
Total ...
............................
Teller......................
Head Cashier ............. by
..............
Scroll Cash No........Entd. by
................
The customer is also supplied with a cheque book which normally

contains 10 to 20 blank forms. A cheque leaf is used for the purpose of
withdrawing money. If the customer does not like to have a cheque book,
he can make use of the withdrawal form for withdrawing money. The first
cheque book is usually branded with the rubber stamp ‗N‘
SPECIMEN COPY OF A WITHDRAWAL ORDER FORM
Care : This Savings Bank Withdrawal Order is NOT a cheque.

The pass Book must accompany this Order Form
Otherwise Paymentwill be refused.
To,
Modern Bank of India
Savings Bank
Madurai
Ledgerfolio.. Initials
.......................................................
Pay Self or bearer

Rupees .......................
Rs...........
...................................
and debit the amount to my/our
Savings Bank Account No. ........................
.........................
Depositor
(s)
38
Deposits
NOTES
A withdrawal form should be accompanied by the pass book. Every cheque

book contains a ‗Requisition slip‘ attached to it at the end. When the
cheque book is nearing completion. he can fill up the Requisition Slip and
obtain a fresh cheque book.
In addition to the above, a customer is also given a pass book which
reflects the customer‘s account in the banker‘s ledger. It usually contains
the rules and regulations of the bank and the terms and conditions of the
deposit. Every customer is supposed to have read and understood the
conditions. He Should comply with them under all Circumstances.
10. Passport Size Photograph
Now-a-days banks insist upon the prospective customers to affix
their passport size photographs on the application forms at the time of
opening accounts. This is to prevent impersonation and for easy
identification.
Other Important Points
(1) Every deposit becomes the property of the bank
(2) Generally the bank is responsible for the safety of the deposit.
(3) If the deposit of a customer is the property of another, say a
trust, then that deposit does not
become the property of the bank
(4) A banker may use his discretion in allowing or not allowing a
person to deposit money and
it cannot be questioned,.(Faselli Vs. Liggs National Bank)
(5) If money or cheque is entrusted to an employee of the bank for
being credited to the customer‘s account and if that money/cheque is
misappropriated and false entries are made in the pass book, the bank is
not liable to make good the loss caused to the customer unless the fraud
was committed by the employee in the course of his employment as was
decided in the case of State Bank of India Vs. Shyama Devi (1978)
2.3 CURRENT DEPOSIT ACCOUNT ( CURRENT OR

RUNNING ACCOUNT )
A current account is an account which is generally opened by
business people for their convenience. Money can be deposited and
39
Deposits withdrawn at any time. Money can be withdrawn only by means of
NOTES cheques. Usually, a banker does not allow any interest on this account.
Even then, people come forward to deposit money on current account,
namely
(1) Overdraft facility, and
(2) Other facilities like collection of cheques, transfer of money and
rendering agency and general
utility services.
That is why current accountholders do not mind a banker charging
some commission for services rendered and incidental charges for
maintaining the account – whether it is in debit or in credit.Even though a
banker does not allow any internet, he charges interest on overdraft on a
day-to-day basis. In Bank of Maharashtra Vs. United Construction Co. &
Others, it was held that when a customer overdraws the account with or
without express consent, it amounts to a loan and the customer is around to
make good the payment with a reasonable interest. Current accountholders
should keep a minimum balance Rs. 500/- to keep the account running. In a
mechanised branch, a minimum balance of Rs 5,000 has to be maintained.
If this minimum is not kept, a minimum charge of Rs.1/-per operation will
be debited to the account. The bank sends a ‗Statement of Account‘ to the
customers every month. As these deposits are repayable on demand, the
banker should keep a large cash reserve. This may be one of the reasons
why a banker does not pay any interest on current deposit. In addition to
the above, a banker should observe all the general precautions in opening
the account as listed earlier in this chapter,
2.4 FIXED DEPOSIT ACCOUNT

A fixed deposit is one which is repayable after the expiry of a
predetermined period fixed by the customer himself. The period varies
from 15 days to 3 years. A deposit account can be opened for a period of
more than 3 years and in that case the rate of interest remains the same
level. In England, these deposits are not repayable on demand but they are
withdrawable subject to a period of notice. Hence, it is popularly known as
‗Time Deposit‘ or ‗Time Liabilities‘ In India also, the banks have begun to
call it ‗Term Deposit‘ Normally the money on a fixed deposit is not
Self-Insrtuctional Material repayable before the expiry of a fixed period.
40
Opening the Account Deposits
As usual, the prospective fixed depositholder is expected to fill up NOTES
an application form prescribed for the purpose, stating the amount and the
period of deposit. The application itself contains the rules and regulations
of the deposit in addition to the space for specimen signature. Unlike as in
opening a current account, a banker does not insist upon a letter of
introduction or reference for opening a fixed deposit account because of
the absence of frequent transactions of this account. After all, this account
will never show any debit balance and put the banker in trouble.
Interest
The interest rate offered on the fixed deposit is so attractive that it
has resulted in a change in the composition of bank deposits. Till recently,
most of the deposit of commercial banks had been demand-deposits and
now fixed deposit occupies more that 70% of the bank deposits. The rate of
Interest varies according to the period of deposit. In Indian banking history,
the first ever highest interest rate of 15% was offered on term deposits
from 1.2.97 on wards.
However, in recent times, the R.B.I has deregulated the interest
rates on fixed deposit. The banks are given the freedom to fix their own
rates for different periods.
Consequent upon the reduction of bank rate to the lowest level in
the history of Indian Banking, most of the banks have reduced the interest
rates on fixed deposit considerably. However, special rates have been
fixed for deposits of senior citizens of 60 years of age or above giving them
some incentives.
The present rates applicable to fixed deposits in most of the
nationalized banks with effect from 05.05.2003 are as follows
Serial Term of the Deposit Interest
No. Per Annum
1. 7 days to 14 days 4.00
2. 15days and upto 45days 4.25
3. 46 days and upto 179 days 5.00
4. 180days to less than 1 year 5.25
5. 1 year to less than 2 years 5.50
41
Deposits 6. 2 years to less than 3 years 5.75
NOTES 7. 3 years and above 6.00
For deposits of senior Citizens

Serial Term of the Deposit Interest
No. Per Annum
3. 3 year and above 6.50
Tax Deduction Scheme (T.D.S) Extended to fixed Deposit

Though the interest rates on fixed deposit are attractive, the system
of tax deduction at source was extended in 1991-92 to cover interest
payment made by banks on fixed deposits, where the interest payment
exceeds Rs. 2,000/- per financial year. Since it acted as a deterrent factor in
the welfare and development of a sound and healthy banking system, it was
completely withdrawn by the Governor subsequently. However, it has been
re-introduced from the financial year 1995-96. This T.D.S is applicable to
interest payments exceeding Rs. 10,000 per financial year.
Period of the deposit
The minimum period has been fixed as low as 7 days. As per the
guidelines of the Indian Banks Association, banks should not accept
deposits for a period Longer than 10 years. If the maturity date of a fixed
deposit falls on a holiday, it hould be paid only on the succeeding working
day, since, a fixed deposit cannot be claimed before the maturity date as
per the terms of the original contract.
Fixed Deposit Receipt

At the time of opening the deposit account, the banker issues a
receipt acknowledging the receipt of money on deposit account. It is
popularly known as F.D.R (Fixed Deposit Receipt). It contains the amount
of deposit, the name of the holder of the deposit, the rate of interest, due
date etc., Onthe reverse side of the F.D.R separate columns are provided
for making entries regarding interest.
42
PARTICULARS OF A F.D.R. Deposits
NOTES
1. No 2. Name of the bank and place
3. Due Date
4.Date
5.Name of the Depositor
6.Amount
7.Period
8.Interest Rate
9.Signature of the Manager
FIXED DEPOSIT RECEIPT
(FACE VIEW)
Royal Bank Ltd
No : 145678 Due
on
Nazareth Branch
Date .......2002
Received
from.....................................................................................
Rupees ........................... as a fixed deposit repayable
In.......... months after date with interest at at the rate
% Perannum.
Rs.
Accountant
Manager
BACK VIEW OF F.D.R
MEMORANDUM PAYMENT OF
INTEREST
1. This F.D.R duly discharged Da Half year A Signature

te ended m of
should be surrendered at the o authorised
time of payment or renewal of u person

nt
deposit. To prevent loss of
interest. the receipt intended for
renewal should be sent on due
43
Deposits date.
NOTES
2. The F.D.R is not transferable by
endorsement In the absence of
special instruction, the amount
of F.D.R. can be paid only to the
depositor in person.
3. Rate of interest overleaf is

subject to Reserve Bank‘s
directive issued from time-to-
time. Received payment/Please
renew…. month/years
SIGNATURE OF THE
DEPOSITOR
Debtor and Creditor Relationship

The Legal position of a banker in respect of a fixed deposit is that
of debtor who is bound to repay the money only afer the expiry of a fixed
period. The banker continues to be a debtor even after the period is over,
though he does not pay any interest after the date of maturity. In the case
Hindustan Commercial Bank Ltd., Vs. Jagtar singh, it was held that the
fixed deposit, after the expiry of the said period, becomes a ― demand
deposit‖ payable without interest and it does not become a loan and a such
Article 60 of the Limitation Act relating to deposit is applicable.
Cheques not permitted
The customer has no right to draw cheques on this deposit account,
Hence, the amount can not be withdrawn by means of cheques after the
period is over. Alternatively, the customer can request the banker to
transfer the amount with interest either to a current or savings account and
there after he can withdraw the amount by means of a cheque.
Surrender of F.D.R
Every bank makes it obligatory on the part of the depositor to
surrender of F.D.R. before claiming the money on maturity. Therefore, it is
essential to get the receipt duly discharged at the time of maturity. When
such a receipt is so surrendered by the owner, the banker can not put forth
any excuse and refuse to repay the amount.(United Commercial Bank Ltd.
44
Vs.Okara Grain Buyers syndicate Ltd.) Deposits
NOTES
Loss of F.D.R
Where a deposit receipt is lost, generally a banker demands the
coustomer to sign an indemnity bond with a guarantee. It will protect the
banker against losses in future. In extraordinary cases, the customer may be
asked to go to the court and seek its authorization. Hence, to avoid troubles
the customer is well advised to preserve the receipt very carefully till be
gets the payment.
Exemption from stamp Duty
A fixed deposit receipt, though an important document, is exempted
from stamp duty under the Indian Stamp Act. This is just to popularize the
deposit account, Otherwise and receipt exceeding Rs.20/- requires to be
stamped.
F.D.R--- Not a Negotiable Instrument
A deposit receipt is not a Negotiable Instument. The transferee,
therefore, can not get better title than of the transferor himself. That is why
the receipt has been specifically marked ‗Not transferable‘. How ever,
money in deposit account becomes a debt from the bank and like any other
debit this can be assigned, To be effective, prior notice of assisgnment
should have been served on the banker. The assignee should also give a
notice to the banker informing him of his right to the deposit.
In Abdul Rehiman Vs. Central Bank of India. it was held that the
F.D.R was not a negotiable instucment and therefore it could not be
transferred by a were endorsement in blank. Hence to be on the safer side,
the banker should pay it only to the original depositor.
Fixed deposit – subject to Garnishee Order
A Garnishee Order is one of a court order attaching a customer‘s
account in the hands of the banker.This order can attach only a present debt
and not a future debt. Since the fixed deposit is a present debt payable. as a
future debt, it can very well attach this account. A Garnishee Order issued
in joint names cannot attach an individual account.
Fixed Deposit – Subject to Income Tax Act
The Officers of the Income Tax have been vested with wide powers
to attach the account ( Current or Savings or Fixed) of a customer in the
hands of a banker for non-payment of income tax under Sec. 226 of the
45
Deposits Income Tax Act 1961. In recent times the income tax officers have been
NOTES increasingly using this right to collect income tax arrears from the assesses.
In such cases a banker is bound to comply with their orders. Again the.
I.T.O may call for information regarding fixed deposits of Rs. 50,000/- or
above.
F.D.R. —Subject to Donatio Mortis Causa
A fixed deposit receipt may contain a clause namely Donatio Mortis
Causa Clause. It means a gift made in contemplation of death. Hence, a
holder of a Fixed Deposit Receipt can give it as a gift to any person in
anticipation of his death. This gift will be valid and the donee will get a
good litle only when the donor dies. The donee‘s title is subject to the title
of the donor.
F.D.R. —Subject to Conversion

Conversion means dealing with the goods of another inconsistent with
his right. For instance, if a banker collects an uncrossed cheque for a
person who is not a real owner of the cheque, then the banker will be held
liable for conversion. So also, the collection of a Fixed Deposit Receipt
amounts to conversion because it acknowledges only the receipt of money
and it is not an order to pay money to somebody. In Pearce Vs. Creswick,
the banker was held liable for having paid the money to another banker as
usual against Fixed Deposit Receipt.
Fixed Deposit Claimed before Maturity

Normally a customer is not allowed to withdraw money before the
expiry of the fixed period. But banks in England allow their customers to
withdraw the fixed deposit amount at any time after giving a short notice.
This is not considered to be a good practice because the very purpose of
this deposit will be defeated. Moreover, bankers will find themselves in a
tight corner during depression when the money market will be tight.
In India, many banks allow their customers to borrow money by

offering F.D.R. as security. The F.D.R. should be returned after having it
duly discharged. Generally a banker allows upto 90% of the deposit as
loan. The interest charged on this loan is 2% higher than the interest
allowed on the deposit. Besides, it is subject to a tax on interest which
Self-Insrtuctional Material works out to approximately ½ % (i.e., Interest allowed + 2% x 0.3% tax).
46
In recent times, a provision has been made for a pre-mature withdrawal Deposits
of fixed deposit. If a customer wants to withdraw a fixed deposit before NOTES

maturity, he should forego 1% less than the rale applicable to the period for
which the deposit has remained in the bank. Example: A person opens a
fixed deposit for 3 years. The rate of interest allowable is 6%. But at the
end of the first year he wants to withdraw money. The rate applicable for
one year is 5.5%. Now the banker will allow 4.5% interest (5.5% - 1 %)
and not (6% -1 %) on the deposit and allow the customer to withdraw
money.
Simultaneous O.D. Facility to Fixed Depositholders
A new scheme has been introduced by the State Bank of India called
CASHKEY' scheme. As per this scheme, simultaneous O.D. facility in a
current account equal to 75% of the amount of deposit made under the
'CASHKEY' scheme are automatically available to term depositholders
who have a minimum initial deposit of Rs. 5000/-. This scheme is available
at all branches of the State Bank of India.
Lien on Fixed Deposit Receipt
As stated earlier, no lien is available on the fixed deposit account. The
banker has only a right of set-off. However, a banker can exercise his lien
on the fixed deposit receipt which can be offered as security provided it is
duly stamped and signed by the customer. In Union Bank of India Vs.
Venugopalan (1990) it was clearly established that the banker could
exercise lien on the F.D.R. only when it is duly discharged and given tot he
banker as a collateral security.
Payment of Interest
Interest on fixed deposit is payable only for the fixed period of
deposit. Interest will be payable by the bankers on the deposit for the
overdue period only when the deposit is renewed. Interest is paid for each
calander half year. Of late, some banks have begun to make even monthly
payment of interest on the standing instruction of their customers. But it
has been banned. However, quarterly payment of interest on fixed deposit
is permitted.
Nomination Facility
The nomination facility has been extended to deposits of all kinds and
safety lockers with effect from 29.03.1985 on the recommendations of the
Talwar Committee. The said nomination can be made in favour of only one
individual. Where the nominee happens to be a minor, another individual
can be appointed to receive the amount on behalf of the minor. This
nomination can be cancelled or varied at any time during which the deposil
is held by the bank in the name of the depositor. Separate nomination
forms are available for nomination, cancellation and variation of
nomination
47
Deposits Fixed Deposit in Joint Names
NOTES A fixed account may be opened in the names of two or more
individuals. While opening such a joint account, a banker should get clear
instruction as to whom the amount should be paid on the due date. In the
absence of such clear instruction, a banker should pay only when the Fixed
Deposit Receipt is duly discharged by all of them. Difficulties may arise in
the event of the death of one of the parties. There was a time when a banker
was justified in paying the amount to any one of joint depositholders as
was decided in the case of Wallace Vs. Kelsall. It does not hold good any
more. A banker cannot presume that the survivor is entitled to claim the
amount especially when there is a dispute between the survivor and the
legal representative of the deceased depositor. In McEvoy Vs. Belfast
Banking Company, it wa held that the rule of survivorship was not
applicable in the .licence of clear instructions. To avoid difficulties, it is
advisable that the joint accountholders, at the time of opening the account,
declare in writing that it is “with benefit to the survivor.” The usual clause
in such cases is "Either or Survivor," "Former or Survivor" which
invariably finds its place in the Account Opening Form itself.
Fixed Deposit and the Law of Limitation Act
The Law of Limitation does not cover a fixed deposit. The F.D.R.
invariably contains a condition for its return to claim the fixed deposit
amount Hence, the period of three years will be calculated from the date on
which the F.D.R. is surrendered. Otherwise the period of three years will
have to be calculated from the date of expiry of the fixed deposit account.
2.5 SAVINGS DEPOSIT ACCOUNT

This deposit is intended primarily for small-scale savers. The
main object of this account is promotion of thrift. Hence, there is restriction
on withdrawals in a month. Heavy withdrawals are permitted only against
prior notice. Generally, the number of withdrawals permitted is 50 per half
year.
This account can be opened with a minimum amount which differs
from bank to bank. The smallest amount that can be deposited or
withdrawn is Rs. 1/-. A minimum balance of should be maintained and if
cheque book facility is allowed, the minimum balance should be Rs. 250/-.
In the case of a mechanized branch, this minimum balance has been fixed
at Rs. 1,000/-. If the minimum balance is not maintained, incidental
charges is levied by the bank.
In carries an interest rate of 4% from April 2000 per annum.
Interest is allowed on minimum monthly balances in steps of Rs. 10/- and
multiples there of between the 10th and the last day of each calendar
month.
Generally, overdraft facility is not available in the Savings Bank
Account. However, instant credit facility upto Rs. 2,500/ only is available
48
to Savings Bank customers for their outslalion cheques provided such Deposits
cheques do not arise out of trade transactions. It is indeed a privilege given NOTES
to savings bank accountholders who are non-traders. Again, occasional
overdrawings upto Rs. 2,500/- are permitted only to those who have
satisfactory dealings.
The depositor is supplied with a pass book. Generally, no wilhdrawals
are allowed without the presentation of the pass book along with the
withdrawal slip. Now-a-days savings accountholders are given cheque
facilities and money can be withdrawn by means of cheques also. Cheques
are also collected on this account. The nomination facility is also available
in Savings Bank Accounts.
Now, bankers demand a letter of introduction for opening a savings
deposit account also because cheque book facility has been extended to this
account. In India, Post Offices also offer savings bank facility. Since they
combine two conveniences namely postal and savings bank, they have reg-
istered a phenomenal growth.
A savings bank account can be closed after one year. If closed earlier,
a nominal service charge of Rs. 10/- would be levied.
Insurance-Linked Savings Bank Deposit
In recent times, some of the banks have been offering the additional
benefit of life insurance protection along with the usual benefits of a
savings deposit account. This insurance benefit is a free service and entails
no formalities like medical examination. The depositor has to maintain a
balance of Rs. 500/- if the branch is in a rural area or Rs 1,000/- if it is
situated in other centres. In case the depositholder dies, he is entitled to get
an insurance benefit of double the average balance in the account if he is
between 18 and 40 years. It is subject to a maximum of Rs. 10,000/-. If he
is between 41 and 49 years, the amount of insurance benefit is the same as
the average balance subject to a maximum of Rs. 5,000/-. Therefore the
insurance benefit ceases. This type of deposit is a real boon to a person
who dies prematurely.
2.6 RECURRING DEPOSIT
It is one form of savings deposits. Depositors save and deposit
regularly every month a fixed instalment so that they are assured of the
sizeable amount at a later period. This will enable the depositors to meet
contingent expenses. Banks have found these deposits popular. Many
people would not have saved if these deposits had not been introduced.
This deposit works on the maxim ‗little drops of water make a big ocean.‘
Any person can open this deposit account. He can even have more then one
account at a time. This account can be opened in joint names also.
It may be opened for monthly instalments in sums of Rs. 5/- or in
multiples of Rs. 5/- with a maximum of Rs. 1,000/-. The number of
monthly instalments may vary from 12 months to 72. The total amount is
repayable 30 days after the last instalment has been paid.
For deposits of higher instalments, the maturity amounts can be
calculated as multiples of the maturity amount for an instalment of Rs. 5.
Every depositor should pay the monthly instalment within 30 days Self-Insrtuctional Material
49
Deposits from the due date. If he fails to do so, interest will be charged on the
NOTES
instalments in arrears at the rate of 4 paise for every Rs. 5/- per month.
A recurring deposit holder can get a loan on the security of a recurring
deposit. The banker may giant 75% of the total amount paid as loan and the
interest of 2% over the recurring deposit rate is charged. These accounts
are transferable from one branch to another. A recurring deposit holder is
given die recurring deposit pass book for his verification. The rate of
interest is similar to the rate offered on fixed deposit but it is compounded.
2.7 OTHER DEPOSITS
In addition to the above, a mushroom growth of deposits has come into
practice. In fact, for most of the above deposits, Recurring Deposit Scheme
forms the basis. By identifying a package of scheme suitable to different
target group of customers, the banks have come forward to really cater to
the requirements of different customers. To be successful in the ever
increasing competitive market, all efforts should be taken to increase the
number of ‗satisfied‘ customers by offering them attractive and innovative
deposit schemes so as to meet their requirements.
2.8 NEW DEPOSIT SCHEME FOR NRI’S (1992)
With a view to mobilise substantial deposits and attract foreign
exchange on a non-repatriable basis, a new Non-Resident (Ordinary Non-
Repatriable) Rupee Deposit Scheme has been recently introduced by the
Government of India. The transfer of foreign exchange, from non-residents
and overseas corporate bodies, to this account would be converted into
rupees at the prevailing exchange rate. Deposits with a maturity of 6
months to 3 years can be accepted and they are free from any reserve
requirements and net bank credit regulations. Above all, the banks are free
to determine the deposit and lending rates under this scheme.
2.9 TERMINOLOGIES
1) Current account
2) Savings account
3) Fixed deposit account
4) Recurring deposit
5) Joint deposit
1) Explain the legal position of abankcr with regard to a fixed
deposit.
2) Draw a fixed deposit and discuss its main features.
3)Distinguish between a Current Account and Savings Bank
Account
4))Discuss the formalities which a banker has to observe before
opening a new account.
5)What is a letter of introduction? Why is it required at the time of
opening a new account?
Self-Insrtuctional Material 2.11 REFERENCE BOOKS
50
Practice‖, Himalaya Publishing House, Mumbai. Deposits
2) Dr. Sunilkumar (2016), ―Insurance and Risk Management‖, NOTES

51
PassBook
UNIT – III PASS BOOK
NOTES 3.1 Introduction
3.2 Maintanace of a Pass Book
3.3 Is PassBook an authentic Record
3.4 Situation in America
3.5 Position in India
3.6 Correct Entry
3.7 Entries Favourable to the Customer
3.8 Wrong entry Favourable to a Coustomer Constitutes a Settlement of
account only when.
3.9 Entries Favourable to the Banker
3.10 Terminologies
3.1 INTRODUCTION
All kinds of deposit accounts are in the nature of running accounts.
So it becomes imperative for a banker to inform his customers of the real
position of their accounts from time to time. For this purpose, a banker
makes use of a small booklet called pass book. A pass book is a booklet.
where in a banker records his customer‘s account as it appears in his
ledger. It is called a pass book because it passes between the hands of a
banker and his customer very often. It reflects the customer‘s account in
the banker‘s ledger. All the amounts deposited by a customer are credited
and the cheques paid by banks against his account are debited. The balance
is shown from time to time. In the place of a passbook, statements of
account may also be sent to coustomers.
3.2 MAINTENACE OF A PASS BOOK

A pass book may be maintained in the from of a ledger account
with debit entries on the left hand side and credit entires on the right hand
side. This method is not popular amongst bankers. Most of the banks
follow a tabular from for maintaining the pass book. There is economy of
stationary in this method. The specimen given is the next page illustrates it
well.
A pass book may also be maintained in the from of a ‗ loose-leaf
ledger card system.‘ In such a case, entries would have to be made by
means of book keeping machines. It can be adopted only by big banks.
When such a system is followed, it becomes necessary for the banker to
Self-Insrtuctional Material send periodical statements regarding the accuracy of the entries made there
52
in to the customers for their approval and return. These statements serve PassBook
the purpose of a pass book NOTES
Some Western banks, having a large number of customers of their

rolls and a large number of transactions, take Photostat copies of their
customer‘s accout and forward them for their approval. It saves the labour
of writing cut statements.
Specimen of a pass Book with Specimen Entries
Savings Bank Pass Book
A/c No.5
The Modern Bank Ltd.,
Ledger No. 11
Savings Bank
Ledger Folio:17
in account with
Depositor‘s Name : Kumar

Occupation : Supervisor
Address : ‗Sure Transport Company Ltd.‘
Dr. Cr. Balance
Date Particulars Rs. Rs. P. Rs.P. Initials
P.
2002
June By Cash 50 450
5 By Cheque 760.50 1,210.50
June 9 To Cheque 160.50 1,050
June 04468
15 To Self 04469 100 950
June By Cash 50 1,000
17 To Self 04470 200 800
June By Interest 20 820
23
June
27
June
30
3.3 IS PASS BOOK AN AUTHENTIC RECORD?

A pass book is nothing but a statement of account rendered by a banker
to his customer. Does it bind both the parties? What is its proper function?
The answer to these questions are very difficult because law is not yet
definite on these points. In the absence of sufficient provisions in Law, the
bankers have to fall back upon custom and past experience.
According to Sir John Paget ― the proper function of a pass book is
53
PassBook to constitute a conclusive and unquestionable record of transactions
NOTES between the banker and customer and it should be recognized as such.‖
Thus, the entires in the pass book ar prima facie evidence against the
banker and the customer is bound by it. To support Sir John Paget‘s View,
in Devaynes Vs. Noble it was pointed out in judgement that on delivery of
the pass book to the customer ―….. he examines it and if there arises an
error of omission, he brings it or sends it back to be rectified and if not, his
silence is regarded as an admission that the entries are correct.‖ A pass
book has been accorded so much significance. As against this, there are
some opposite views which deny any authoritative position given to a pass
book. In Keptigalla Rubber Estate Company Ltd. Vs. National Bank of
India Ltd, Justice Bray said ―he knew of no authority in England for the
proposition, when a pass book is taken out of the bank by a customer or by
some clerk of his, and is returned without objection, there is a settled
account between the banker and customer by which both are bound. It
would be absurd to hold that the taking of a pass book and its return
constitules a settled account.‖ In Canara Bank Vs. Canara Sales
Corporation and others, it was held ―an implied contract as to the
settlement of accounts, does not arise between an customer and his banker
merely by reason of the banker sending a pass book to a customer and the
customer failing to point out any irregularities therein.‖ One is really
confused in one‘s attempt to find out an answer to the question ―What them
is the proper function of a pass book?‖
3.4 SITUATION IN AMERICA

The significance of an entry in a pass book is not well defined in India.
So, we have to find out the position as obtaining in other countries. In
America, the situation is favourable to a banker. There, a pass book is
recognised as an authentic record. It is because there is a duty on the part of
a customer to examine his pass book. Therefore, whenever, the pass book s
sent to him, it is his duty to examine it very carefully. If he keeps silent,
means he has admitted the entries as correct and the pass book in such a
case constitutes a settled account. Thus, in Morgan Vs. United States
Mortgage and Trust Company, it was laid down that ―a depositor who
sends his pass book to be written-up and receives it back with his paid
Self-Insrtuctional Material cheques as vouchers, is bound to examine the pass book and vouchers and
54
to report to the bank without unreasonable delay, any error which may be PassBook
discovered.‖ NOTES
3.5 POSITION IN INDIA

The position in India is not well defined. This difficulty arises because
a customer is not bound to examine his pass book. So, if a customer does
not examine the pass book, we cannot claim that he has accepted it as a
settlement of account. To find an answer to what the real effects of entries
m a pass book are, we have to carefully analyse the type of entries. The
entries in a pass book may be of two kinds viz., (i) a correct entry, and ii) a
wrong entry.
3.6 CORRECT ENTRY

A dispute does not arise in respect of a correct entry and therefore we
can boldly say that a correct entry constitutes a settlement of account as
between a banker and a customer.
Wrong Entry
To err is human and therefore a banker may commit an error in a pass
book. What is the result of this wrong entry? To find out an answer to this
question, we have to decide the nature of the wrong entry. The wrong entry
may again be either (i) favourable to a customer, or (ii) favourable to a
banker.
3.7 ENTRIES FAVOURABLE TO THE CUSTOMER

Can a customer rely upon a wrong entry favouable to him? The
answer is ―yes‖ It is so because all the entries in a pass book are made by
the banker or his agent. Therefore a pass book record can be used as an
evidence against a banker. If the customer acts upon them as bonafide so as
to alter his legal position, the banker is stopped from rectifying the same
Thus, in Pakley Bowden and Co.Vs. The Indian Bank Ltd, it was observed
that ― if a bank makes a wrong entry of credits without knowing the fact,at
the time the entries were made and intimated to its customer the credit
entries and the customer acting upon he intimation of credit entries alters
his positions to his prejudice, the banker, there after, will be stopped from
contending the credit entries were wrongly made….. ―This in skyring Vs.
Greenwood an army officer was paid a particular sum by mistake and he
spent away the amount thinking that it was his own. It was held that the
55
PassBook officer had altered his position and the money could not be recovered.
NOTES However if the customer has not altered his position by relying
upon a wrong entry. then the banker will not be held liable. In United
Overseas Bank Vs. Jiwani (1977) the banker had credited Mr.Jiwani‘s A/c
twice by mistake with a sum of $11,000 which facilitated him to buy a
hotel without the necessity to borrow any money from elsewere. It was
held that, though the banker had supplied him an inaccurate information,
Mr. Jiwani had not acted differently. In other words, he would still have
purchased the hotel by borrowing extra money even if the mistaken credit
had not been available to him. So the banker was not held liable.
In Canara Bank Vs. Canara Sales Corporation and Others. the
Chief Account Officer of the Corporation forged the signature of the
Managing Director of 42 Cheques between 1957 and 1961, for a total
amount of Rs.3,26,047/42. This was discovered by the corporation only
during March.‘61, and the banker was sued for having paid cheques with
forgen. signatures. But the bank pleaded that the corporation was negligent,
for it did not raise any abjection at the appropriate time eventhough it was
supplied with the monthly statements of accounts and half yearly accounts.
It was held that the bank was liable because there was no binding on the
part of the customer to examine his pass book and to report the
discrepancies to the bank.
Thus, if a customer draws a cheque relying upon the larger credit
balance, his banker will have no right to dishonor it. If the banker
dishonours the cheque, he will be held liable to pay damages for wrongful
dishonor of cheque, as was decided in the case of Holland Vs. Manchester
Liver Pool District Banking company. In the above case, the pass book was
showing a credit balance of £ 70 intead of £ 60. The banker later found out
the mistake and dischonoured the customer‘s cheque for £ 65 which was
drawn in complete reliance on the larger credit balance. It was held that the
banker was liable to pay damages. Thus,
3.8 WRONG ENTRY FAVOURABLE TO A

COUSTOMER CONSTITUTES A SETTLEMENT OF
ACCOUNT ONLY WHEN.
(i) the customer believes that it is true.
(ii) the customer draws a cheque in good faith and in complete
reliance on the larger
56
credit balance, PassBook
(iii) the wrong entry is communicated to the customer (Smith Vs. NOTES
Cox and Co).

(iv) in any case a customer can not rely upon any fictitious entry
made in the pass book by a
bank employee. (British and North European Bank Vs.
Zalzstien).
A banker can have this mistake rectified, Provided (i) the customer
has not been adversely affected. and (ii) the sum has not been withdrawn.
Hence. if a banker wants to rectify the mistake. he must immediately
inform the customer. Until the matter is settled, the banker should go on
honouring the cheques drawn in reliance on the larger credit balance. The
priniciple is longer the duration, lesser the chances of a banker to rectify
the mistake. To conclude, we can say that a pass book belongs to a
customer and the entries made in it are statements on which the customer is
entitled to depend and act.
3.9 ENTRIES FAVOURABLE TO THE BANKER

The wrong entry in a pass book may sometimes be favourable to a
banker. Does it constitute a settlement of account? The answer is ‗no‘ It is
so because, the mistake is committed by the banker and the customer is not
bound by the mistake, However, there is one exception to the above rule.
That is, where a customer has so acted as to render the entries as correct by
his conduct, then those entries would constitute a settled account. In other
words, if the customer, by his conduct, accepts the entries as correct, later
on he can not question the accuracy of those entries. Whether the customer
has rendered the entries as settled one or not depends only upon the
circumstances. For instance in Chatterton Vs London and Country Bank
the customer returned the pass book to the banker after ticking all the items
as correct ones. Even then it was held that there was no admission of the
correctness of entries.
There have also been certain judgements favourable to bankers. In
Vagliano Brothers Vs. Bank of England, the plaintiff received his pass
book from time to time and used to check each item with the paid bills as
vouchers. Only then the pass book was returned. It was held that the
Vagliano brothers had rendered the account as a settled one by their
57
PassBook conduct and so they had been guilty of negligence with respect to the
NOTES examination of the false vouchers. So the banker was not held responsible
for the mistake. In Balakrishna Pramanink Vs. Bhowanipore Banking
Corporation Ltd., the customer used to scrutinize entries in the pass book
and call for explanations when needed. It was held that the customer, by
his conduct. had rendered the entries as settled ones and so later on the
could not complain about the compound interest being debited to this
account.
From the above cases it is quite evident that where a customer has
voluntarily taken up the duty of examining his pass book and if he is
negligent of verifying those entries, then, the liability falls only on the
customer. Those entries constitute a settled account.
A customer‘s duty to examine his pass book can arise, from an
express agreement. In special circumstances, if the attention of the
customer is drawn to the accounts, he is under an obligation to examine the
pass book and to report any inaccuracies in them. In such a case, if the
customer keeps silent, it may be presumed that he has accepted the entries
as correct. If a banker succeeds in establishing this custom, the court may
give legal recognition to the practice. That is why some bankers send
periodical statements to their customers and ask them to certify them as
correct. If they do so, they are bound by them.
This concept of settled account is based upon one main principle
namely ―one will not be permitted to profit from a mistake of which one
has been a ware.‖
The place of pass book in the Indian Banking System is not well
defined. To be on the safe side, a banker should see that the pass book is
made up, signed and returned to the customer as often as possible. When a
pass book is sent, the date should be noted in the ledger together with the
initials of the clerk who is in charge of it. He is responsible for its
accuracy. Whenever an error is discovered, the customer should be
informed of it immediately and asked to return the pass book for
conrrection. When a pass book is lost, a duplicate can be given against a
payment of Rs. 3/- with opening entries and with additional charge of Rs.
2/- per ledger folio and it should be marked ‗DUPLICATE.‘ If a pass book
Self-Insrtuctional Material is prepared carefully it will eliminate many complications.
58
PassBook
3.10 TERMINOLOGIES
1)Pass book 2) Correct entry 3) Wrong entry 4) NOTES
Favourable 5) Settlement 6)Customer

1)Under what circumstances does a wrong entry in a pass book in
favour of a banker bind the
customer?
2) What is the effect of sending confirmation slips along with a pass
book?
3)When will a wrong entry favourable to a customer constitute a
settlement of account?
4)What is the proper function of a pass book according to Sir John
Paget?
5) Explain the entries favourable to the banker.

2) Dr. Sunilkumar (2016), ―Insurance and Risk Management‖, Galgotia
Publishing Company.
59
Crossing
NOTES
UNIT – IV CROSSING
4.1 Introduction
4.2 Kind of Crossing
4.3 Essentials of General Crossing
4.4 Forms of General Crossing
4.5 Significance of General Crossing
4.6 Special Crossing
4.7 Not negotiable Crossing
4.8 A/c Payee Crossing
4.9 Double Crossing
4.10 Opening of Crossing
4.11 Terminologies
4.1 INTRODUCTION
A cheque without crossing is called an open cheque. It is open to
many risks. In order to protect it from risks, crossing has been introduced.
Crossing originated almost by accident. It was Irwin, one of the bank
employees, who mooted the idea of Clearing House. It was there, the
practice of crossing cheques originated. So, he can better be called, the
father of crossing. In those days, bankers used to stamp their names on
cheques while passing them through Clearing Houses. It enables the
clearing house clerks to make up the accounts. Moreover, such stamping
(crossing) of a cheque ensured safely, because, there was the danger of
bank employees being mishandled and robbed, while carrying cheques to
the clearing house. Seeing the advantage of such crossing, people began to
cross cheques. They began to insert the words ―& Co‖, when the name of
the payee‘s banker was not known. But, crossing was not recognized
outside the clearance.
In the year 1856, crossing of cheques became a matter of
legislation. It was laid down by the 1956 Act:
(i) that, when a cheque is crossed with or without the words ‗& Co‘ in
between, it should be presented through some banker, and
(ii)that, when a cheque is crossed in favour of a particular banker, its
payment should be made only to that banker or another banker
60
acting as his agent. Crossing
But in Simmons Vs. Taylor, it was laid down that crossing was not an NOTES
integral part of a cheque and that its erasure did not amount to forgery. In
Bellamy Vs. Morjori Banks, it was also said that ― …….. crossing is a
mere memorandum on the face of the cheque and forms no part of the
instrument itself and in no way alters its effects …..‖
The above decision was nullified by the Act of 1858. It was laid
down in that Act that, crossing was a material part of a cheque and its
obliteration or alteration amounted to forgery and that, the person
committing this fraud was liable to transportation for life. This Act led to
the foundation of the law of special crossing. Later on, in 1876, the Act of
1858 was repealed. This is the story behind the present form of crossing.
4.2 KIND – OF CROSSING

Crossing is of two types namely General Crossing and Special
Crossing.
General Crossing
Sec. 123 of the Negotiable Instruments Act 1881 defines general
crossing as follows:
―Where a cheque bears across its face, an addition of the words
‗And company‘ or any abbreviation there of, between two parallel
transverse lines or of two parallel transverse lines simply, either with or
without the words ‗Not negotiable‘, that addition shall be deemed to be a
‗crossing, and the cheque shall be deemed to be crossed generally.‖
4.3 ESSENTIALS OF GENERAL CROSSING

(i) Two lines are of paramount importance in crossing.
(ii)The lines must be drawn parallel and transverse. Transverse means,
that, they should be arranged in a crosswise direction. They should
not be straight lines. Mathematical signs for plus and
multiplication do not constitute crossing, because, they are not
constitute a crossing within the meaning of Sec.123:
(a) (b) (c) (d) (e)
X
(iii) The lines are generally drawn on the left hand side so as not to
61
Crossing
obliterate or alter the printed number of the cheque. Preferably, the
NOTES
line should cut across some of the writings. The following picture
will make the position clear.
(iv) The words ‗And Company‘ or its abbreviation may be written in

between the lines. They themselves are not essential and so, they
do not constitute crossing, without two parallel transverse lines.
But, it has been the practice to write them when the drawer does
not know the name of the payee‘s banker.
(v) So also, the words ‗Not Negotiable‘ may be added to a crossing.
But, they themselves do not constitute a crossing.
4.4 FORMS OF GENERAL CROSSING
Note: Two parallel transverse lines themselves constitute a crossing. So,

inbetween these lines, any
word can be written.
4.5 SIGNIFICANCE OF GENERAL CROSSING

(i) The effect of general crossing is that it
gives a direction to the paying banker.
(ii) The direction is that, the paying banker
should not pay the cheque at the counter. It should be paid only to
a fellow banker. In other words, payment is made through an
account and not at the counter. Sec. 126 of the Act clearly lays
down that, ―where a cheque is crossed generally, the banker on
whom it is drawn, shall not pay it otherwise than to a banker.‖
(iii) If a crossed cheque is paid at the counter
in contravention of the crossing:
62
(a) the payment does not amount to payment Crossing
in due course. So, the paying banker will lose his statutory NOTES
protection,
(b) he has no right to debit his customer‘s
account, since, it will constitute a breach of his customer‘s
mandate,
(c) he will be liable to the drawer for any
loss, which he may suffer,
(d) he will be liable to the true owner of the
cheque who may be a third party, irrespective of the fact, that,
there is no contract between the banker and the third party. As
a general rule, a banker is answerable only to his customer and
this liability to a third party her is an exception.
(iv) The main intention of crossing a cheque
is to give protection to it. When a cheque is crossed generally, a
person who is not entitled to receive its payment, is prevented from
getting that cheque cashed at the counter of the paying banker.
But, it gives only a limited protection, in the sense, that if the thief
is not the customer of the paying banker, he can encash that cheque
through his banker, by forging the signature of the payee.
However, it can be detected. To avoid this danger, special crossing
was introduced.
4.6 SPECIAL CROSSING

Sec. 124 of the Negotiable Instruments Act of 1881 defines a
special crossing as follows: ―where a cheque bears across its face, an
addition of the name of a banker, with or without the words ‗Not
Negotiable‘, that addition shall be deemed a crossing, and the cheque shall
be deemed to be crossed specially, and to be crossed to that banker.‖
Essentials of Special Crossing
(i) Two parallel transverse lines are not at all essential for a special
crossing.
(ii)The name of a banker must be necessarily specified across the face
of the cheque. The name of the banker itself constitutes special
crossing.
(iii) It must appear on the left hand side, preferably on the corner, so as
63
Crossing
not to obliterate the printed number of the cheque.
NOTES
(iv) The two parallel transverse lines and the words ‗ Not Negotiable‘
may be added to a special crossing.
Forms of Special Crossing
Significance of Special Crossing

(i) It is also a direction to the paying banker. The direction, is that, the
paying banker. The direction, is that, the paying banker should pay
the cheque only to the banker, whose name appears in the crossing
or to his agent. Sec 126 of the Act clearly lays down that ―where a
cheque is crossed specially the banker on whom it is drawn, shall
not pay it, otherwise than to the banker to whom it is crossed or his
agent for collection.‖
(ii) If a cheque specially crossed to a bank is presented by another
bank, not in the capacity of its agent, the paying banker is justified
in returning the cheque.
(iii) A special crossing gives more protection to the cheque than a
general crossing. It makes a cheque still safer because, a person,
who does not have a real claim for it, would find it difficult to
obtain payment. In special crossing, the cheque is specially crossed
to the payee‘s banker. Hence, the banker, in whose favour the
cheque has been crossed, knows the payee and his specimen
signature well. So, he will not collect it for any person other than
the payee. If there is any forgery, it can be easily detected by the
banker. But, we can not say that, it gives full protection in the
sense, that, an unscrupulous person, who has an account in the same
bank but at a different branch, can encash it by forging the
signature of the payee. It can also be detected. However, there is
some danger in special crossing also. To overcome this danger,
64
‗Not Negotiable‘ and ‗A/c payee‘ crossings have been introduced. Crossing
NOTES
4.7 NOT NEGOTIABLE CROSSING
As stated earlier, Secs. 123and 124 of the Act permit the use of the
words ‗Not Negotiable‘ in the crossing. This type of crossing is termed as
‗Not Negotiable‘ crossing .
Forms of Not Negotiable Crossing
Forms of Not Negotiable Crossing
Significance of Not Negotiable Crossing

‗Not Negotiable‘ does not mean not transferable. Not negotiable
crossing does not affect the transferability, but, it kills only the
‗negotiability.‘ Negotiability is something different from transferability.
Negotiability is a broader term which includes transferability . As per law,
negotiability means transferability by mere delivery or endorsement and
delivery plus transferability free from defect, But, transferability does not
possess the second quality namely transfer free from defect. So, one part of
the negotiability is the transferability. In other words, if a document is a
negotiable one, a bonafide transferee who receives it in good faith and for
value paid, can obtain a good title, despite the fact that, the documents, has
prior defects. But, in case a document is a not negotiable instrument, the
transferee cannot obtain a good title, when there is prior bad title. Hence,
no one can be a holder in due course in the case of a not negotiable
instruments. In Hibernian Bank ltd. Vs. Gysin and Hansan, It was held that
the words ‗Not Negotiable‘ when they appear on a bill must be assigned
their ondinary meaning in law i.e., the instrument is deprived of one of the
most important characters of negotiable instruments namely, transferability
free from defects.
Thus, a Cheque Crossed ‗Not Negotiable‘ can be transferred like
any other cheque. But, the transferee can not obtain a better title than that
of the transferor. It has been provided in sec. 130 of the Negotiable
Instruments Act that ― A person taking a cheque crossed generally or
65
Crossing
specially, in either case bearing the words ―not negotiable‖, shall not have
NOTES
and shall not be capable of giving a better title to the cheque than that,
which the person from whom he took it had.‖
The words ‗ Not Negotiable‘ do not impose any additional duty on
either the collecting banker or the paying banker. But, it is a warning to the
person, who takes this document, that, he should be very careful in
receiving it, In commissioners of state savings Bank of Victoria Vs.
Permewan Wright and Co., learned Judge Griffith said ― In my opinion, the
words ‗Not Negotiable‘ on a crossed cheque are a danger signal held out
before every person invited to deal with it and are equivalent to saying.
― take care, this cheque may be stolen.‖Thus, a cheque crossed ‗ not
negotiable‘ is just like a stolen property, where good title can not be passed
on to others. If that cheque is offered, the transferee should know the
previous endorsers and their good title to the cheque. Otherwise, he will be
compelled to give it back to the true owner, if that cheque happens to be a
forged one. That is why sir John paget rightly says that the words. ‗Not
Negotiable‘ have no special meaning as far as a banker is concerned, and
so, he can justifiably ignore it.
The object of this type of crossing is to give protection to the true
owner of the cheque by protection to the true owner of the cheque by
preserving his right against any subsequent holder. so, this type of crossed
cheques can safely be sent through post.
To put it in a nutsell, if a cheque is crossed ‗not negotiable‘ it is
taken out of the category of negotiable instruments. But, it can be
transferred subject to the title of the transferor.
4.8 A/C PAYEE CROSSING

There is no provision in law regarding this type of crossing. But it
has been developed in practice. If the words, ‗A/c Payee‘ are added to a
crossing, it becomes and A/c payee crossing
Significance of A/c Payee Crossing
‗A/c payee‘ crossing does not restrict the transferability of cheques.
In British Bank of Middle East Vs. Abmal Brothers, the drawer of a cheque
(Abmal Brothers) pleaded that, since, the cheque had been marked A/c
payee only, the negotiation on it was null and void. But it was held that
‗A/c payee‘ crossed cheque can be negotiated. But, if the words ―or order‖
66
which appear immediately after the payee‘s name, are struck through and if Crossing
the cheque is crossed ‗A/c payee‘, that cheque will be considered to be not NOTES
transferable.
Forms of A/c Payee Crossing
This type of crossing gives a further protection to a cheque. This

crossing gives a direction to the collecting banker. The direction is that,
the collecting banker should not collect it for any person other than the
payee. In other words, a collecting banker should ensure that, the cheque is
credited only to the account of the payee. Hence, practically speaking,
such cheques can not be negotiated further.
If a collecting banker collects such a crossed cheque for any person
other than the payee, it will constitute negligence on the part of the
collecting banker, and so, he will lose the statutory protection given under
Sec.131 of the Act.
In India, the A/c payee directions were abused during the multi-
crore securities scam period. The A/c payee cheques issued to banks on
RBI, instead of being credited to the payee banks, were directly credited to
the broker‘s accounts. Hence, the RBI has issued the following strict ordrs
with regard to an A/c payee crossing. ― Crediting the proceeds of A/c payee
cheques to parties other than that clearly delineated in the instructions of
the issues of the cheques is unauthorised and should not be done under any
67
Crossing
circumstances.‖
NOTES
Thus, in actual practice, A/c payee crossed cheques cannot be
collected to the account of any person other than the payee himself
The paying banker is not concerned with this type of crossing
However, if such a cheque bears any endorsement other than that of the
payee, the safest method will be to return it. It is so because, if the words
‗A/c Payee‘ were put on by the drawer, and if the banker honours it, it
would amount to disobeying his customer‘s mandate.
The safest form of crossing will be a combination of ‗Not
Negotiable‘ and ‗A/cpayee‘ crossings, which give the fullest protection to a
cheque
4.9 DOUBLE CROSSING

Sec.125 of the Act provides that ―Where a cheque is crossed
specially, the banker to whom it is crossed, may again cross it specially to
another banker, his agent for collection‖.
Form of Double Crossing
This form is not followed in
practice.The present practice is to indicate
the agent by specifying the fact on the
back of the cheque as follows
Pay to Canara Bank

as agent for collection
for Indian Bank
(sd) Manager
Sec. 127 of the Act lays down that, ― Where a cheque is crossed
specially to more than one banker, except when crossed to an agent for the
purpose of collection, the banker on whom it is drawn, shall refuse
payment there of ― Thus, if a cheque is crossed to two or more banks, the
paying banker is put in confused position as to whow he should pay. Such
ambiguity renders the cheque invalid. But, a banker in whose favour a
cheque is crossed, can cross it again in favour of another banker for the
purpose of collection. It does not render the cheque invalid.
Who Can Cross a Cheque
(i) The drawer of a cheque can cross it at the time of issuing it.
68
(ii) Any holder can cross an uncrossed cheque. He can convert Crossing
general crossing into special crossing , and, he can even add the words NOTES
― Not Negotiable‘ ‗or ‗ ‗A/c payee‘ to a crossing.

(iii) The banker in whose favour a cheque has been crossed, can
again cross it in favour of another banker, for the purpose of
collection, as an agent.
4.10 OPENING OF CROSSING

The cancellation of crossing is usually termed as ‗ opening of
crossing‘. Law does not make any provision for the cancellation of a
crossing. But, it has been risen out of custom. When a drawer wants to
cancel the crossing, he writes the words ‗Pay cash‘ upon the cheque,
followed by his full signature. The drawer alone has a right to cancel the
crossing. But, once a crossed cheque has been issued, even the drawer‘s
right ceases. In the words of Sir John Paget ―When the drawer has once
parted with the cheque, he can not retract or neutralize his mandate to the
prejudice of any one who has taken the cheque on the faith of it…‖
4.11 TERMINOLOGIES
1) Crossing 2) Special 3) Double 4) Cheque 5) Opening 6)Payee

1) What is ‗marking‘ of a cheque? What is its significance?
2) Is it obligatory to mark a cheque? Is it similar to acceptance of a
bill?
3) Bring out the significance of marking at the request of a drawer.
4) Can a banker present a cheque to another to be marked as good
for payment? If so, what is its
significance?
5) Discuss the legal implications of marking of a post – dated
cheque with a relevant case law on this subject.

69
Paying Banker
UNIT – V PAYING BANKER
NOTES 5.1 Introduction
5.2 Precautions before honouring a Cheque
5.3 Circumstancess under which a can be Dishonoured
5.4 Answers to Dishonoured
5.5 Statutory Protection to Paying Banker
5.6 Payment in due Course
5.7 Holder in due Course
5.8 Rights and privileges of a holder in due Course
5.9 Recovery of money paid mistake
5.10 Terminologies
5.1 INTRODUCTION
A banker on whom a cheque is drawn should pay the cheque when
it is presented for payment. This cheque-paying function is a distinguished
one of a banker. This obligation has been imposed on him by Sec. 31 of
the N.I.Act. A banker is bound to honour his customer‘s cheques, to the
extent of the funds available and the existence of no legal bar to payment.
Further, the cheque must be in order and it must be duly presented for
payment at the branch where the account is kept. The paying banker should
use reasonable care and diligence in paying a cheque, so as to, abstain from
any action likely to damage his customer‘s credit. If the paying banker
wrongfully dishonours a cheque, he will be asked to pay heavy damages.
At the same time, if he makes payment in a hurry, even when there is no
sufficient balance, the banker will not be allowed to debit the customer‘s
account. If he does so, it will amount to sanctioning of overdraft without
prior arrangement, and, later on, the customer can claim it as a precedent
and compel the banker to pay cheques in the absence of sufficient balance.
His position is very precarious and is in between the devil and the deep sea.
5.2 PRECAUTIONS BEFORE HONOURING A CHEQUE

In order to safeguard his position, the paying banker has to observe
the following precautions before honouring a cheque.
I. Presentation of the Cheque
First of all, a paying banker should note whether the presentation of
the cheque is correct, It can be found out by paying attention to the
following factors.
(a) Type of the cheque: Before honouring a cheque, he must find
Self-Insrtuctional Material out the type to which it belongs. Cheques may generally be of two types—
70
open or crossed. If it is an open one, the payment may be made at the Paying Banker
counter. if it is crossed, the payment must be made only to a fellow banker. NOTES
If it is specially crossed, the payment must be specifically made to that

banker, in whose favour it his been crossed. If there are ‗A/c Payee‘ and
‗Not Negotiable‘ crossings, the paying banker need not worry, as they are
the directions only to the collection banker, If the paying banker pays a
cheque contrary to the crossing, be is liable to the drawer and to the true
owner and this payment can not be regarded as a payment in due course.
Therefore, he must pay secial attention to the type of a cheque.
(b) Branch: Then the paying banker should see whether the cheque
is drawn on the branch where the account is kept. If it is drawn on another
branch, without any prior arrangement, the banker can safely return the
cheque.
(c) Account: Even in the same branch, a customer might have
opened two or more accounts. For each account, a separate cheque book
would have been issued. Hence, the paying banker should see that the
cheque of one account is not used for withdrawing money from another
account. In State Bank of India Vs. Vathi Sambamurthy (1988)it was held,
that, for the withdrawal of money from an account, only the cheque
relating to the account wherefrom money has to be withdrawn must be
used.
(d) Banking hours The paying banker should also note whether the
cheque is presented during the banking hours on a business day. Payment
outside the banking hours does not amount to payment in due course. In
Joachimson Vs. Swiss Banking Corporation it was held that ― the promise
to repay is to repay at the branch of the bank where the account is kept, and
during banking hours. ―However, a banker is justified in extending the
time, during peak days, for those, who are still waiting for encashing a
cheque, The banker may allow a slight margin as was decided in the case
of Baines Vs. National Provincial Bank. In the aforesaid case, a cheque
was presented and paid at 3.05p.m. instead of paying it before 3 p.m. It
was held that the bank did not act out of the way in making payment.
The hours of banking business are statutorily laid down. Even
public holidays are notified under the Negotiable Instruments Act. It is so,
because, Sec. 25 of the N.I. Act specifies that ―when the day, on which a
71
Paying Banker promissory note or bill of exchange is at maturity is public holiday, the
NOTES instrument shall be deemed to be due on the next proceeding business

day.‖ Thus, the object of declaring a public holiday is to enable the
determination of due dates of instruments. Hence, cheques should not be
paid on a bank holiday or during non-banking hours on a working day.
(e) Mutilation: If the cheque is torn into pieces or cancelled or
mutilated, them, the paying banker should not honour it. He should return
the cheque for the drawer‘s confirmation. In case a cheque is torn
accidentally, the drawer must confirm it by writing such words as
―Accidentally torn by me‖ and affixing his full signature. A cheque torn
into two or more pieces is generally returned with a remark ―Mutilated.‖
II. Form of the Cheque
Before honouring a cheque, a banker should see the form of the cheque
and find out whether it is regular or not.
(a) Printed form: The cheque must be in the proper form. It must
satisfy all the requirements of law. The customer should draw cheques
only on the printed leaves supplied by the bankers, failing which, the
banker may refuse to honour it.
(b) Unconditional order: The cheque should not contain any
condition. If it is a conditional one, the paying banker‘s position will
become critical and he may not honour it.
(c) Date: Before honouring a cheque, the bank must see whether
there is a date on the instrument. If it is undated, it can not be regarded as a
valid instrument. If a cheque is ante dated, it may be paid if it has not
become stale by that time. A cheque which is presented after six months,
from the date of its issue is a stale one. If a cheque is post – dated, he
should honour it only on its due date. Sir John Paget rightly observes ―a
banker who pays a post – dated cheque has disobeyed his customer‘s
mandate and authourity.‖
(d) Amount: The next important precaution is that the banker
should see whether the amount stated in the cheque, both in words and
figures, agree with each other. If the amount is stated only in figures, the
banker should return it with a remark ―Amount required to be stated in
words.‖ However, if the amount is stated only in words, the banker may
Self-Insrtuctional Material honour it. Supposing, there is a difference in the amount stated in words
72
and figures, then, the banker can take any one of the following courses Paying Banker
available to him: NOTES
(i) he can dishonor the cheque with a memorandum ―words and figures
differ,‖ or
(ii) he can honour the amount stated in words, or
(iii) he can honour the smaller amount.
According to Sec. 18 of the N.I. Act, ―If the amount undertaken or
ordered to be paid is stated differently in figures and words, the amount
stated in words shall be the amount undertaken or ordered to be paid.‖
However, in practice, if the difference is insignificant, payment is
sometimes made. But, usually the paying banker returns the cheque under
such circumstances, since, there is an audit objection to the practice of
honouring such cheques.
(e) Material alteration: A paying banker should be very cautious in
finding out the alterations that may appear on a cheque. If there is any
material alteration, the banker should return it with a memorandum
―Alteration requires drawer‘s confirmation.‖ If the alteration is confirmed
by the drawer by means of his full signature, then the banker can have no
objection to honour it. If the alteration is not apparent, and, if it is paid in
due course, then, the banker will not be liable.
III. Sufficient Balance
There must be sufficient balance to meet the cheque. If the funds
available are not sufficient to honour a cheque, the paying banker is
justified in returning it. So, before honouring a cheque, he must check up
the present state of his customer‘s account. For this purpose, he must
compute the balance in the account of his customer. In computing the
balance, the previous agreement, if any, for O.D. should be taken into
account. He should not disclose the state of affairs of his customer‘s
account to anybody. He must not offer a part of the amount of the cheque,
if the balance is insufficient to meet the full amount of the cheque. For
computing the balance, a banker may combine the accounts of the same
customer, if he has more than two, after giving due notice to the customer.
Under certain circumstances, a banker, in order to protect the customer,
may combine the accounts and pay a cheque. In computing the balance, he
must not earmark any money for meeting contingent liabilities.
73
Paying Banker IV. Signature of the Drawer
NOTES The next important duty of a paying banker is to compare the
signature of his customer found on the cheque with that of his specimen
signature. If he fails to do so and if he pays a cheque, which contains a
forged signature of the drawer, then, the payment will not amount to
payment in due course. Hence, he can not claim protection under Sec. 85 of
the N.I. Act. If the signature has been too skillfully forged for the banker to
find it out, even then the banker is liable. However, if the customer
facilitates the forgery of his signature by his conduct, then, the banker will
be relieved from his liability.
V. Endorsement
Before honouring a cheque, the banker must verify the regularity
of endorsement, if any, that appears on the instrument. It is more so in the
case of an order cheque, which requires an endorsement before its delivery.
For instance, if there is per pro endorsement, the banker must find out the
existence of authority. Failure to do so constitutes negligence on the part
of the paying banker.
VI. Legal Bar
The existence of legal bar like Garnishee Order limits the duty of
the banker to pay a cheque.
VII. Minor Precautions
A paying banker should look into the following minor details also,
before honouring a cheque.
(a) He must see whether there is any order of the customer not to
pay a cheque.
(b) He must see whether there is any evidence of misappropriation
of money. If so, the cheque should be returned e.g., breach of
trust.
(c) He must see whether he has got any information about the
death or insolvency or insanity of his customer. Failure to
note those instructions will land him in trouble.
5.3 CIRCUMSTANCES UNDER WHICH A CHEQUE

CAN BE DISHONOURED
A paying banker is under a legal obligation to honour his
customer‘s mandate. He is bound to do so under his contractual
74
relationship with his customer. A wrongful dishonor will have the worst Paying Banker
effect on the banker. However, under the following circumstances, the NOTES
payment of a cheque must be refused:

(a) Countermanding: Countermanding is the instruction given by
the customer of a back requesting the bank not to honour a particular
cheque issued by him. When such an order is received, the banker must
refuse to pay the cheque.
Countermanding, in order to be really effective, must be in writing.
The written mandate should contain all the details of the cheque, viz., date,
number of the cheque, name of the payee and the amount. Without these
details, the banker would find it difficult to oblige the customer. The
mandate must be signed by the customer. In the case of a company, any
director can stop payment of cheque. So also, any partner or any one of the
joint account holders can stop the payment of a cheque.
If the countermanding instructions are not clear, then the banker will
not be liable. In Westminster Bank Vs. Hilton, the customer had
instructed his banker not to pay his cheque No. 117283 instead of 117285.
The cheque No.117285, therefore, was paid. It was held that the banker
was not liable. In Mitchel Vs. Security Bank, the cheque in question was
for 196.75 and was dated Dec.23. But a stop payment order was given for
196.75 and the date was given as Dec. 21. The banker was not held liable
for having paid the cheque,. It was said that ―where the drawer notifies a
bank to stop payment on a cheque, his notification must be explicit, and
describe the cheque with reasonable accuracy.‖ Where a customer is
maintaining two accounts and the account number is not specified, it is
advisable to register the stop order on both the accounts. (Reade Vs. Royal
Bank of Ireland). The countermanding instructions should be served to the
officer of the bank in the banking house and during banking hours.
If a customer informs by telephone or telegram regarding the
stopping payment of a cheque, the banker should diplomatically delay the
payment, till written instructions are received. If the situation is very
critical, he can return the cheque by giving a suitable answer like ‗payment
countermanded by telegram and postponed pending confirmation. ‗In
curtice Vs. London city and Midland Bank Ltd. a telegram sent to stop
payment of a cheque, was put into the bank‘s letter box. When the box
75
Paying Banker was opened, the telegram was overlooked. It was held that the
NOTES countermanding was not effective until the telegram came into the hands of
the manager. Even a stop order given over the telephone is valid but it is
advisable to act upon written instructions. In Shude Vs. American State
Bank, a stop order was given over the telephone and the customer
identified himself as ― Mr. Shude from Anchor Steel.‖ But, the banker
returned the cheque drawn by the Anchor Steel Company. It was held that
the banker was liable. However, it would not be advisable to act upon the
oral orders because, if the banker returns the cheque, the customer, if he
happens to be an unscrupulous person, may claim damages for wrongful
dishonour of the cheque by saying that he never informed the banker to
stop payment of his cheque.
The drawer alone has the right to countermand the payment of a
cheque. In case a cheque is lost by a holder, he should stop payment of
that cheque only through its drawer. It is so because, a banker is always
answerable only to the drawer, in the case of dishonour of a cheque. In the
case of a draft, its purchaser has no right to countermand its payment.
Any countermanding instruction given to one branch is not effective,
as a notice given to another branch, as was decided in the case of Burnett
Vs. Westminster Bank.
Again, if a cheque is covered by a ‗cheque card,‘ then, that cheque
can not be countermanded. A cheque card is a document issued by a bank
which enables the holder to encash cheques, upto a stated maximum, at any
branch of the issuing bank. Since it contains an undertaking by the issuing
bank to pay it, it is readily acceptable to all parties particularly to third
parties. Hence, it can not be countermanded.
If a banker, by mistake, honours a countermanded cheque:
(a) the payment does not amount to payment in due course,
(b) he will have to answer for having disobeyed his customer‘s
mandate,
(c) he has no right to debit his customer‘s account with the amount
of the countermanded cheque,
(d) he may have to dishonour the customer‘s subsequent cheques
for want of funds in the account,
76
Therefore, countermanding instructions, once received, must be Paying Banker
kept as constant record. A ‗stopped payment‘ register may be maintained NOTES
for ready reference. It is advisable that a slip, giving the details of the
cheque to be countermanded, is pasted on the customer‘s account.
Altermatively, a red ink mark may be made against the customer‘s account,
so that, the clerk concerned with posting of cheques may be careful.
When a banker dishonours a countermanded cheque, it would be
advisable to give answers like ― ordrs not to play‖ rather than ―Payment
stopped‖ because the latter can be interpreted in any way.
(b) upon the receipt of notice of death of a customer. Death puts an
automatic end to the contractural relationship between a banker and his
coustomer. When a banker receives written information from an
authoritative source, (preferably from the nearest relatives) regarding the
death of a particular customer, he should not honour any cheque drawn by
that deceased customer. If the banker is unaware of the death of a
customer, he may honour the cheque drawn by him. It would be held valid
notwithstanding the fact the payment has been actually made after his
death
(c) Upon the receipt of notice of insolvency: Once a banker has
knowledge of the insolvency of a customer, he must refuse to pay cheques
drawn by him. Usually, the banker will be served with a notice of the
presentation of petition upon which he can take necessary action.
(d) Upon the receipt of notice of insolvency: Where a banker
receives notice of a customer‘s insanity, he is justified in refusing payment
of the cheque drawn by him. The banker should make a careful note, when
the lunacy order is received. It is advisable that the banker should act upon
a definite proof of the customer‘s insanity like a doctor‘s certificate, a court
order etc.
(e) Upon the receipt of notice of Garnishee Order: Garnishee Order
refers to the order issued by a court attacing the funds of the judgement
debtor (i.e., the customer) in the hands of third party (i.e., the banker.) The
term ‗Garnishee‘ refers to the person who has been served with the order.
This Garishee proceedings comprise of two steps. As a first step
‗Garnishee Order Nisi‘ will be issued. ‗Nisi‘ means ‗unless‘. In other
words, this order gives an opportunity to the banker to prove that this order
77
Paying Banker could not be enforced. If the banker does not make any counterclaim, this
NOTES order becomes an absolute one, This ‗Garnishee order absolute‘ actually
attaches the account of the customer. If it attaches the whole amount of a
customer‘s account, then, the banker must dishonour the cheque drawn by
that customer. He can honour his cheques to the extent of the amount that
is not garnished. Hence, the banker should go through the terms of the
order very carefully.
If the order is vague or if it gives a wrong description of the party,
it is not effective, (Koch Vs. Mineral Ore Syndicate). A Garnishee Order
issued against a husband‘s account can not attach a joint account in the
name of the husband and wife (Hirschorn Vs.Evans). If the order is so
worded as to attach two accounts in different capacitites, then, it attaches
both the accounts. (Plunkett Vs. Barclays Bank Ltd). A Garnishee Order in
the name of a firm, attaches both firm‘s account and the private account of
the partners, A cheque in favour of a judgement debtor can not be attached
by the order, because, the cheque is not property of the payee until the
money is paid to him, The proceeds of sale of shares, stock etc., are not
attached, if they are not received by the bankers on the date of the orter.
this orter cannot attach cheques paid into the account of the judgement
debtor but not yet collected. however, in case where a cheque is sent for
collection by one bank(principal bank) to another(agent bank), the moment
the cheque has been realized by the agent bank,that realization is deemed
to be a realisation made by the principal bank itself, and as such it could be
attached as was decided in the case of geraldC.S.lobo vs.canar a bank
(1991). the fact that the realisation slip was recived by the principal bank at
a later date was considered immaterial in the above case. foreign balances
are not attachable. if this order is sent to the head office,then,a reasonable
time should be given for communicating this order to the concerned
branch.in india this provision is contained in order 121,Rule 46 of the code
of civil procedure 1908.
(f)Upon the receipt of notice of assignment: the bank balance of a
customer constitutes an asset and it can be assigned to any person by
giving a letter of assignment to the banker. once on assignment has been
made,the assignor has no legal rights over the bank balance and therefore,if
Self-Insrtuctional Material any cheque is drawn by him, the banker should refuse to honour it.
78
(g) when a breach of trust intended: in the case of a trust account Paying Banker
mere knowledge of the costomer‘s intention to use the trust funds for his NOTES
personal use, is a sufficient reason to dishonor his cheque.

(h)Defective title: if the person who brings a cheque for payment
has no title or his title is defective, the banker should refuse to honour the
cheque presented by him. for instance,a person who brings a cheque,which
has been countermanded or which has been forget, has no title to it.
(i)Other grounds:A banker is justified in dishonouring a cheque
under the following circumstances also.
If a cheque is:
i. A conditional one,
ii. Drawn on an ordinary piece of paper,
iii. A stale one,
iv. A post –dated one,
v. multilated,
vi. Drawn on another branch where the account is not kept,
vii. presented during non-banking hours,
viii. if the words and figures differ,
ix. if there is no sufficient funts,
x. if the signature of the costomer is irregular, and
xi. if the endorsement is irregular, and
xii. if a crossed cheque is presented at the counter.
5.4 ANSWERS TO A DISHONOURED CHEQUE

Eventhough it is not obligatory on the part of a paying banker to give
reasons, while dishonouring a cheque,in practice, he gives such reasons to
satisfy the rules of the clearing house. in giving the reasons, he must be
very cautious and must see that his answer neither damages the customer‘s
credit nor misleads the party presenting the cheque. that is why,usually
information is sparingly given in such cases. most of the banks have a slip
containing the reasons printed on it and they put a tick mark against the
appropriate reason.
TAMILNADU BANK LTD,
Regd.office: Madurai
_________ 19
MEMORANDUM OF CHEQUE RETURNED
79
Paying Banker cheque No.______________ is returned for
NOTES the Reason Marked X Below

PAYEE‘S ENDORSEMENT REQUIRED
PAYEE‘S ENDORSEMENT IRREGULAR
PAYEE‘S ENDORSEMENT REQUIRES
BANK‘S CONFIRAMTION
CHEQUE IS POST-DATED
CHEQUE IS OUT OF DATE
REFER TO DRAWER
PAYMENT STOPPED BY DRAWER
AMOUNT IN WORDS AND FIGURES
DIFFERS
EFFECTS NOT CLEARED PLEASE PRESENT
AGAIN
CROSSED CHEQUE SHOULD BE
PRESENTED THROUGH A BANK
NO ADVICE
ALTERATION REQUIRES DRAWER‘S FULL
SIGNATURE
NOT SUFFICIENT FUNDS
To
____________
___________
Manager.
In this connection, one must note that, the return of a dishonoured
cheque itself amounts to, giving a notice of dishonour.
Usual Answers
(a) N.S., N.F., N.S.F.: These abbreviations denote the absence of
sufficient money in the account of the customer. N.S. means Not
Sufficient, N.F. means No Funds , N.S.F. means Not Sufficient
Funds.
(b) E.I. It means ‗Endorsement Irregular.‘
80
(c) E.N.C. It refers to ‗Effects Not Cleared.‘ This answer is used when Paying Banker
cheques are drawn against cheques paid in but not yet collected. NOTES
(d) D.D. It denotes ‗Drawer Deceased.‘

(e) W.F.D. It means ‗Words and Figures Differ.‘
(f) ‗Exceeds Arrangement‘ : It is used when the cash credit or O.D. is
completely exhausted.
(g) D.R. It is an abbreviation of ‗Discharge Required.‘ It is used when
the instrument is not discharged with proper endorsement.
(h) N.P.F. It means ‗Not Provided For.‘ It is used when no
arrangements are made to meet a cheque in the absence of any
balance.
(i) R.D : It means ‗Refer to Drawer‘. For the first time it was held in
Sterling Vs. Barclays Bank Ltd. that the words ‗Refer to Drawer‘
has defamatory meaning and the banker is liable for an action of
libel. In Jayson Vs. Midland Bank Ltd., it was held that R.D. had
the effect of lowering the prestige of the customer . In Pyke Vs.
Hibernia Bank, the banker was liable to pay £400 of libel for
having used the term R.D. However, in Plunket Vs. Barclays Bank
Ltd. the banker was justified in using the term R.D. Again, in
Baker Vs. Australia and New Zealand Bank Ltd., the court held that
the reason present again is defamatory.
Now R.D.is most commonly used by bankers. It is a milder form of
refusal. It is generally meant to convey to the holder the idea that the
cheque has been dishonoured and he should find out the reason for it from
the drawer.
Banking Practice in India
As per the banking practice in India, R.D. refers to the dishonour of a
cheque for want of funds in the account of the drawer, as was decided in a
recent case Voltas Ltd., and others Vs.Agarwalla and others (1991). Again
in V.S Krishnan Vs.V.S Narayanan, (1991) it was held that the use of the
term R.D. would not render the complaint non-maintenable under Sec.138
of the N.I.Act.
According to the New Sect. 138, if a cheque is returned with the
words. (a) amount insufficient to honour the cheque. and/or (b) exceeds the
amount arranged to be paid from the account, it constitutes an offence and
81
Paying Banker is punishable under the Act. Since the expression R.D. does not disclose a
NOTES detinite reason, it is advisable on the part of the bankers in india to give a
more positive and definite reason (Specifically the twin reasons mentioned
under sec. 138 if applicable) for the dishonour of a cheque, so that, the
scheme of the new Section would be more effective and meaningful.
5.5 STATUTORY PROTECTION TO A PAYING

BANKER
Supposing, a paying banker pays a cheque which bears a forged
signature of the payee or endorsee, he is liable to the true owner of the
cheque. But, it is quite unjustifiable to make the banker responsible for
such errors. It is so because, he is not expected to know the signature of the
payee or endorsee. Therefore, law relieves the paying banker from his
liability to the true owner in such cases. This relief is known as ‗Statutory
protection,‘The origion of the statutory protection can be traced to the
passing of the Stamp Act of 1853 in England. Sec.60 of the Bill of
Exchange Act, 1882 gives protection to the paying banker in England.
Statutory Protection Under Indian Law
Sec, 85 of the N.I.Act, 1881 offers protection to the paying banker
in India. It reads as follows.
― Where a cheque payable to order purports to tbe endorsed
by or on behalf of the payee, the drawee is discharged by payment in due
course.‖ To Claim protection under sec.85, the banker should have fulfilled
the following conditions.
(i) He should have paid an order cheque.
(ii) Such a cheque should have been endorsed by the payee or his order.
(iii)
It should have been paid in due course.
Order Cheque
The Statutory protection has been extended to an order cheque.
Example of an order cheque is ― Pay to X or order.‖ When such a cheque is
paid by the banker. he is entitled to get protection. Endorsement is a must
for an order cheque and so protection is mainly extended to an order
cheque.
endorsed by payee or his order
82
such a cheque requires an endorsement by its payee. so, it must be Paying Banker
properly endorsed by him to any person authorized by him to abrain NOTES
payment. protection can not be claimed if such a cheque is not endorsed by

a payee or any third party.
5.6 PAYMENT IN DUE COURSE

The cheque should have been paid in due cours. sec.10 of the N.I.Act
defines payment in due course as follows:
―payment in due course means payment in accordance with the apparent
tenor of the instrument, in good faith and without negligence, to any person
in possession thereof unter circumstances which do not afford a reasonable
ground for believing, that,he is not entitled to receive payment of the
amount of the amount therein mentioned.‖
This concept of payment in due course has three essential features‖
(i)Apparent tenor of the instrument: To avail of the statutory
protection, the payment should have been made according to the apparent
tenor of the instrument. the apparent tenor refers to the intention of the
parties as it is evident from the face of the instrument. example: if a drawer
draws a cheque with a post-date,his intention is to make payment only after
a certain date. if it is paid before the due date,this payment does not amount
to payment in due course. so also, the payment of a countermanded cheque
does not amount to payment in due course.
(ii) payment in good faith and without negligence: Good faith forms
the basic for all banking transactions, and so, it is taken for granted. as
regards negligence, the banker may sometimes be careless in his duties
which constitutes an act of negligence is proved, the banker will lose the
statutory protection given under sec.85.
example:
(a) payment of a crossed cheque over the counter.
(b) payment of a post –dated cheque before maturity.
(c) failure to verify the regularity of an endorsement.
(d) In madras provincial co-operative bank Ltd., Vs,south Indiar
Match factory Ltd.,(in liquidation) one Mr.Ramachandra Rao,a
former employee,was appointed as a liquidator, the fact of
which was known to the banker.Once,a cheque drawn in favour
83
Paying Banker of Rao, in his official capacity,was paid into his private account.
NOTES it was held that the paying banker was negligent.

(iii)payment to a person who is entitled to receive payment:the
banker should have made the payment to the ‗holder, of the
instrument,In other words, the banker must see that the person who
presents the cheque, is in possession of the instrument and he is
entitled to receive the amount.it was the cheque.
sec.8 of the N.I.Act defines a holderas ―the‘holder‘of a promissory
note, bill of exchange or cheque, means any person entitled,In his
own name, to the possession thereof and to receive the or recover
amount due thereon from the parties thereto.‖
the more possession of a document does not make one a holder. He
must have a genuine title to it. for instance, if a person brings in a
cheque which has been countermanded, or forged, though,he is in
possession of the instrument, he has no title to it. thereof, if a
banker suspects the title of the paying banker
person, he should not make payment.if a banker makes payment in
such caces, he can not get statutory production under sec.85.
Protection to a Bearer cheque
now, this protection has been extended to bearer cheques
also unter sec.85(2). (refer to Endorsement chapter for sec.85(2)).If
a bearer cheque is paid in due course, the banker is entitled to get
protection.
Protection to a Crossed Cheque
Originally, this protection was extended only to open cheques.
Now, this has been extended to crossed cheques also. Sec. 128 of the N.I.
Act gives protection in respect of crossed cheques also. sec.128 of the
N.I.Act gives protection in respect of crossed cheque to the drawer as well,
provided, it comes into the possession of the payee.
sec.128 of the act runs as follows ― where a banker on whom a
crossed cheque, is drawn,has paid the same in due course,the banker
paying the cheque and (in case such cheque has come to the hands of the
payee) the drawer thereof, shall respectively be entitled to the same rights
and be placed in the same position in all respects, as they would
84
respectively be entitled to and placed in, if the amount of the cheque had Paying Banker
been paid to and received by the true owner thereof.‖ NOTES
protection to a Materially Altered cheque:

protection has also been extended to a materially altered
cheque.(Refer to Material Alteration chapter.)
Protection to a Draft:protection has been extended to drafts drawn
by one office of a bank on another office of the same bank. this was made
possidle by the amendment of sec.84 in 1930.
Forgery of a customer‘s signature: sec.85 of the N.I.Act/gives
protection only when the payee or endorsee‘s signature is forged and the
banker makes payment in due course.if a banker pays a cheque which
carries a forged signature of his customer,it does not amount to payment in
due course. it is so because every banjer is expected to known the signature
of his own customers.Hence,he can not even think of claiming protection
in the case of forged endorsement of the drawer.
In Bihta co-operative development and cane Marketing Union
Ltd.,Vs.Bank of Bihar, thw supreme court pointed out that‖ if the
sjgnatures on the cheque are not genuine, there is no mandate on the bank
to pay and the cheque is a mere nullity.‖ when this is the case, a paying
banker cannot claim any protuction in respect of a cheque where the
customers signature has been forged.
In canara Bank Vs. canara sales corporation Others, the supreme
court has categorically said that‖ a cheuque carrier a mandate, to the bank
to pay. if the cheque is forged there is no such, mandate, and the banker
therefore, cannot debit the customers‘account.Inaction on the part of the
customer for a long period cannot by itself afford a satisfactory ground for
the bank to escape from he liability‖.
InNational Westminster Bank Ltd.Vs.Barclays Bank International
Ltd.and another,it was held that ―the mere fact that a banker honoured a did
not carry with it an implied representation of the banker to the payee that
the drawer‘s signature was genuine and that the paying bank can recover
the money‖. However, if the customer by his conduct enabled the forgery
of his signature, then, the paying banker is relieved from his liability.
whether the customer has enabled the forgery or not depends upon the
circumstance of the case.
85
Paying Banker For instance, it was held m Bansi Lal Vs. Sadasheo Bhopati that the
NOTES rule, requiring customers to keep cheque books under lock and key, was
not valid. Even leaving a signed blank cheque form in an unlocked table
doesn‘t form a good ground for the customer‘s negligence (Baxendale Vs.
Bennett).
In Lewes Laundary Co. Vs. Barclay and Co., the secretary who was
previously convicted for forgery, was allowed to keep the company‘s pass
book and cheque book. He forged the signature of the directors and
obtained payment for many cheques. It was held that the banker was liable
and the customer did not enable the forgery.
In Greenwood Vs. Martins Bank, Mr. Greenwood, the customer,
did not inform the banker of the forgery of his signature by his wife. He
was silent even though he knew about the forgery. It was held that the
customer was liable. It was pointed out in the aforesaid case that ―mere
silence would not amount to representation but when there was a duty to
disclose, deliberate silence might become significant and amount to a
representation.‖ So also, if the customer comes to know of any suspicious
activities of any officer of a bank connected with banking, he must report
the matter to the director immediately. Thus, the fundamental rule which is
applicable here is ―a banker must recognise his customer‘s signature.‖
Therefore, if he pays a cheque which contains a forged signature of his
customer, he can not claim statutory protection under Sec. 85 of the Act
(Canara Bank Vs. Canara Sales Corporation and others).
Again in Babulal Agarwala Vs. State Bank of Bikaner and Jaipur
(1989), the banker had claimed statutory protection for a bearer cheque
which contained a forgery of his customer‘s signature. The banker had paid
it without knowing the forgery. It was held that the banker could not claim
any protection at all since, it was a question of forgery of a customer‘s
signature and a forged cheque is ‗no cheque‘ at all.
When a Banker Acts Both as Paying and Collecting Banker
When a banker acts both as a collecting banker and a paying banker,

it would be as a collecting banker that a decision would be taken. In
Worshipful Carpenter‘s Company Vs. British Mutual Banking Company
Ltd., it was held that the statutory protection is available only when a bank
acts as a paying banker and not as both paying and collecting banker.
86
Paying Banker
5.7 HOLDER IN DUE COURSE
One should not con fuse the term holder in due course with the NOTES
concept of payment in due course. Sec. 9 of the N.I.Act Lays down that
‗Holder in due course‘Means ―any person, who for consideration became
the possessor of a promissory note, bill of exchange or cheque if payable to
bearer, or the payee or endorsee therof, if payable to order before the
amount mentioned in it became payable and without having sufficient
cause to believe that any defect existed in the title of the person from
whom he derived his title.‖Thus, a holder in due course is the person (i)
who receives an instrument innocently (i.e., in good faith and without
negligence). and (ii) who has paid value for the same, (iii) who has
received the instrument before its maturity.(iv) who is in possession of the
instrument as a bearer or payee or endorsee. That is why it is said, ―every
holder in due course is a holder, but, every holder is not a holder in due
course.‖ For all legal purposes, the title of the holder in due course is
superior to that of the true owner.But, if the instrument contains a forgery,
than, his title is lost. True owner‘s title will become superior.
One of the important conditions to be fulfilled to become a holder
in due course is that one must receive the instrument in good faith and
without negligence, If person receives a cheque for valuable consideration,
knowing fully well that it had been dishonoured previously, he cannot be
regarded as a holder in due course as was decided in the case of sukanraj
Khimraj,Bombay Vs. N.Rajagopalan & Others (1989)
However, in M/s Ponnappa Moothan & Sons Vs. Catholic Syrian
Bank Ltd, & Others (1991) it was held mere failure to prove bonafide or
absence of negligence by the holder would not negative his claim of being
a ‗ holder in due course,‘
5.8 RIGHTS AND PRIVILEGES OF A HOLDER IN DUE

COURSE
The Following are some of the important rights and privileges of a
holder in due course.
(1) He obtains a better title to the instrument than that of a true
owner.
(2) The defective title of the previous endorsers (if any) will not
adversely affect his rights.
(3) He can pass on a better title to others, since, once the instrument Self-Insrtuctional Material
87
Paying Banker passes throught his hands,
NOTES it is purged of all defects,

(4) Until the instrument is finally discharged, every party to that
instrument is liable to him.
(5) Even that drawer of a negotiable instrument cannot claim
invalidity of the instrument
against him.
(6) His claim cannot be denied on the ground that the payee has no
capacity to endorse.
(7) The principle of estoppel is applicable against the endorser to
deny the capacity of
previous parties.
Thus, the title of a holder indue course is supreme.
5.9 RECOVERY OF MONEY PAID BY MISTAKE

Since, in a bank thousands of transactions takes place every day, it
is quite natural that mistakes do occur, By mistake, a banker may pay
money to a wrong person. Can a banker recover money paid by mistake?
The law on this subject is not yet clear. As a general rule, a person whohas
committed a mistake, has every right to rectify the same. But, in rectifying
the mistake, he should not bring and disadvantage to a party. In the same
way, a banker can recover the money paid by mistake without adversely
affecting the other party.
Money can be Recovered
Under the following circumstances, money wrongly paid can
be recovered.
(i) Money received mala fide is recoverable: When a person
receives money by mistake in bad faith, knowing that he is not entitled to
receive that money, then, the banker is entitled to recover the same.
(ii) Money paid under a mistake of fact is recoverable: If the
mistake is a mistake, of fact, then, the money wrongly paid is recoverable.
For instance, a banker pays rhoney to X, thinking that he is Y. This is a
mistake of fact regarding the identity of the parties. Y is under a legal duty
to pay the money back to the banker.
(iii) Mistake between the party paying and the party receiving: If
the mistake is between the party paying and the party receiving, then, the
88
money is recoverable. For instance, a banker by mistake, pays a cheque to Paying Banker
X, the payee, in the absence of sufficient balance in the account of the NOTES
drawer. In such circumstances, the banker can not recover the money paid
by mistake because the mistake is not between the party paying (banker)
and the party receiving (X), but it is between the banker and the drawer.
However, now the position has been entirely changed. When a person is
under a statutory obligation to pay, the mistake committed by him is
deemed to be between the party paying and the party receiving. (Well
Blundell Vs. Synott).
Money can not be Recovered

(i) Money paid under a mistake of law is not recoverable: Ignorance
of law is no excuse. When a banker pays money mistaking law, he can not
recover it. In Holt & Co. Vs. Markhan, Markhan was overpaid a sum of £
310 by Holt & Co. on behalf of the Government in ignorance of the
provisions of law. He was on the emergency list of officers, who were
entitled to get gratuity at a lesser rate. It was held that the money, thus
overpaid, could not be recovered, since, he had already spent the amount
believing that it was his own. The same view was held in Skyring Vs.
Greenwood.
(ii) Money paid on a negotiable instrument to an innocent holder is
not recoverable: When money is paid by mistake on a negotiable
instrument to a holder in due course, it can not be reclaimed after a lapse of
time. Example: A banker who pays a bill to an innocent holder by mistake
cannot recover the money because, after a lapse of time, he can not trace
his previous parties to make them liable (London & Riverplate Bank Vs.
Bank of Liverpool).
(iii) When a person, who receives money in good faith by mistake,
alters his position relying upon it, need not return the same.
In Deutsche Bank Vs. Beiro & Co., a person deposited a bill with
Beiro & Co., for collection who in turn left the same with Deutsche Bank
for collection. Deutsche Bank paid the amount to Beiro & Co. stating that
the bill had been collected. Relying upon this information, Beiro & Co.
paid the amount to the holder. In fact, the bill was not honoured. It was
89
Paying Banker held that Deutsche Bank could not recover the money from Beiro & Co.,
NOTES because, they had altered their position adversely relying upon the wrong
statement supplied by the banker, who was not bound to make such wrong
statements.
(iv) Money paid to an agent by mistake: Where a banker pays

money by mistake to an agent, who in turn has paid the same to the
principal or used it before the mistake is found out, the money can
not be recovered.
5.10 TERMINOLOGIES
1) Paying Banker 2)Circumtances 3) Dishonoured 4)Payment 5)
Recovery 6)Due Course

1)Enumerate the points which a current account ledger keeper must
scrutinize before passing a cheque for payment.
2) Discuss in detail the statutory protection granted to a paying
banker under Sec.85 of the N.I. Act.
3)Under what circumstances, is a banker justified in refusing payment
of cheques drawn upon
him? Discuss his liability in the case of wrongful dishonour of a
cheque.
4) Discuss the position of a paying banker with regrd to the following:
(i) a cheque containing the forgery of endorsement of the
payee.
(ii) a cheque containing the forgery of the drawer‘s signature.
5) Explain the duties and liabilities of a paying banker.

90
UNIT – VI COLLECTING BANKER
Collecting Banker
NOTES
6.1 Introduction
6.2 Banker as a holder for value
6.3 Banker as an Agent
6.4 Conversion
6.5 Statutory protection
6.6 Protection extended to Dividend, Warrants, Drafts etc.,
6.7 Basis of negligence
6.8 Duties of a collecting Banker
6.9 Terminologies
6.1 INTRODUCTION
A collecting banker is one who undertakes to collect the amount of a
cheque for his customer from the paying banker. A banker is under no legal
obligation to collect cheques drawn upon other banks for a customer. But,
every modem banker performs this duty, because, no customer will be
satisfied merely with the function of payment of cheques alone. Moreover,
in the case of crossed cheques, there is no other alternative to collect the
cheques except through some banker. In rendering such services, a banker
should be careful, because, he is answerable to a number of persons with
whom he has no contractual relationship and any negligence or
carelessness on his part may land him in difficulties.
6.2 BANKER AS A HOLDER FOR VALUE

In collecting a cheque, the banker can act in two capacities namely
(a) as a holder for value, and (2) as an agent for collection. The banker
would be regarded as a holder for value:
(1) If he allows his customers to withdraw money before cheques paid
in for collection are actually collected and credited (Underwood
Vs. Barclays Bank),
(2) If any open cheque is accepted and the value is paid before
collection, and/or
(3) If there is a reduction in the overdraft account of the customer
before the cheque is collected and credited in the respective
account.
In all these cases, the banker acquires a personal interest.
Rights of a Banker as a Holder for Value
If the banker acts as holder for value, his rights will be the same as those of
a holder in due course. Thus, according to Sir. John Paget ―Apart from the Self-Insrtuctional Material
91
Collecting Banker question of forged endorsement, if the customer has either no title to the
NOTES cheque or his title is defective, the banker is the holder in due course with a
good independent title against all the prior parties on the cheque.‖ The title
of the holder in due course is superior to that of the true owner. If the
instrument (cheque) contains a forgery, then the title of the true owner will
be superior. So, if there is forgery, the collecting banker will have to refund
the amount to the true owner. But, he can recover the money from the last
endorser, i.e., his own customer for whom he collected the cheque. If the
customer is unable to meet the liability, then, the banker will have to bear
the burden. If the cheque is paid in due course, all the parties wili get
discharged.
6.3 BANKER AS AN AGENT

In practice, no banker credits a customer‘s account even before a
cheque is collected. He collects a cheque on behalf of a customer. So, he
can not acquire any of the rights of a holder for value. He has to act only as
an agent of the customer. This is so because, he can not have a title better
than that of the customer himself. So, a collecting banker can not choose
the capacity in which he wants to act at his discretion. He will be regarded
only as an agent. So, during collection, if a banker, in his capacity as an
agent, collects a cheque which belongs to some other person, to the account
of his customer, he will be held liable for ―conversion‖ of money received.
6.4 CONVERSION
‗Conversion‘ is a wrongful interference or meddling with the goods
of another. Eg: taking or using or destroying the goods or exercising some
control over them in a way that is inconsistent with the owner‘s right of
ownership. The term ‗goods‘ includes bill of exchange, cheque or promis-
sory note. Conversion may be committed innocently. Conversion is a
wrong that renders the person committing it personally liable. This liability
exists even when a person acts merely as an agent.
A Banker’s Liability
Hence, if a collecting banker, however innocent he may be, has con-
verted the goods of another, he will be held personally liable. This liability
exists because the banker is acting as an agent and not as a holder of value.
Self-Insrtuctional Material If it is so, no banker will be in a position to collect cheques for his
92
customers. In those days, the position of a collecing banker was far from Collecting Banker
satisfactory. Therefore, the statutory protection was granted by Sec.131 of NOTES
the N.I. Act against conversion. Sec.131 of the N.I. Act, 1881 corresponds
to Sec. 82 of the B/E Act 1882.
6.5 STATUTORY PROTECTION

According to Sec. 131 of the N.I. Act, ―A banker who has in good faith
and without negligence, received payment for a customer of a cheque,
crossed generally or specially to himself, shall not, in case the title to the
cheque proves defective, incur any liability to the true owner of the
cheque, by reason only of having received such payment." Thus, Sec.131
protects the collecting banker against an action of conversion. Of course,
this is a very high privilege given to the collecting banker. Here, the
banker is protected to a certain extent even against the equity principles
of law i.e., the object of law is always to protect the rights of the true
owner.
The above statutory protection is available to the collecting banker

only if he fuflfills the following conditions:
1. The cheque he collects must be a crossed cheque.

2. He must collect such crossed cheques only for his customer as an
agent and not as a holder for value.
3. He must collect such crossed cheques in good faith and without
negligence.
(1) Crossed cheques only: Statutory protection can be claimed by
a collecting banker only for crossed cheques. It is so because, in the case
of an open cheque, it is not absolutely necessary for a person to seek the
service of a bank. So, a banker, when collecting an open cheque, in which
his customer has no title, becomes liable for conversion.
Protection can be claimed only for those cheques which are crossed before
they reach the hands of a banker. If a cheque is crossed only after it has
reached the hands of a banker, protection under Sec.131 can not be claimed
because it can not be called a crossed cheque within the meaning of the
Sec.131.
(2) Collections on behalf of customers as an agent: The above
protection can be claimed by a banker only for those cheques collected by
93
Collecting Banker him as agent of his customers. If he acts as a holder for value, he will acqu
NOTES re a personal interest in them, and so, he can not claim protection under
Sec. 131. So also, if he collects a cheque for a person other than a
customer, he wiil not be protected. That is, if the stranger (other than the
customer) for whom he collects a cheque has no title, then the banker will
be liable for conversion.
(For the term customer refer to the Chapter—Banker and Customer).
(3) In goodfaith and without negligence: In order to get the

protection under this Section, a collecting banker must act in good faith
and without negligence. This applies to the whole transaction from the
receipt of the cheque from the customer to the receipt of the proceeds
from the paying banker. The question of good faith is not very material
because, joint stock banks do not act otherwise than in good faith. But,
the matter of negligence is of great importance. Hence, the term
negligence has been discussed under a separate heading later in this
chapter.
6.6 PROTECTION EXTENDED TO DIVIDEND

WARRANTS, DRAFTS ETC.
In England, Sec. 95 of the B/E Act offers statutory protection to a
collecting banker against the true owner, in the case of dividend warrants,
which can be crossed. The B/E Amendment Act of 1932 extends
protection to a banker‘s draft also. This rule applies to India as well. In
India, the N.I.Acts products a banker when he collects divisend warrants,
bank drafts and similar papers. this protection is extended to cheques
bearing not negotiable crossing also.
N.I.Act Amended in 1922
In England, the banker used to credit the accounts of their

customers with the cheque even before the receipt of their proceeds.In
capital and county bankLtd.Vs. Gordon,Lord Lindly said‖It must never
be forgotten that,the moment the banker places money to his customer‘s
credit,the customer is entitled to draw upon it,unless, something occurs to
deprivehim of that.‖ This riling proved to be prejudicial to the bankers,as
they were not able to claim protection unter sec.82 of theB/EAct. so, it
led to the passing of theB/E (crossed cheque) Act of 1906. similarly, the
N.I. Act was amended in 1972. the following explanation was added to
94
sec.131. Collecting Banker
―a banker receives payment of a crossed cheque, for a customer, NOTES
within the meaning of this section, not withstanding that he credits his
customer‘s account with the cheque before receiving payment thereof‖
6.7 BASIS OF NEGLIGENCE

The word ‗neligence‘ has no definite meaning in banking law.It has
been very widely interpreted by courts of law frequently to the detrimend of
bankers. it is flexible and is ever expanding in its scope as new circum
stances arise.
The liability for negligence imposes on the banker a statutory duty

to the true owner. But, as a general rule, a banker owes no duty to third
parties. According to Sir John Paget ―The assumption of this duty to a
stranger must be regarded as a part of the price paid by bankers for
protection ...‖
Moreover, when a collecting banker wants to claim protection under I Sec.
131, he has the burden of proving that he has acted without negligence. It is
so because, the true owner‘s case is complete, as soon as, conversion is
proved prima facie against the banker.
There has been considerable difference of opinion, as to, what

constitutes negligence for the purpose of Sec.131. It should be noted that
negligence in this Section is more or less artificial, as there is no
contractual relationship between the collecting banker and the true owner
of the cheque.
In Lloyds Bank Vs. Chartered Bank of India, Australia and China Ltd,
it was stated ―there is no duty at common law on the collecting banker to
exercise care: the duty is entireiy created by the Act.‖
The following definition of the term negligence was given in W.

Walbank & Co. Ltd. Vs. Westminster Ltd. ―Negligence is the doing of that
which a reasonable man under all the circumstances of the particular case
in which he is acting, would not do, or the failure to do something, which a
reasonable man under those circumstances would do.‖ The doctrine of
negligence is so shifting in its implication, that, it can not be said with
certainty as to what constitutes negligence.
For a proper understanding, negligence can be studied under the

95
Collecting Banker following heads:
NOTES
(i) Gross negligence.
(ii) Negligence connected with the immediate collection of

cheque.
(iii)Negligence under remote grounds.
(iv) Contributory negligence.
(i) Gross Negligence: If a banker is completely careless in collecting a

cheque, then, he will be held liable under the ground of ‗Gross
Negligence‘.
(i) Collecting a cheque crossed ‗A/c payee‘ for other than the payee‘s
account: Account payee crossing is a direction to the collecting
banker. If he collects a cheque crossed ‗A/c payee‘ for any person
other than the payee, then, this fact will be proved as an evidence of
gross negligence.(Akrokerri Atlantic Mines Ltd. Vs. Economic
Bank).
(ii) Failure to verify the correctness of endorsement: If a banker omits

to verify the correctness off endorsement on cheques payable to
order, he will be deprived of the statutory protection. (Babins
Junior & Sons Vs. London & South Western Banks).
(iii)Failure to verify the existence of authority in the case of per pro

signatures: If a collecting banker fails to verify the existence of
authority in the case of per pro signatures, if any, it will be proved
as an evidence of gross negligence.
(ii) Negligence Connected with the Immediate Collection: If, on the

face of a cheque, there is a warning that there is misappropriation of
money, the collecting banker should not disregard such warnings. He
should make some reasonable enquiry and only after getting some
satisfactory explanations, he can proceed to collect cheques.
Examples:
(i) Collecting a cheque drawn against the Principal‘s A/c, to the
Private A/c of the agent without enquiry: In Midland Bank Vs.
Reckitt, a solicitor named named Lord Terrington, with a special
Self-Insrtuctional Material power of attorney, drew cheques on Reckitt‘s account and paid
them into his private account with Midland bank, who collected
96
them for him. It was held that the banker was negligent in not Collecting Banker
making proper enquiry, and so, he could not get protection under NOTES
Sec.131. Similarly, collecting a cheque payable to the Principal‘s

A/c, to the Private A/c of the agent without enquiry, constitutes
negligence, which, deprives the banker of the protection guaranteed
under Sec.131.
(ii) Collecting a cheque payable to the firm to the Private A/c of a

partner without enquiry: In Bevan Vs. The National Bank Ltd., the
banker had collected a cheque payable to the firm to the private
account of the partner, who was authorised to operate be account.
In was held that the banker was liable for conversion.
(iii)Collecting a cheque payable to the company to the private account

of a direction or any other officer without enquiry: In Underwood
Vs. The Bank of Liverpool and Maretins, since the banker had
collected a number of cheques payable to the one man company, to
the private account of a sole director, he was held to be negligent
and answerable to debentureholders.
(iv) Collecting a cheque payable to the employer to the private account

of the employee would constitute negligence under Sec. 131 of the
N.I. Act.
(v) Collecting a cheque payable to the trustee, to the private account of

the person operating the trust account is another instance of
negligence of a banker.
(iii) Negligence Under Remote Grounds: Normally, we can not expect

a banker to be liable under certain circumstances. But, the bankers have
been held negligent under those situations which are branded as ‗remote
grounds.‘
Examples:
(i) Motors Trader‘s Guarantee Corporation Ltd. Vs. Midland Bank
Ltd.
Facts: Turner, a dealer in motor car had an account with the
defendant Bank at Birstol. Once, he fraudulently induced the plaintiff – a
motor car hire purchase finance corporation – to make out a crossed cheque
for £ 189.5sh. in favour of ‗Wells and Co.‘ a wellknown firm of motor
97
Collecting Banker dealers. Turner had represented the plaintiff that he was interested in
NOTES buying a motor car and subsequently, he would enter into a hire purchase
agreement. Then, Turner short circuited the entire thing i.e., he made the
cheque payable to himself by forging the signature of the payee. He paid
it into his bank for collection. Of course, the cashier had made reasonable
enquiries and was satisfied.
Decision: It was held that the banker was negligent, because, he

failed to make adequate enquiry in collecting a cheque, payable to a third
person, for a customer whose past transactions had not been satisfactory
and where his cheques had been dishonoured from time to time. In the
above case, the banker had previously dishonoured 35 cheques of Turner.
Commenting upon the aforesaid case, Sir John Paget rightly observes ―lack
of enquiry into the behaviour and habit of the customer seems somewhat
remote from the actual transaction.
(ii) Failure to ascertain the name of the employer of a new customer
constitutes negligence under Sec. 131. (Savory & Co. Vs. Lloyds Bank).
In the case of a married women, failure to verify the name of the employer
of her husband constitutes negligence.
(iii) Omission to obtain a letter of introduction from a new

customer causes negligence ((a) Ladbroke Vs. Todd, (b) Commissioner of
Taxation Vs. English, Scottish and Australian Bank).
In Guardians of St. John‘s Hampstead Vs. Barclays Bank, it was

held that ―the bank will be negligent if it opens the account on the basis of
a reference from a person unknown to the bank.‖
However, in Indian Overseas Bank Vs. Industrial Chain Concerns
(1989), the banker opened an account in the name of the above concern for
which one Mr. ‗S‘ was the proprietor. Mr. ‗S‘ was wellknown to the bank
manager and so he himself had given the letter of introduction. Then, a
number of cheques belonging to the company were collected and later on,
it was found that Mr. ‗S‘ was only an employee of the firm. Hence, the
banker was sued for negligence.
In the Supreme Court, it was held that the banker was not negligent,
since, there was no violation of any rules of the bank. ‗S‘ having been
Self-Insrtuctional Material believed to have been the proprietor, left little scope of suspicion for the
98
bank in regard to cheques payable to industrial chain concerns. Thus, Collecting Banker
except when suspicion arises, in making enquiries, the bank‘s attitude may NOTES
be solicitous and not detective. (Marfani & Co. Vs. Midland Bank).
(iv) Failure to enquire into the source of supply of large funds into
an account which has been kept in a poor condition for a long time
constitutes negligence. In Lloyds Bank Vs. Chartered Bank, it was held
that, a sudden payment of valuable cheques into the account, which was
kept in a poor condition for a longer period, should make the collecting
banker enquire into it before accepting that cheque for collection. In this
case, the Chartered Bank failed to do so and it was held liable.
(v) Contributory Negligence: In fact, this is a guise under which a
collecting banker escapes from his negligence. It is possible that a
collecting banker, even after accepting negligence on his part, can plead for
contributory negligence. That is, if the customer‘s negligence is the
proximate cause for the loss, then, the customer will be liable. In Morison
& Co. Vs. London & County Bank Ltd. one Mr. Abbot was allowed to
draw cheques on behalf of the firm Morison & Co. For a period of two
years, he drew nearly 50 cheques against the firm‘s account and paid them
into his bank with the instruction to collect and credit them to his private
account. When things came to light, the banker approved negligence on
his part, and in turn, proceeded against the employer for contributory
negligence. The bank pleaded that, since the auditor had already pointed
out in his report about the irregularities of drawing cheques by Abbot, the
employer should have pointed out this fact to the banker. But, the firm
failed to do so. It was held that the banker was not liable, since, Morison‘s
Contribution was the proximate cause of the loss.
The statutory protection under Sec. 131 will not be available to a

collecting banker, who collects cheques, where amounts have been altered.
(Kulatilleke Vs. Bank of Ceyton).
If a banker takes a cheque as an independent holder by way of

negotiation, he cannot get protection because he receives payment for
himself and not for a customer.
6.8 DUTIES OF A COLLECTING BANKER

(i)Exercise reasonable care and diligence in collection work: when
a banker collects a cheque for his costomer, he acts only as an agent of the Self-Insrtuctional Material
99
Collecting Banker customer.As an agent,he should exercise reasonable care, diligence and
NOTES skill in collection work. He should observe atmost care when presenting a
cheque or a bill for payment. Reasonable care and diligence depends upon
the circumstance of each case.
(ii) Present the cheque for collection whithout any delay: The
banker must present the cheque for payment without any delay. If there is
delay in presentment, the customer may suffer lossed due to the insolvency
of the drawer or insufficiency of funds in the account of the drawer or
insolvency of the banker himself. In all such cases, the banker should bear
the loss.
In Forman Vs. Bank of England, the bank had passed on a cheque

through country clearing instead of town clearing and so the presentment
was delayed. This resulted in the dishonour of customer‘s another cheque.
So, Forman sued the banker for damages. It was held that the banker was
negligent in collecting the cheque in question, and so, the customer was
awarded compensation.
Recently, the Coimbatore District Consumer Disputes Redressed

Forum awarded a damage of Rs. 2,000/- for the negligence of Dr.
Nanjappa, Road Branch of the Vijaya Bank for having sent a cheque for
collection after a delay of 20 days.
To ensure quick collection of cheques, the RBI has very recently
issued clear – cut instructions specifying the number of days within which
a cheque has to be collected. Generally, 10 to 14 days are allowed
depending upon the location of the branch. If a banker fails to collect a
cheque within this stipulated period, he is liable to pay interest at 2% above
the savings Bank. Interest rate, subject to a minimum of Rs.5. This
amount should be automatically credited to the customer‘s account,
irrespective of the fact, whether he claims it or not.
(iii) Notice to customer in the case of dishonour of a cheque: If the

cheque, he collects, has been dishonoured, he should inform his customer
without any delay. The N.I. Act has prescribed a reasonable time for
giving the notice of dishonour. If the fails to do so, and consequently, any
loss arises to the customer, the banker has to bear the loss.
Self-Insrtuctional Material (iv) Present the bill for acceptance at an early date: As per Sec. 61
100
of the N.I. Act, a bill of exchange must be accepted. Acceptance gives an Collecting Banker
additional currency to the bill, because, the drawee becomes liable thereon NOTES
from the date of acceptance. Moreover, in the case of a bill of exchange

payable after sight, acceptance is absolutely essential to fix the date of
maturity. If a banker undertakes to collect bills, it is his duty to present
them for acceptance at any early date. Sooner a bill is presented and got
accepted, earlier is its maturity.
However, presentment for acceptance is excused in the following

cases: (a) where a bill payable on demand, (b) where the drawee is either a
fictitious person, dead, insane or bankrupt or person having no capacity to
enter into a contract, (c) where, inspite of a reasonable diligence on the part
of the banker, the presentment cannot be effected, (d) where, although the
presentment is not quite regular, the drawee has refused to accept it on
some other ground.
Usually, the bill will be presented for acceptance on the same day
on which it is received or on the next working day. If the drawee is not
within the banker‘s call, he may present it through his agent or through
registered post.
(v) Present the bill for payment: The banker should present the bills
for payment in proper time and at proper place. If he fails to do so and if
any loss occurs to the customer, then, the banker will be liable.
Accourding to Sec.66 of the N.I. Act a bill must be presented for payment
on maturity. As per Sec.21, sight bills are payable on demand. Sec.22 lays
down that the maturity of the bill is the date on which it is due for payment,
to which, 3 days of grace are added. Thus, the rules for calculating the
maturity dates are given in Sec.23,24 and 26 of the N.I. Act. For instance,
when the period is stated in months, the last day of the concerned month is
the due date of which 3 days of grace are added. When the period is stated
in days, the first day may be excluded in calculating the due date. When
the due date falls on a public holiday, it is deemed to be due on the next
working day.
(vi) Protest and note a foreign bill for non – acceptance: In case of
dishonour of a bill by non – acceptance or non – payment, it is the duty of
the collecting banker to inform the customer immediately. Generally, he
returns the bill to the customer. In the absence of specific instructions, Self-Insrtuctional Material
101
Collecting Banker collecting bankers do not get the inland bills noted and protested for
NOTES dishonour. If the bill in questions happens to be a foreign bill, the banker
should have it protested and noted by a Notary public and then forwarded it
to the customer.
6.9 TERMINOLOGIES
1)Collection 2) Value 3)Agent 4) Conversion 5) Statutory 6)
Negligence

1) Give two instances under which a banker can act as a holder for
value.
2) Give two examples for negligence under remote grounds.
3) Discuss in detail the statutory protection granted to a collecting

banker in India.
4) Explain with reference to the relevant provisions, the duties and

liabilities of a colleting
banker and the legal protection he enjoys.
5) What constitutes negligence under Sec. 131 of the N.I. Act?

Practice‖, Himalaya
Publishing House, Mumbai.
Galgotia Publishing
Company.
102
UNIT – VII SUBSIDIARY SERVICES Subsidiary Services
7.1 Introduction NOTES
7.2 Agency Services

7.3 Payment and Collection
7.4 Purchase and sale of Securities
7.5 Banker as Executor, Administrator and Trustee Executor
7.6 Administrator
7.7 Trustee
7.8 Attorney
7.9 Miscellaneous or General utility services
7.10 Terminologies
7.1 INTRODUCTION
Modern commercial banks, besides performing the main
functions viz., accepting deposits and lending money, cover a wide range
of financial and nonfinancial services to customers and general public. The
bank services are steadily increasing to meet the growing needs of the
community.
The services and facilities provided by a modern banker may be classified
into two as,
(i) Agency services.
(ii) Miscallaneous services or general utility services.
7.2 AGENCY SERVICES

The banker acts as the agent of his customer in performing the
following functions.
(I) Payment and collection of subscriptions, dividends, salaries, pension
etc.
(II) Purchase and sale of securities.
(III) Acting as executor, administrator and trustee.
(IV) Acting as attorney.
7.3 PAYMENT AND COLLECTION

Bankers make payments and receive money on behalf of their customers in
the following ways.
(a) Payment of insurance premia.
(b) Payment of membership subscription to clubs, libraries and
professional associations.
(c) Payment of rent and salaries.
(d) Collection of dividends on behalf of customers.
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Subsidiary Services (e) Collection of pension, rent etc.
(f) Transfer of funds from one account to another.
NOTES The banks charge only a nominal amount for this service. Tannan
considers this service as an indirect asset that promotes the business of the
bank.
For doing this service, the banker should get a clear instruction in
writing from the customer. The instructions of the customer should be clear
and unambiguous . It should not be in uncertain terms which give rise to
controversial meaning. If the banker goes wrong due to equivocal
instruction, he can not be held liable on the ground of negligence, if he
acted in good faith.
The banker may not accept instructions which are difficult to comply
with, but once accepted, it is the duty of the banker to carry out instructions
carefully and promptly. Once, the instructions are accepted, the customer
should ensure that necessary funds are in his credit on the specified date.
The banker is under no obligation to make payment unless the account is in
credit or operating with an agreed overdraft.
Having accepted standing instructions, a banker would be deemed to
be negligent if he fails to carry them out, unless it can be proved that non-
compliance has resulted from circumstances beyond his control. In order to
ensure timely compliance, the standing instructions must be recorded in a
register designated as ―Standing Instruction Register‖ and noted in the
ledger folio of the account holder concerned.
7.4 PURCHASE AND SALE OF SECURITIES

Banks undertake to purchase and sell shares and debentures of joint
stock company on behalf o its customers only. Whenever the customers
delegate the work, the bankers should get clear and precise instruction in a
special form used for this purpose. The form should contain the following
particulars.
(a) Particulars of securities to be sold or purchased.
(b) The minimum and maximum price at whichthe securities are to be
sold or purchased.
(c) The period within they are to be sold or purchased.
(d) The names, address of the persons in whose name they are to be
registered.
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In executing the sale or purchase order, the banker acts as an agent of Subsidiary Services
the customer. Only members of the stock exchange can be the function of NOTES
purchase and sale of securities. As the banks are not the members of the
stock exchange, they appoint brokers who act as sub-agents of the banks to
carry out the bank‘s instructions. The recent amendment in the Stock
Exchange Regulation Act, permits the bank to become members in the
local stock exchange. The banker should strictly follow the customer‘s
instructions and use skill and care in execution of sale and purchase order.
In case of an order from the customer for purchase of securities, the
bankers should ensure that sufficient funds are available in the account of
the customer. The banker should ensure that this position continues till the
order is executed. While delivering the shares to the customer, he should be
advised to have them transferred to his name as early as possible.
No action for execution of sale order should be taken until the
securities come into possession of the bank and they are found good for
immediate delivery in the market. Relative transfer deeds duly signed by
the seller and witnessed must accompany the shares. On receipt of the sale
proceeds, the amount has to be credited to the customer‘s account under
advice to him.
The banks today undertake to purchase and sell government
securities, bonds of public undertakings, National Saving Certificates and
units of Units Trust of India.
7.5 BANKER AS EXECUTOR, ADMINISTRATOR AND

TRUSTEE EXECUTOR
A person may make a will expressing his intention regarding
disposal of his properties after his death. A will has to be in writing signed
by the person making the will who is called testator and attested by two
witnesses. A will becomes effective only after it is approved by a court of
competent jurisdiction by the issuance of a probate. A probate is a copy of
the will duly certified under the seal of the court together with a grant of
administration to the estate of the testator. The probate is conclusive as to
the appointment of executor and the validity and content of the will. The
person appointed by the will to administer the estate of the deceased is
known as the executor.
7.6 ADMINISTRATOR
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Subsidiary Services In case a person dies without making a valid will, the property of
the person will devolve according to the law which he is subject to. The
NOTES person claiming the property of the deceased may apply to the court for the
administration of the estate. The person in whose favour the court grants
letter of administration is known as the administrator.
The administrator and the executor perform similar functions
except that the administrator administer the property of the deceased
according to the law and that the executor follows the instructions
contained in the will of the deceased.
7.7 TRUSTEE
A person may desire that after his death, a part or whole of his
estate be held in a trust for the benefit of certain beneficiaries named in the
will. In such a case he may create a trust under his will directing certain
person to hold the property on a trust and hand over the income from the
property to such person after a specified time or uponthe happening of a
specified event. The person who holds the property for the beneficiaries is
known as trustee. In some cases, the owner of the property may divest
himself of the property in part or whole, in favour of person or persons
known as trustees who have to administer the property.
Banker as Executor, Administrator and Trustee
Commercial banks undertake the function of executors,
administrators and trustees. Many banks have set up their respective head
offices. Executor and Trustee Department which administers the trust and
will of the customers. Banks are better fitted to do the service because:
(1) The bank, beibng a corporate body has a continuous exixtence. An
individual may not be able to act due to his incapacity or death.
(2) Banks have staff having specialized knowledge and rich
experience and so the management of the trust/property will be
efficient.
(3) The management of the trust/property is economical as the over
head charges are spread over a number of trusts.
(4) Banks act honestly and promptly which may not be expected from
an individual trustee.
(5) The affairs relating to the estateare kept confidential as in case of
other business of customers.
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The banks also act as trustees for debenture holders as companies Subsidiary Services
finance their projects through the issue of debentures. Banks are in a better NOTES
position to act as such trustees as they have knowledge of the working of

the industry and can safeguard the intrest of the debentureholders.
7.8 ATTORNEY
Power of attorney may be given by a customer to his banker.
Legal effect of acting under a power of attorney is as valid as if customer
had done it himself. By granting power of attorney, the customer
authorizes the banker to receive dividend and interest on securities
belonging to him and give a valid discharge thereof. The banker may also
be empowered to sign transfer forms in respect of purchase and sale of
stock exchange securities and government securities.
7.9 MISCELLANEOUS OR GENERAL UTILITY

SERVICES
The banker provides the following general utility services to customers.
1) Safe custody of valuables,
2) Letters of credit,
3) Traveller‘s cheques,
4) Remittance of funds,
5) Merchant banking,
6) Dealing in foreign exchange business,
7) Lease financing,
8) Factoring,
9) Housing finance,
10) Underwriting of securities
11) Tax consultancy,
12) Credit caards,
13) Gift cheques,
14) Cosultancy service,
15) Teller system.
1.Safe custody of valuables
Banks accept shares, debentures, bonds, fixed deposit receipts,
deeds of property, life insurance polices and sealed boxes and packets
containing will or valuables such as jewellery from their customers for safe
custody. Banks are equipped with strong, fire proof and their proof rooms
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Subsidiary Services for safe maintenance of the articles. There are two ways through which a
baner ensures safety of its customer‘s valuables.
NOTES (i) By accepting valuable for safe custody.
(ii) By hiring out safe deposit vaults or lockers to the customers.
(i) Safe Custody: Safe custody accounts are normally opened only
for those customers who maintain satisfactory accounts or who are
properly introduced to the bank.
The articles for safe custody may be handed over to the banker either
openly or in a sealed box or envelope. While accepting sealed boxes, the
banker should see that they are sealed properly. The words ‗contents
unknown ‗should be prominently written on such boxes to indicate that the
bank has n knowledge of the content of the package.
The bank issues a safe custody receipt which contains the name
and address of the customer and the particulars about the articles lodged for
safe custody. The customer is asked to preserve the safe custody receipt
and surrender the same while taking delivery of the articles. In case the
receipt is lost by the customer, the articles may e delivered against a letter
of indemnity signed by the account holder.
A customer may take delivery of all securities lodged for safe
custody or only a part of them. In the former case, he has to surrender the
safe custody receipt duly discharged. Where the customer desires a part
delivery, he has to write a delivery order and hand it over to the bank along
with the relative safe custody deposit receipt.
Ordinarily, the securities are returned to the customer himself and
not to a third party. In case, the articles are to be delivered to a third party,
the banker should ensure that:
(a) the safe custody receipt is duly discharged by the customer,
(b) delivery of securities is permitted to a third party by a
separate letter of authority signed by the customer.
Safe custody accounts can be opened in single or joint names,
partnership firms, companies, trust etc.
Liability of the banker
The liability of the banker in respect of safe custody is the same
as that of a bailee under the contract of bailment.
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The banker should take as much care of the articles accepted for Subsidiary Services
safe custody as a man of ordinary prudence would take in case of his own NOTES
goods. If he does so and thereafter there is loss or destruction of valuables,

he shall not be liable for the loss in the absence of any contract to the
contrary.
However, the customer may hold the banker liable in the following cases:
(1) For negligence: The banker shall be held liable for negligence e g.,
the safe deposit vaults are not strong and thus thefts are possible,
the banker leaves the vault unlocked and entry to the safe vault is
not restricted that enables any one to remove the articles.
Chandra Trikha Vs. Punjab National Bank
It was decided in the case that where a bailee bank failed to deliver
the box in the same condition as it was entrusted and items of
ornaments found missing, the bank has failed in its duty as bailee to
take care of goods and hence liable to compensate the bailor for the
loss suffered.
(2) For conversion: If the property held for safe custody is delivered to
a wrong person, the banker will be held for conversion.
(3) For fraud by his own employees: The bank shall be held liable for
any fraud committed by any of its employees dealing with the
articles given for safe custody.
(ii) Safe Deposit Vault: Banks provide safe deposit locker
facility to its customers in metropolitan cities and large towns to keep
articles and valuables. Lockers which are convenient repositories for
personal jewellery, official documents and securities are hired out
customers. Locker cabinets are usually installed in strong rooms which
have security arrangements like grill doors and a fire resistant strong door.
The doors can be opened by the use of separate keys held by the bank
officers for dual control. The customer is allowed access to the vault during
the prescribed business hours. Some private banks have cameras
monitoring those using lockers. Further accessed guards are employed in
the premises.
Each locker has only one key for use by the renter and there is no
duplicate of it. For opening the locker, two keys are to be used i.e., the
renters‘ key and another key which is common for all lockers in the cabinet
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Subsidiary Services known as the ‗custodian key‘ or ‗master key‘. Usually one master key is
kept in the safe custody of another branch of the same bank or another
NOTES bank. Once a locker is opened with the help of the master key and renter‘s
key, it can be locked by the renter‘s key alone. The banker has neither
knowledge nor takes cognizance of the locker.
Opening of Locker Account: As a general rule, the renter
should be introduced. They are required to open a savings or current
account and file an authority to the bank to debit rental charges to the
respective account.
Lease Agreement: The hirer is required to execute a lease
agreement which contains all the terms and conditions under which the
locker is hired out.
Rent: The rent for the locker depends on its size and is collected
in advance from the renter. In case a locker is surrendered before the expiry
of the term, no refund of rent for the unexpired period is usually allowed.
Lockers are usually let out for one year although they may also be let out
for two or three years.
Nomination: The hirer of a locker is allowed to nominate a
person to whom, in case of death of the hirer, the bank may give access to
the locker and liberty to remove the contents of the locker.
Rama Chakravarthy Vs. Punjab National Bank
In the above case, the wife of a deceased customer claimed the
content of the safety locker as the nominee of the deceased customer. But
the banker demanded a successions certificate from her.
It was held that the banker has no business to ask the nominee to
produce a succession certificate where there is anominee.
Loss of Key: If the key of the locker is lost, note should be
made of the loss on the declaration card, specimen signature book and the
safe custody register. The bank should call upon the renter in writing to
deposit an amount sufficient to cover the cost of breaking open the locker
and fitting a new one. The drilling open should be done in the presence of
renter/ renters. If the renter is unable to be present, he must sign a letter
authorizing the bank to break open the door in the presence of a specified
person and to deliver the contents to him after the locker is opened.
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Surrender of Locker: A locker may be surrendered at any time. Subsidiary Services
While surrendering the locker, the renter should open the NOTES
locker, remove all contents and handover the key to the

custodian of the vault. The banker should obtain the signature
of the renter to a declaration on the relative card that the renter
has removed the contents of the locker and the banker is relived
from liability.
Death of Renter : In case of death of a renter, the contents of
the locker shall be delivered to the legal representative of the
deceased only after getting a valid succession certificate from
the court.
Prohibitory orders: a banker may receive an order from a court
or a government department asking him to seal a particular
locker and stop operations. The locker should be promptly
sealed with bank‘s seal under intimation to the renter.
Joint Names: a locker may be hired in the joint names of two or
more persons. In such a case, the banker must get clear
instructions in regard to operation of the locker account. The
instructions can not be varied by any one of the joint renters.
subsequent modifications can be made by the consent of the
them.
2. Letters of Credit
Letters of credit assume great importance in international trade. The
problem in the foreign trade is that the exporters and importers are
separated by distance and are unfamiliar with each other. The exporter will
send the goods only if he is satisfied with the credit worthiness of the
importer. Moreover, if the exporter is to be paid immediately after
shipment of the goods, the importer will have to make payment before he
actually receives them. On the other hand, if payment is to be made by the
importer after receipt of the goods, the exporter will have to wait for a long
time to get payment for the goods. The problem of payment in foreign
trade is overcome by banks which issues what is known as a letter of
credit. The letter of credit assures payment to exporters soon after he parts
with the goods and enables the importer to make payment only after he
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Subsidiary Services receives the goods or the document of title to goods. Thus letters of credit
facilitate foreign trade.
NOTES Definition: ―A letter of credit is defined as, ―letter issued by the importer‘s
bank in favour of the exporter authorizing him to draw bills up to an
amount specified in it and assuring him of payment against the delivery of
the prescribed documents in his own country.‖
The letter of credit is a sort of a guarantee to the exporter that his draft
will be honoured by a specified bank upto a certain amount as per the
specified terms.
the importer who wishes to import goods approaches his banker and
requests him to open a letter of credit in favour of the overseas supplier.
The letter of credit is a sort of a guarantee to the exporter that his draft will
be honoured by a specified bank upto a certain amount as per the specified
terms.
the importer who wishes to import goods approaches his banker and
requests him to open a letter of credit in favour of the overseas supplier.
The importer is called the opener of Accountee and his bank is known as
opening bank. The letter of credit is sent to the foreign branch of the bank
or to its correspondent bank, which is called the negotiating bank. After
satisfying itself about the authenticity of the credit, the bank forwards it to
the exporter who is called the beneficiary.
The exporter ships the goods, prepares the documents and draws a
bill on his importer. The negotiating bank receives the bill and pays the
amount if it is in accordance with the letter of credit. The opening bank
receives the bill and documents and presents them for acceptance if they
are D/A bills and for payment if D/P bills. Documents are delivered on
payment or acceptance, as the case may be, to the importer who takes
delivery of the goods from the ship.
A letter of credit has four principle parties:
1. Applicant (Opener): Normally applicant is the buyer of goods on
whose behalf the LC is opened on the basis of his instructions.
2. Issuing Bank (opening Bank): The bank which issues the LC and
undertakes to make payment to the beneficiary on surrender of
documents as per terms of the LC.
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3. Beneficiary: Beneficiary is normally the seller of goods who has to Subsidiary Services
get paymet from buyer, in whose favour the LC is opened. NOTES
4. Advising Bank: The bank through whom the LC is advised to the

beneficiary thereby assuring genuineness of the credit. Advising
bank is normally situated in the country / place of beneficiary.
The other parties involved in a letter of credit are:
1. Confirming Bnank: This is a bank normally in the exporter‘s
country which adds its confirmation to the LC, thereby undertaking
the responsibility of payment / negotiation/ acceptance/ under
credit, in addition to that of the issuing bank.
2. Negotiating Bank: The bank which negotiates the documents
received under the LC.
3. Paying Bank or Norminated Bank: The bank nominated and
authorized by the issuing bank to make payment under credit.
4. Reimbursing Bank: The bank authorized to honour the
reimbursement claim of settlement to
negotiation/acceptance/payment. It is normally the bank with
which the issuing bank maintains an account, from where payment
will be made.
Types of Letters of Credit
The various types of letters of credit are as follows:
(i) Documentary and clean letter of credit: A documentary or
secured letter of credit is one which the issuing bank undertakes to honour
the bills drawn under it only when it receives with it certain documents
such as bill of lading, insurance policy, invoice, certificate of origin etc.
The documents are held by the issuing bank as security for advance made
by it.
A clean or open letter of credit is one where no documents are
involved. The issuing bank undertakes to honour the bills without
production of any documents. Such a letter of credit is issued for
customers of high financial standing.
(ii) Revocable and irrevocable letter of credit: A revocable letter of
credit is one where the issuing bank reserves the right to cancel or modify
the credit at any time without giving notice of cancellation to the
beneficiary. A revocable letter of credit, therefore, does not constitute a
113
Subsidiary Services legally binding undertaking between the banker and the exporter. It is
mere intimation or advice to the beneficiary to draw bills under the credit.
NOTES Such credit provides no real security to the exporter. But, if there is a
specific provision in the letter of credit that notice of cancellation should be
given, the banker must abide by it.
An irrevocable letter of credit is one which can not be cancelled or
modified without the consent of the beneficiary. Banks in India, generally,
open only irrevocable credits.
(iii) Fixed and Revolving Letter of Credit: A fixed letter of credit is
opened for a specific amount or for a specific period. The exporter may
draw one or more bills up to the amount specificfied. The credit would
exhaust as soon as the total amount has been withdrawn. If the period is
fixed, it expires after the lapse of the prescribed time.
In case of revolving letter of credit, the amount of credit remains
constant during the period of validity. When a bill is drawn, the amount
gets reduced and when the bill is duly honoured, the credit amount is
automatically renewed. For example, a revolving letter of credit is opened
for a sum of Rs. 70,000. The exporter draws a bill for Rs. 20,000. Now the
credit amount will get reduced to Rs. 50,000. When the bill for Rs. 20,000
is paid by the importer the original sum Rs. 70,000 will be available to the
beneficiary. The revolving credit obviates the need to establish a fresh
credit each time.
(iv) Confirmed and unconfirmed letter of credit: The prupose of
letter of credit to the exporter is that he can undertake shipment of goods
without ascertaining the credit worthiness of the importer. However, to
what extent can the exporter rely on the undertaking given by a bank in a
foreign country? To overcome this, the exporter may ask the importer to
open a confirmed letter of credit.
In such a case, the importer has to request his bank to open a
condirmed letter o credit. The opening bank then would request the
negotiating bank to add confiramation to the credit and the latter does so, it
is called confirmed letter of credit. The negotiating banker here becomes
the confirming bank.
The confirming bank becomes independently liable to make
payments to the beneficiary. A confirmed letter of credit can neither be
114
modified nor cancelled without the consent of all parites. So it is Subsidiary Services
essentially an irrevocable letter of credit. NOTES
An unconfirmed letter of credit is one which does not carry the

confirmation of the negotiating bank.
(v)With or without recourse letter of credit: In case of a letter of
credit with recourse; the beneficiary of the letter of credit holds himself
liable to the holder of the bill, in the event of dishonour. Where the
beneficiary does not hold himself liable, such a letter of credit is known as
without recourse letter of credit.
(vi) Transferable and non-transferable letter of credit: Under an
ordinary letter of credit, the beneficiary alone has the right to draw bills of
exchange and get them negotiated. He can not transfer his right to another
person. In case, a transferable credit is issued, the beneficiary has the right
to transfer the credit in whole or in part to one or more third parties. Such
letters of credit are issued in cases where beneficiary may be an
intermediary in the trade transaction and not a supplier himself.
(vii) Back-to-back letter of credit: If an intermediary in a trade
transaction has received a non-transferable letter of credit he can not
transfer it to the supplier. In such a case, he can request the banker to open
a new credit in favour of the supplier on the security of the letter of credit
issued in his in favour of the supplier on the security of the letter of credit
issued in his favour. Such a letter of credit is called back-to-back letter of
credit.
(viii) Red clause letter of credit: A red clause letter of credit is one
which contains a clause which gives to the negotiating bank to grant
advance for short period to the beneficiary upto a specified amout at the
responsibility of the issuing bank. The particular clause in the letter of
credit used to be generally printed in red ink and so is known as red clause
and the credit is known as red clause letter of credit.
(ix) Green clause letter of credit: In addition to the credit facilities
available under Red clause for purchase, processing and packing, the
exporter get finance for warehousing and insurance charges at the port
where the goods are stored pending availability of the ship.
Traveller’s Letter of Credit:
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Subsidiary Services Traveller‘s letters of credit are issued for the convenience of
travelling public. A traveler who intends to go abroad incurs great risk if he
NOTES keeps cash with him. Traveller‘s letter of credit issued by banks avoids the
risk of loss or inconvenience in carrying large amount of cash.
A travelers letter of credit takes the form of a request by the issuing
bank to its foreign agents or correspondents to honour the drafts issued by
it in favour of the traveler who is called the beneficiary. If the letter is
addressed to more than one bank it is called a circular letter of credit.
The travelers letter of credit consists of two part (i)letter of credit
and (ii) letter of identification or letter of indication. It is essential to
produce before the banker the letter of identification along with the letter of
credit to receive payment. To avoid theft and impersonation, the customer
should keep the letter of credit and letter of identification separate.
Every withdrawal with full details viz., date, name of the payee,
place of payment, the amount in words and figures, the name of the paying
bankers are recorded in the proforma printed on the back of the letter of
credit. The paying bank collects the drafts issued by the issuing bank at the
time of making payments from the beneficiary and presents them to the
issuing bank to get reimbursement.
The applicant for a letter of credit is asked to deposit full amount
for the which the letter of credit is required. In some cases the account of
the customer is debited with the amount.
A letter of credit is also issued against the guarantee of the
customers to pay the amount with interest at a latter date. Such a letter of
credit is called guarantee letter of credit.
Circular Note:
A Circular Note resembles a circular letter of credit, but with one
difference. Circular notes are in the form of cheques issued for a round
sum, generally in the currency of the country of the issuing bank. The
name of the holder and the number of letter of letter of identification
supplied and instruction to the correspondent bank are entered on the
reverse side of the circular note.
3.Travellers‘ Cheques
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The Travellers‘ Cheque can be useful to persons who frequently Subsidiary Services
travel within the country or abroad. The features of the a travellers‘cheque NOTES
are the following:

1. A travellers‘ cheque can be purchased by anyone. He need not be a
customer of the bank.
2. Travellers‘ cheque are issued in different denominations printed
thereon, e.g. Rs. 50, Rs. 100 or Rs. 500. A person can buy any
number of cheques. No commission is charged on sale of travelers
cheques negotiable in India.
3. The purchaser has to deposit money with the issuing bank
equivalent to the amount of travelers cheque he intends to buy.
4. At the time of purchase, the purchaser shall have to sign at the place
marked ‗when countersigned below with this signature‘.
5. At the time of encashment, the purchaser is required to sign on the
travelers cheque at the specified place and to fill in the date and
place of encashment.
6. The travelers cheques are usually encashabler only at the branches
of the issuing bank or at the branches of the other banks with which
the issuing bank may have arrangement. Nowadays, banks enter
into arrangements with the establishments such as hotels,
restaurants, shops etc. Who accept the travelers cheques from their
customers. Such establishments display the following sign board
for this purpose.
‗WE ACCEPT STATE BANK‘S TRAVELLERS CHEQUES‘
7. There is no expiry period for the traveller‘s cheques. Unused
cheques can be returned back to the issuing bank and payment can
be obtained for them.
8. The travellers‘ cheques are issued in single name only i.e. not in
joint names / clubs, societies and companies.
4. Remittance of Funds
Banks remit funds from one place to another through the network
of their branches. The main instruments for transfer of funds are bank
drafts, mail transfer, telegraphic transfers and travelers cheques.
Bank Drafts
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Subsidiary Services A bank draft is an order from one branch to another branch of the
same bank to pay a specified sum of money to the person named therein or
NOTES to his order.
A person who wants to send money can buy a draft by paying the
required amount from a bank and send to another who can enchash it in his
place. Banks issue drafts for a nominal commission. The commission
depends upon the amount to be remitted. This service is extended to public
in general. The purchaser of the draft need not be a customer or account
holder or the bank.
Legal Status of a Draft

According to Section 13 of the Negotiable Instruments Act, bank
draft is not a negotiable instrument. But a draft has all the attributes of a
bill of exchange, such as an instrument in writing, containing an
unconditional order, signed by the banker etc. Hence a bank draft is
treated on par with a bill of exchange. Sections 85-A and 131 of the
Negotiable Instruments Act specifically treat a bank draft as a bill of
exchange or a cheque. Section 85-A provides protection to bank against
forged or unauthorized endorsement on drafts and Section 131 gives
protection to collecting banker in respect of crossed draft.
The Calcutta High Court in Shukla Vs. The Punjab National Bank
Ltd., (1960) has observed that ―a bank draft, which is an order by branch of
a bank to its another branch, fulfils all the attributes of a bill of exchange.‖
The above view was upheld by the Calcutta High Court in a subsequent
case, State Bank of India and another Vs.Jyothi Ranjan Mazumdar. Hence
a bank draft can be treated as a negotiable instrument.
Stopping payment of Bank Draft
A bank draft is a commitment on the part of the issuing bank to pay
a certain amount of money to a third party. The purchaser of the bank draft
is not deemed to be a party to the instrument. Therefore, the banker should
not comply with ‗stop payment order‘ of the purchaser of a draft. If the
draft is passed on to the payee, he acquires a right in the instrument which
can not be set aside by the ‗Stop payment order‘ of the purchaser. If the
draft has been negotiated by the payee to a holder in due course, the latter
would have enforceable right against the banker.
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Cancellation of Draft Subsidiary Services
Sometimes the purchaser of the bank draft may return it to the NOTES
issuing bank with a request to cancel it and refund the amount to him. In
such a case, the banker is justified in complying with such request of the
purchaser provided the draft has not been delivered to the payee. The
contract entered into between the bank and the payee of the draft is
imcomplete and revocable until and unless it is delivered to the payee. The
purchaser is, therefore, is competent to get the draft cancelled so long as it
is not delivered to the payee. The moment the draft is sent to the payee the
purchaser loses this right.
Loss of Draft
In case the draft is lost and it is reported to the issuing bank, it
should promptly advice the loss to the drawee branch which will make note
of the loss in the record to guard itself against the fraudulent use of the lost
draft. If the purchaser reports that the draft has been lost without any
endorsement thereon, the issuing bank may safely refuse payment of the
same because any endorsement thereon would be deemed to be a forged
endorsement and the holder of the draft can not get good title.
Where the draft is lost by the purchaser he is entitled to get a
duplicate one from the issuing bank. The banker, before issuing a
duplicate draft, should take the following steps:
1. The banker should be satisfied with the genuineness of the request
by the purchaser for the issue of a duplicate.
2. A confirmation as regards non-payment of the draft should be
obtained from the drawee bank.
3. An indemnity bond must be obtained from the purchaser. If the
draft has reached the hands of the payee, he should also sign the
indemnity bond.
4. When a duplicate draft is issued, the drawee bank must be advised
of it.
The period of validity of the draft is six months from the date of
issue.
Mail Transfer
The facility of transforming money by mail is available to
customers having some sort of an account with the bank. The remitter
119
Subsidiary Services deposits the amount to be transferred with a small commission with the
remitting branch. After receiving the money, the bank sends instructions by
NOTES mail to its drawee branch to credit the account of the payee with the
specified amount and informs the payee about it. Remittance of money by
mail transfer is relatively cheaper, safer and more convenient. Mail
transfers are effected not only for remittance with in the country but also
for international remittances.
Telegraphic Transfer
Telegraphic transfers are effected by telegram, telephone or telex as
desired by the remitter. Transfer of funds by telegraphic transfer is the
most rapid and convenient but expensive method.
Electronic Remittances
Now - a - days almost all banks have computerised their operation.
Besides, all banks in different countries are inter – linked with cach other
through internet. This mechanization has facilitated esay remittance of
money not only inside the country but also to any part of the world through
the press of a button. Money can be transferred from one account in one
branch to another account in another branch of the same bank or a different
bank.
After the introduction of computers, M.T. and T.T. have lost their
significance. It is so because computers have facilitated speedy remittance
of funds from one end to another in a moments notice. Thus, it minimises
the loss of interest since money is transferred instantly from one end to
another. Moreover, it facilitates transfer of money from one branch of a
bank to another branch of a different bank also which is not possible in the
case of M.T. or T.T.
Recently arrangements have been made to pass on messages either
general or specific through satellite facility. For instance banks all over the
world are inter-linked with a satellite maintained by SWIFT (Society for
Worldwide Inter – bank Financial Telecommunications) in Europe. In
India, Gateway, Bombay, maintained by the Computer Maintenance
Corporatin of India is its agent. Those banks which want to enjoy this
satellite facility in India can open SWIFT centres with Gateway, and thus,
all the banks in the world are inter-linked with each other. Any general
information like foreign exchange rate movements or specific information
120
like remittance of money. Or opening of Letter of Credit or making Subsidiary Services
forfeiting arrangements can be passed on to the banks concerned or to all NOTES
the banks as a whole as the case may be in a moment‘s notice through this
satellite arrangement.
Foreign Inward Remittance Payment Scheme (FIRPS)
This new scheme is mainly intended for facilitating easy remittance
of money from foreign countries. It is meant purely for foreign inward
remittance. Any NRI or foreign notional can remit money in foreign
currency to any beneficiary in India through his bank in abroad.
Generally, it is done by means of an order to its branch or correspondent in
India to pay the stated sum to the person named in the document. This
remittance is in foreign currency. This document can be encashable only at
the specified branch or the specified bank which is acting as a
correspondent.
Now, under this new scheme, the branch concerned or the
correspondent bank in India will convert the foreign currency into Indian
rupee at the then prevailing market rates and issue another document in
favour of the beneficiary. This document is called FIRP instrument. Since
the bankers in India are authorised dealers in foreign exchange, they can
covert the foreign currency into Indian rupee easily.
For all practiacal purposes, this FIRP instrument is treated as a
Negotriable instrument and hence it can be endorsed to anybody in
settlement of claims. Moreover, it is encashable at any branch of any
commercial bank which is a member of the Foreign Exchange Dealers
Association of India (FEDAI).
5. Mechant Banking
Merchant banking is a British concept brough into India by
Grindlays Bank in 1969. State Bank of India, Bank of Baroda, Bank of
India, Canara Bank, Indian Bank, Indian Overseaas Bank and Syndicate
Bank have organized merchant banking divisions.
Merchant banking divisions offer under one roof a wide range of
services financial, technical, managerial etc., which are ordinarily available
through a widely spread non-banking agencies and professionals.
The main services of a merchant banking division of a commercial
bank are the following:
121
Subsidiary Services 1. All aspects of project counseling such as, preinvestment and
feasibility studies to identify a project.
NOTES 2. Liaison work to help the entrepreneurs obtain various government
consent including letter of intent and industrial licences and other
permissions from government and semi – government badies.
3. Preparation of project reports after examining means and sources of
finance.
4. Assisting in formulation of financial plan and preparation and filing
of application for of loans.
5. Management of public issue including preparation and issue of
prospectus, finalization of issue agencies and completion of the
issue.
6. Assisting companies in matters relating to corporate restructuring,
amalgamations, mergers and take over etc.,
7. Assistance to widen and strengthen the capital base of small scale
industries which are planning to enter medium scale sector by
undertaking expansion/diversification of their activities and
involving change in the type of organization.
8. Help to locate and evaluate new market in foreign countries and
assist in finding out foreign collaboration.
The amount of fee charged for the service by the bank depends
upon the type and nature of serviceas well as time required for completing
the assignment.
6. Dealing in Foreign Exchange Business:
Banks offer varied services in respect of foreign exchange business.
(1) Deferred payments: Banks execute deferred payment guarantee
on behalf of their constituents to enable them to acquire plant and
machinery from overseas suppliers on deferred payment terms. In suitable
cases even foreign currency loans are arranged for this purpose.
(2) Import packing facility: Import packing facilities are extended
to first class customers whereby the imported goods are released against
trust receipts. Outstandings under such facility are to be liquidated within
a stipulated period.
(3) Export Finance: Banks grant export finance both at pre-andpost-
shipment at concessional rates of interest. Under post-shipment credit,
122
facilities like discounting of bills etc., are made available. Preshipment Subsidiary Services
advances are granted for a maximum period of 90 days NOTES
(4) Forward Contracts: Some banks enter into forward contracts

with importers or exporters for sale or purchase of foreign exchange at
fixed rate to safeguard them against fluctuations in the rates of foreign
exchange.
(5) Issue of solvency certificates, freight certificates, introduction
letter for various purposes relating to foreign exchange business is another
significant service.
(6) Banks get trade information and disseminate it and pass on the
enquiries to the importers and exporters. They also initiate trade enquiries
on behalf of customers to locate suitable buyers for their products abroad.
7. Leasing Finance
Lease is a method of financing equipment and machinery. It is a
mechanism by which a person acquires the use of an asset by paying a pre-
determined amount called ‗rental‘ periodically over a period of time. In
countries like USA, UK and Japan approximately 25 per cent of plant and
equipment is being financed by leasing companies.
The Banking Regulation Act, 1949, did not permit banks to directly
transact leasing business. The Banking Laws (Amendment) Act, 1983,
enables commercial banks to carry on equipment leasing business and set
up subsidiaries for carrying on such business. A subsidiary company
promoted by a bank may undertake equipment leasing business and such
other activities incidential thereto.
8. Factoring
Factoring is a ―continuing arrangement between a financial
institution (the ‗factor‘) and a business concern (the ‗client‘) selling goods
or services to trade customers (the ‗customers‘) whereby the factor
purchases the client‘s book debts (accounts receivables) either with or
without recourse to the client and in relation thereto controls the credit
extended to the customers and administers the sales ledger.‖
The purchase of book debts or receivables is central to the function
of factoring, permitting, the factor to provide basic services such as: (i)
123
Subsidiary Services administration of the seller‘s sales ledger, (ii) Provision of pre – payment
against the debts purchased, (iii) collection of the debts purchased and (iv)
NOTES covering the credit risk involved. Besides the above four basic services,
factors could also provide certain advisory services by virtue of their
experience in credit and financial dealings and access to extensive credit
information. Thus, as a financial system combining all the related services,
factoring offers a district solution to the problems posed by working capital
tied up in trade debts.
To ease the working capital problems arising from delays in
payment of bills, introduction of factoring service was recommended by
Vaghul Committee. Later, Kalyanasundaram committee was specifically
appointed to examine the feasibility of introduction of factoring service in
India. The committee‘s recommendation that there is need and scope for
factoring was accepted by the Reserve Bank of India. Banking Regulation
Act was amended in July 1990 for the purpose and RBI directed that
facoring activities could be undertaken by banks through the medium of
separate subsidiaries. Following this, the State Bank of India has set up
Factors and commercial Service Private Limited for providing factoring
service to industries.
9. Housing Finance
Banks played insignificant role in providing housing finance till the

early seventies. The Reserve Bank of India appointed a ‗Working Group‘
to examine the role of banking system in providing finance to housing
schemes. The recommendations of the Group were examined by the
Reserve Bank which issued guidelines to banks in 1979. Accordingly, the
banks could advance housing loans directly to the parties concerned or
indirectly to State Housing Boards or Housing and Urban Development
Corporations in the form of subscription to their bonds or debentures.
State Bank of India, Canara Bank and Punjab National Bank have
formed housing subsidiaries to provide housing finance. In tune with the
new housing policy of the government, the Reserve Bank of India has
liberalised credit for housing finance. According to the new guidelines the
maximum period of repayment is 15 years, the maximum margin is 35 per
cent and the rate of interest is 12.5%, 13.5%, 14% and 14.5% to 16% per
124
annum according to the size of the loan. The rate of interest for scheduled Subsidiary Services
caste and tribes on housing loan upto Rs. 5,000 will remain at 4% per NOTES
annum.
10. Underwriting of Securities
Commercial banks underwrite a portion of the public issue of shares,

bonds and debentures of joint stock companies. Such underwriting
provides an indirect form of insurance to the companies on the event of
public subscriptions falling short of expectations. Nowadays banks act as
bankers to a particular issue of shares or debentures. They receive
applications for share and application money from the public. They also
undertake to receive subsequent instalments from those who are allotted
shares.
11. Tax Consultancy
Tax consultancy service is of recent origin. This service is intended to

help tax payers wno may not be able to afford a consultant of their own.
The bank:s‘ income tax department offers complete tax service which
consist of advice on income tax and other personal taxes, preparing
customer‘s annual statement, claiming allowances, file appeals etc., The
consultancy service is also provided tc non-resident Indians. A survey
reveals that quite a few people utilise this service.
12. Credit Cards
Banks have recently introduced the credit card system. Credit cards
are issued to good customers having current or saving accounts, free of
charge. The credit card enables a customer to purchase goods or services
from certain retail and service establishments upto a certain limit without
making immediate payment. The establishments get paid by the bank
operating the plar. The bank assumes the risk and responsibility of collect-
ing the dues from the customers.
Each credit card bears the specimen signature of. the holder and is
embossed by the issuing banker with the holders‘ name and address. The
establishments, on presentation of the card, delivers the goods or provides
the services. The supplier places the credit card in a special imprinter
125
Subsidiary Services machine to record the holder's name and number on a sales voucher to
which are added the particulars of the transaction. The holder signs the
NOTES voucher and the signature is compared by the supplier with that on the
card. The voucher is then sent to the bank which pays it after deducting its
service charges. Once in a month, the bank sends a statement of all the
credit purchase in the previous month to the credit card holder and the
latter has to remit the amount either by cash or by cheque.
The facilities provided to credit card holders are fast expanding.

Central Bank and Canara Bank permit their credit card holders to withdraw
cash from any branch of the bank upto a certain limit. Central Bank got
tied up with Mastercard of USA, the largest card – issuing organization in
the world. More than three million establishments spread over 140
countries honour Mastercard. As on June 30, 1998 twelve banks, SBI and
its associates were engaged in credit card business further 20 Indian banks
have entered into business by having tie up arrangements with other banks.
13. Gift Cheques
Banks in India sell gift cheques against payment in cash or by debit

to an account. Gift cheques are issued in fixed denominations. As the
name indicates, these cheques are intended to be given as gifts on
occasions such as wedding, birthdays etc. The purchaser of the cheque
need not be an account holder with that bank. The payee can encash them
at any time. The gift cheque is payable on par at all branches of the issuing
bank. It has no negotiability and its payment is made only to the payee.
14. Consultancy Service
State Bank of India and Indian Bank have set up consultancy cell
to provide consultancy service to small scale industries. The consultancy
service covers technical, financial, managerial and economic aspects. This
service is offered not only at the project stage but also at every stage of
implementation of the project.
15. Teller System

126
The object of the teller system is to expedite payment of cheques Subsidiary Services
for small amounts. Under this system, the teller is authorised to receive NOTES
cash and make payments upto limited amounts without reference to the
ledger balance or the specimen signatures. He is expected to be conversant
with the type of accounts allotted to him and the specimen signatures of
relative customers. Only in case of doubt, the teller gets the balance or
signature verified. This system is adopted at certain serected centres and
not all the branches of a bank.
7.10 TERMINOLOGIES
1) Subsidiary 2) Agency 3) Collection 4) Sale of Securities 5)
Executor 6) Attorney

1. Describe the mechanism and effect of different commercial letters
of credit.
2. What is a letter of credit? What is its significance in financing

foreign trade?
3. Decribe the procedure to tbe followed in regard to safe deposit

vault.
4. Explain the agency service performed by a banker.
5. Describe the subsidiary services of a modern commercial bank.

127
Insurance and Risk UNIT –VIII INSURANCE AND RISK
Structure
8.1 Introduction
NOTES 8.2 Methods of Risk Management
8.3 Lack o f Insurance
8.4 Perks( Benefits) Of Insurance To Risk Management
8.7 Reforms in Insurance Sector in India
8.10 Problems Faced by Public Enterprises
8.12 Terminologies
8.1 INTRODUCTION
Insurance Risk Management is the assessment and quantification of the
likelihood and financial impact of events that may occur in the customer's
world that require settlement by the insurer; and the ability to spread the risk
of these events occurring across other insurance underwriter's in the market.
Risk Management work typically involves the application of mathematical and
statistical modelling to determine appropriate premium cover and the value of
insurance risk to 'hold' vs 'distribute'.
Insurance Risk Management: Value
Alignment of the pricing market strategy and reinsurance arrangements to
the organisation's risk appetite as well as optimising the goals of the organisation
Assist clients to recognise risk events and changes to claim rates earlier, so
as to move towards a more market responsive, risk-based pricing approach which
ensures the efficient deployment of capital and a reduction in extreme risk event
losses.
Enhance the feedback mechanism from claims function to underwriting and
product development processes to improve the performance and profitability of
these processes.
8.2 Methods of Risk Management
As people begin to age, they usually encounter more health risks.
Managing pure risk entails the process of identifying, evaluating and
subjugating these risks – a defensive strategy to prepare for the unexpected.
The basic methods for risk management – avoidance, retention, sharing,
transferring, and loss prevention and reduction – can apply to all facets of an
individual's life and can pay off in the long run. Here's a look at these five
methods and how they can apply to managing health risks.
1)Avoidance
Avoidance is a method for mitigating risk by not participating in activities
that may incur injury, sickness or death. Smoking cigarettes is an example of
Self-Instructional Material 128
one such activity because avoiding it may lessen both health and financial Insurance and Risk
risks.
According to the American Lung Association, smoking is the leading cause of NOTES
preventable death in the U.S. and claims more than 438,000 lives per year.
Additionally, the U.S. Center for Disease Control and Prevention notes that
smoking is the No. 1 risk factor for getting lung cancer, and the risk only
increases the longer that people smoke.
Life insurance companies mitigate this risk on their end by raising premiums
for smokers than nonsmokers. Under theAffordable Health Care Act, also
known as Obamacare, health insurers are able to increase premiums based on
age, geography, family size and smoking status. The law allows for up to a
50% surcharge on premiums for smokers.
2) Retention
Retention is the acknowledgment and acceptance of a risk as a given.
Usually, this accepted risk is a cost to help offset larger risks down the road,
such as opting to select a lower premium health insurance plan that carries a
higher deductible rate. The initial risk is the cost of having to pay more out-of-
pocket medical expenses if health issues arise. If the issue becomes more
serious or life-threatening, then the health insurance benefits are available to
cover most of the costs beyond the deductible. If the individual has no serious
health issues warranting any additional medical expenses for the year, then
they avoid the out-of-pocket payments, mitigating the larger risk altogether.
3)Sharing
Sharing risk is often implemented through employer-based benefits that
allow for the company to pay a portion of insurance premiums with the
employee. In essence, this shares the risk with the company and all employees
participating in the insurance benefits. The understanding is that with more
participants sharing the risks, the costs of premiums should shrink
proportionately. Individuals may find it in their best interest to participate in
sharing the risk by choosing employer health care and life insurance plans
when possible.
4)Transferring
The use of health insurance is an example of transferring risk because the
financial risks associated with health care are transferred from the individual
to the insurer. Insurance companies assume the financial risk in exchange for a
fee known as a premium and a documented contract between the insurer and
individual. The contract states all the stipulations and conditions that must be
met and maintained for the insurer to take on the financial responsibility of
covering the risk.
By accepting the terms and conditions and paying the premiums, an individual
has managed to transfer most, if not all, risk to the insurer. The insurer
carefully applies many statistics and algorithms to accurately determine the
129
Self-Instructional Material
proper premium payments commensurate to the requested coverage. When
Insurance and Risk claims are made, the insurer confirms whether the conditions are met to
provide the contractual payout for the risk outcome.
NOTES 5)Loss Prevention and Reduction

This method of risk management attempts to minimize the loss, rather
than completely eliminate it. While accepting the risk, it stays focused on
keeping the loss contained and preventing it from spreading. An example of
this in health insurance is preventative care.
Health insurers encourage preventative care visits, often free of co-pays, where
members can receive annual checkups and physical examinations. Insurers
understand that spotting potential health issues early on and administering
preventative care can help minimize medical costs in the long run. Many
health plans also provide discounts to gyms and health clubs as another means
of prevention and reduction in order to keep members active and healthy.
8.3 Lack of Insurance

Although it‘s easy to perceive insurance as a cost, in reality, it‘s
probably one of the biggest value adds to any business. Devastating events
such as natural disasters can single-handedly bring a business to its end,
quickly and without any prior warning. Insurance can effectively minimize the
damage cause by these unforeseen events, which in some instances can mean
saving a company from having to close its doors – that‘s a tremendous amount
of value.
However, many small businesses and young companies are
often underinsured. As NBC News notes, this is for two reasons: First, they
may not have the capital to acquire all the insurance they need to cover their
bases. Second, they are unaware of what they need to insure and don‘t take
stock of their insurance needs regularly, so their companies outgrow their
coverage.
―One of the biggest lapses is in the area of business interruption insurance,‖

Clair Wilkinson, vice president at the Insurance Information Institute,
explained to the news source. ―This kind of coverage, which you might need
to buy separately from a standard business insurance package, can be critical
after a natural disaster, fire or power failure that shuts your business down.
Business interruption insurance covers lost profits and operating expenses,
such as salaries, that must still be paid even when a company can‘t operate.‖
8.4 PERKS( BENEFITS) OF INSURANCE TO RISK MANAGEMENT

For young businesses, insurance should be a crucial cornerstone
in risk management programs because it brings so much to the table. Risk
Management Monitor recently discussed some of the core benefits of risk
management:

1) Protection from financial loss – For young businesses, a multitude of Insurance and Risk
things can go wrong, from natural disasters to theft and burglary. Insurance
can be a key tool in preventing financial losses in the early stages of the game.
When companies have small budgets, even having to buy a new laptop NOTES
because a thief stole one from the office can be devastating.
2) Better reputation – New businesses are always looking for financial

support, whether it‘s from angel investors or banks. Having insurance reflects
well on the company and makes the owner look responsible, which can help
secure that necessary loan or investment.
3) Improve liability – General liability insurance protects entrepreneurs

against unforeseen everyday threats, whether it‘s someone slipping on their
floors or getting their fingers jammed in the door on the way out. There are
only so many things businesses can prepare for, liability insurance helps
entrepreneurs prepare for the rest.
If you wish to learn more about risk management programs, leave your
contact info and one of our representatives will contact you shortly.
The insurance market has evolved from the establishment of the first
automobile insurance policy to the various types of life insurance products
that are available today. The insurance market has a structure that involves
property and casualty insurers, life insurers as well as health insurers. Each
of these types of insurers have regulations that apply to the policies that they
provide. Insurers are regulated by a combination of state and federal laws,
depending on the type of insurance they offer.
1)Property and Casualty
Property and casualty insurers offer various types of insurance for

individuals to purchase, such as automobile and homeowners insurance. A
property and casualty insurer can also offer types of commercial insurance,
such as a small business package, general business liability, umbrella
policies and workers compensation. Property and casualty insurers are
regulated by laws in each state where they sell policies.
2) Mutual Insurance Companies
A mutual insurance company is a company owned by policyholders. This

means that each policyholder is given a vote to decide who will sit on the
board of directors. A mutual insurance company can sell types of insurance
or only provide one type of product or service to their customers. The
earnings from a mutual insurance company are distributed to policyholders
in the form of dividends.
131
3) Stock Insurance Companies
Insurance and Risk
A stock insurance company is a company owned by stockholders. Unlike a

mutual insurance company, a stock insurer not only needs to protect its
NOTES
policyholders but also maximize profits for the company's policyholders. A
stock insurance company can pay dividends to stockholders but generally do
not pay dividends to their policyholders.
4)Life Insurance
Property and casualty insurers can also provide types of life insurance. A life
insurance company can be a mutual insurance company or part of a stock
insurance company. Companies that provide life insurance usually offer
financial products to their policyholders, such as annuities and certain types
of mutual funds.
5) Health Insurance
The insurance market also contains companies that provide health insurance
policies to individuals as well as employers in the form of a group health
insurance policy. Companies that provide a group health insurance policy to
an employer are regulated by a combination of federal and state laws. States
can also provide health insurance to residents if it is unavailable from a
private insurer because of cost or ineligibility.
6) Common Ownership
Many insurance companies are under a common ownership in which one

corporation has one or more insurance business that act as independent
companies. The most common type of common ownership for an insurance
company is when it is established as a captive insurer. A captive insurer can
be formed to provide coverage for various types of business risks. The most
common type of captive insurer provides reinsurance coverage. This is a type
of insurance where multiple insurance companies share the same loss.

Evaluating a company‘s future performance
Understanding a subject entity‘s industry is a hallmark of any good
valuation report. Conducting a very detailed and intense industry analysis can
provide valuation analysts with specific knowledge needed to determine an
appropriate conclusion of value. As a general rule, a company‘s performance
is commensurate with the industry to which it belongs. Understanding the
different aspects of an industry is a key component to evaluating future
performance and the overall value of a company. This is an aspect of business
valuation that warrants greater attention from valuation professionals.

Insurance and Risk
NOTES
―Oftentimes, the industry outlook section of a business valuation report is

overlooked and not given the proper attention it deserves.‖
Oftentimes, the industry outlook section of a business valuation report is

overlooked and not given the proper attention it deserves. Appropriately
analyzing a company‘s industry has many useful applications. First and
foremost, a valuation analyst should understand a subject entity‘s industry to
determine whether he or she can reasonably expect to perform the valuation
engagement with professional competence. A poor understanding of a
company‘s industry is a legitimate reason to decline an engagement.
Industry research and analysis is applicable when reviewing both

nonfinancial and financial information during the course of a valuation
engagement. Nonfinancial industry data that needs to be considered include
industry performance, industry outlook, environmental concerns, supply
chains, products and/or services offered, competitive landscape, and capital
intensity, to name a few. These considerations assist in determining (and
defending, if necessary) projected growth rates, capital requirements, discount
rates, and the discount for lack of marketability.
There are a number of items to consider when researching industry

performance. They include external competition, current performance,
industry restructuring, trends, and regulations. The industry outlook is
important because it gives the reader of a valuation report an idea of where a
company may be going in the next three to five years. This information is not
only useful in forecasting, but it allows for analyzing a company with respect
to economic indicators such as a recession, rising employment, consumer
expenditures, etc. Environmental concerns can be a material factor if there is a
major concern in a particular industry. This may impact future capital
investment and cash flow. A valuation analyst should, if possible, evaluate a
subject entity‘s supply chain and understand the interplay between a company
133
and both their key buying (e.g. vendors) and selling (e.g. customers) industry
Insurance and Risk participants. Perhaps the most important consideration is a company‘s
product/service segmentation and understanding how it relates to their
industry. This gives the valuation analyst knowledge about a company‘s main
NOTES source of revenue, opportunities for growth, and concentration level. All
factors described in this paragraph are key drivers in determining revenue
volatility.
An industry‘s competitive landscape offers important information regarding

cost structure benchmarking, competition, and barriers to entry. Understanding
cost structure benchmarks of an industry helps a valuation analyst to compare
a subject entity‘s profit margin against industry norms. Competition can be
broken down by geographic location to further analyze the number of
companies competing and whether internal and/or external competition exists.
Internal competition may include price, location, quality of service, and extra
services offered. External competition mainly includes any sort of cheaper
alternative available to a consumer. A valuation analyst should consider and
make a checklist of the following factors when determining an industry‘s
barriers to entry: competition, concentration, life cycle stage, capital intensity,
technology change, regulation, and industry assistance.
Most valuation reports of operating entities include analytical procedures as

part of the financial analysis. This includes analyzing liquidity, profits and
profit margins, sales, debt, and assets. In addition to performing a financial
analysis of a subject entity, a valuation analyst should obtain financial
information specific to the subject entity‘s industry (if available). This
includes comparative common size industry financial information for the
relevant time period. It is important to compare and benchmark the
performance of a subject entity with competitors and industry trends and
norms. This comparison between a subject entity‘s financial performance and
the financial performance of the subject entity‘s industry as a whole is a good
indication of the overall health of a company.
Analyzing a subject entity‘s industry also assists with determining an

appropriate discount rate. There are three main types of industry risk to
consider. Those three industry risks are: structural risk, growth risk, and
sensitivity risk. Structural risks include such components as barriers to entry,
competition, supply/demand, revenue volatility, and life cycle stage. Growth
risk evaluates forecasted industry growth against past performance of a subject
entity. Sensitivity risk evaluates the most significant external factors affecting
an industry‘s performance. For example, components of sensitivity risk may
include per capita disposable income and the national unemployment rate.
These items are very general, but there may be components of sensitivity risk
applicable to a certain industry which should be considered.
Understanding a subject entity‘s industry is a hallmark of any good valuation

report. Conducting a very detailed and intense industry analysis can provide
valuation analysts with specific knowledge needed to determine an appropriate
conclusion of value. As a general rule, a company‘s performance is Insurance and Risk
commensurate with the industry to which it belongs. Understanding the
different aspects of an industry is a key component to evaluating future
performance and the overall value of a company. This is an aspect of business NOTES
valuation that warrants greater attention from valuation professionals.
8.7 Reforms in Insurance Sector in India:
The winter session of the India parliament concluded on December

20,2013. Against the backdrop of the slowing growth rate and demands from
the investment community for economic reforms, one critical piece of
legislation that was expected to be considered by the parliament was The
Insurance Laws (Amendment) Bill, 2008 (the "Bill"). The government‘s
approval to increase the foreign direct investment limit for the insurance sector
from 26 per cent. to 49 per cent. had also given rise to the expectation that the
Bill would be passed at the winter session of the parliament.
In 2004, the Law Commission recommended a comprehensive reform of

the Insurance Act, 1938 (the ―Insurance Act‖). In 2005, the Narasimhan
Committee made further recommendations for changes to the Insurance Act.
The Bill, which amends the Insurance Act, 1938, the General Insurance
Business (Nationalisation) Act, 1972 and the Insurance Regulatory and
Development Authority ("IRDA") Act, 1999 and incorporates the
recommendations of the Law Commission and the Narasimhan Committee has
been up for consideration by the parliament since 2008.
Lack of political consensus has led to yet another hiatus in the passage of the
Bill into law. Had the Bill been passed at the recently concluded session of
parliament, it may perhaps have reinforced the message to the global
investment community that economic reforms are underway.
key features of the bill
• Increased foreign investment: The bill proposes an increase in the foreign

investment ceiling from 26 per cent to 49 per cent.
• Capital raising: The Bill provides for general insurance companies to raise
funds from the capital markets with the permission of the government. Under
the current laws, insurance companies may raise only equity share capital.
• Lloyd's, the society of underwriters based in London is to be allowed to do

business in India through joint ventures through Indian partners and to act as
reinsurers through their branches in India. Since Lloyds is not a company but
an insurance market, further clarity is needed as to whether the intention is to
allow individual members to operate in the country.
135
• Special Economic Zone ("SEZ"): The Bill proposes to allow foreign insurers
Insurance and Risk to operate in SEZs without regulatory control but allows the government in its
discretion to allow any of the provisions of the Insurance Act to be applicable
to such insurers.
NOTES
proposals other
The Bill also proposes, amongst others, to provide greater protection to the
insured by imposing penalties to those insurers who fail to meet their
obligations with respect to underwriting third party motor insurance or other
insurance policies in rural sectors and allows for the partial assignment of
insurance policies. The Bill also does away with the existing requirement for
Indian promoters of an insurance company to reduce their stake to 26 per cent.
over a period of ten years.
The insurance sector:

Currently, there are 52 insurance companies operating in India. Out of
these 52 companies, 1 is in the reinsurance business, 24 are in the life
insurance business and 27 are in the non-life insurance business. The General
Insurance Corporation is the sole national reinsurer in the country. Insurance
penetration (measured as a ratio of the premium to the GDP) and insurance
density (measured as a ratio of the premium to the total population) in India
has been at significantly low levels in India compared to its peers in Asia. As
of 2011, insurance penetration in the life insurance sector was 3.40 percent,
whereas the penetration in the non-life insurance sector was in the range of
0.55 per cent. to 0.75 per cent. Insurance density as of 2011 was USD 49.0 for
the life insurance sector and USD 10.0 in the non-life sector. The measure of
insurance penetration and insurance density reflects the level of development
of the insurance sector in a country. These low penetration levels suggest that
the insurance sector in India has a promising potential for growth.
Additionally, a rising population, a growing economy, increased domestic
savings and greater awareness of insurance products are positive indicators for
growth for the insurance industry.
The insurance industry in India does appear to be at a crossroad. A

regulatory environment which is perceived to be discouraging to innovation
and competitiveness has stifled the ability of insurance companies to remain
profitable and seek ways to increase their product offerings. It is prescient that
the IRDA in its annual report stated that "Since the opening up of the Indian
insurance sector for private participation in 1999, India has reported an
increase in insurance density for every subsequent year and for the first time
reported a fall in the year 2011."
What the passage of the bill into law would mean

Indication that the government is focused on reforms:
The passing of the Bill in parliament would be an important reinforcement

to the foreign investment community of India's commitment to financial and
economic reforms. It is important for the global business community to
perceive India as a safe harbor for their capital. Insurance and Risk
Address capital requirements:
The insurance business is a capital intensive business. The IRDA estimates NOTES
that if insurance companies are to improve insurance penetration and introduce
new products and improve distribution networks while maintaining and
increasing their customer base, they will need approximately 612 billion
rupees. With a raise in the investment ceiling to 49 per cent., the insurance
sector would be able to raise much needed capital to grow and improve the
value proposition to end customers and operational performance. Increasing
the ceiling for investment in the insurance sector is the best way to meet
additional capital requirements. Also, like water seeking its own level, any
delay in the passage and implementation of the Bill may also result in capital
moving to other competitive markets.
Prospects for growth:
India is expected to have a working population of 795.5 million by the year

2026. Additionally, increasing incomes would also lead to greater disposable
incomes which are often the target of financial service providers like insurance
companies. Also, as the population becomes more financially literate, their
appreciation of the benefits of insurance would be enhanced. With the wider
participation of foreign insurers in the Indian insurance industry, the potential
for growth in the insurance sector be realized to a greater degree.
Infrastructure investment:
Another persuasive argument for the Bill to be passed is the need for
investment in the infrastructure sector. Infrastructure or its lack thereof is
frequently cited as one of the biggest hurdles to doing business in India. India's
planning commission has projected a doubling of infrastructure investment to
$1,025 billion in the 12th Five Year Plan (2012-2017). The government has set
of target of $500 billion in infrastructure spending from the private sector. It is
widely anticipated that the reforms to the insurance sector once implemented
would result in more capital flow into the country which would lead to more
investments by insurance companies in the infrastructure sector. The Bill also
complements the relaxations which the IRDA had effected to allow insurers to
invest in the infrastructure sector.
The past of insurance sector in India
In the history of the Indian insurance sector, a decade back LIC was the only
life insurance provider. Other public sector companies like the National
Insurance, United India Insurance, Oriental Insurance and New India
Assurance provided non-life insurance or say general insurance in India.
However, with the introduction of new private sector companies, the insurance
sector in India gained a momentum in the year 2000. Currently, 24 life
137
insurance companies and 30 non-life insurance companies have been
Insurance and Risk aggressive enough to rule the insurance sector in India.
But, there are yet many more insurers who are awaiting for IRDAI approvals
NOTES to start both life insurance and non-life insurance sectors in India.
The present of insurance sector in India

So far as the industry goes, LIC, New India, National Insurance, United
insurance and Oriental are the only government ruled entity that stands high
both in the market share as well as their contribution to the Insurance sector in
India. There are two specialized insurers – Agriculture Insurance Company
Ltd catering to Crop Insurance and Export Credit Guarantee of India catering
to Credit Insurance. Whereas, others are the private insurers (both life and
general) who have done a joint venture with foreign insurance companies to
start their insurance businesses in India.
This collaboration with the foreign markets has made the Insurance
Sector in India only grow tremendously with a high current market share.
India allowed private companies in insurance sector in 2000, setting a limit on
FDI to 26%, which was increased to 49% in 2014. IRDAI states – Insurance
Laws (Amendment) Act, 2015 provides for enhancement of the Foreign
Investment Cap in an Indian Insurance Company from 26% to an Explicitly
Composite Limit of 49% with the safeguard of Indian Ownership and Control.
Private insurers like HDFC, ICICI and SBI have been some tough competitors
for providing life as well as non-life products to the insurance sector in India.

Though LIC continues to dominate the Insurance sector in India, the
introduction of the new private insurers will see a vibrant expansion and
growth of both life and non-life sectors in 2017. The demands for new
insurance policies with pocket-friendly premiums are sky high. Since the
domestic economy cannot grow drastically, the insurance sector in India is
controlled for a strong growth.
With the increase in income and exponential growth of purchasing power as

well as household savings, the insurance sector in India would introduce
emerging trends like product innovation, multi-distribution, better claims
management and regulatory trends in the Indian market.
The government also strives hard to provide insurance to individuals in a

below poverty line by introducing schemes like the
 Pradhan Mantri Suraksha Bima Yojana (PMSBY),

 Rashtriya Swasthya Bima Yojana (RSBY) and
 Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY).

Introduction of these schemes would help the lower and lower-middle income Insurance and Risk
categories to utilize the new policies with lower premiums in India.
With several regulatory changes in the insurance sector in India, the future NOTES
looks pretty awesome and promising for the life insurance industry. This
would further lead to a change in the way insurers take care of the business
and engage proactively with its genuine buyers.
Some demographic factors like the growing insurance awareness of the

insurance, retirement planning, growing middle class and young insurable
crowd will substantially increase the growth of the Insurance sector in India.

Public Enterprises in any country cannot perform all the economic and
business activities efficiently. Even in a socialist country, public enterprises in
all the fields cannot discharge their full responsibilities.
Complete governmentalisation or nationalisation will lead towards serfdom or
anarchism. In absence of free will personal interests; the economic activities
will not provide adequate and qualitative production.
This is the reason that some troubles have started in some parts of the USSR and
China. In Indian conditions where we have adopted mixed economy, expecting too
much from public enterprises will distort the economy and ultimately will lead
towards wastage of precious resources.
Supporting and subsidizing by the Government indirectly punish the tax-payers and
the country-men. Therefore, it is the high time to recast our Industrial Policy and
should consider the productivity and efficiency as criteria to continue a particular unit
whether public enterprises or private enterprises.
The public enterprises cannot be sustained as sacred cow without milk. Similarly, the
unscrupulous private enterprises declaring themselves sick cannot be put on
ambulance for a longer time. It is a matter of satisfaction that the Government has
started taking pragmatic approaches to revive the productivity and efficiency base
criteria for the development of an enterprise.
The restrictions on utilisation of full capacity by private enterprises are being

removed gradually to increase production and productivity of the economy. The
public enterprises will have to come at the combative of the private enterprises.
If the formers are losing in the efficiency and productivity criteria, they should be
closed down and the private enterprises having more efficiency and productivity
should be encouraged to increase production of the economy.
The industrial policy that public enterprises provide more employment opportunities
although production is nominal should be changed to bring them under productivity
criterion. Providing employment for the sake of employment is adding fuel to the fire
of inflation any trend in the economy because the productivity is very low.
139
The Government decision to denationalise certain production undertaking is welcome
Insurance and Risk step because they remain idle without production or very small production. Other
political parties should realise the gravity of productivity and discard the public
enterprises for the sake of political system.
NOTES
The Government cannot perform all the functions with equal efficiency. The
regulatory role, promotional role, entrepreneurial role and planning role have not been
fully discharged by Government
Barring few enterprises as envisaged in the Industrial Policy 1956, rest of the public
enterprises should be returned back to the private institutions if their productivities are
not improved to the level of a private enterprise.
The government should concentrate more on regulatory and planning roles. The
entrepreneurial role should be confined only to those areas where the private
entrepreneurs are hesitant and cannot discharge their functions satisfactorily at
national level.
Non-profitable business activities, defense, transport, education, communication and

such types of public activities should be undertaken by the Government. W. A. Levis
observed: ―The nationalisation of industry is not essential to planning; a government
can do nearly anything it wants to do by way of controlling industry without resorting
to nationalisation‖.
Neither state monopoly nor private monopoly is desirable in the economy. The
competition, being the backbone of the productivity should be encouraged to promote
the economy.
The competition may be between and amongst the public and private enterprises. The
productivity and efficiency are the important criteria to permit the continuation of an
enterprise.
The public enterprises in some areas performed better than the private enterprises and,
therefore, should be permitted to continue to accelerate the growth of the economy.
On the other hand, many public enterprises are wasting public money because of
continuous loss and less production.
Such enterprises should be handed over to the competent private companies. On the
reverse, some private enterprises are at loss and declaring themselves sick. They
should be taken over by the Government companies of the area or by the private
houses as the circumstances and nature of the business may be prevailing at that time.
The privatisation may be done after analysing the efficiency of the organisation and
their role in the economy. The problem of public enterprises, inefficiency of public
enterprises and efficiency of private enterprises, are considered under privatisation
and efficiency.

8.10 PROBLEMS FACED BY PUBLIC ENTERPRISES Insurance and Risk
The following are the problems faced by government (Public) enterprises:

1. Bureaucratic management: The organizations are run by bureaucrats who may not
NOTES
have knowledge of running an enterprise or knowledge of the industry trends and
practices.
2. Lack of autonomy: These enterprises lack freedom and flexibility. They are subject
to the control of the politicians and bureaucrats. Due to this, their performance is
affected.
3. Delayed decisions: Decisions are delayed due to red-tapism and bureaucratic

procedures. A file may have to pass through many officials for approval before a
decision can be taken. By the time a decision is taken, the business environment
might have undergone considerable changes.
4. Unplanned production: Many of the public sector enterprises produce products

which are not in tune with the market demand. The needs of consumers are not taken
into account while planning production. The result is poor sales and the organization
is left with huge unsold stocks which are then disposed off at a discount.
5. No clear-cut price policy: There is no clear cut price policy. Certain organization
follow a cost plus price policy, some administered pricing, a few dual pricing
followed by those adopting association pricing. There is no clarity with regard to the
price policy.
6. Delays and cost overruns: Due to poor planning, lack of funds, mismanagement
etc. many projects face delays and the consequent cost overruns. It is common to find
new projects being announced without earlier projects being completed.
7. High overheads: Many of these organizations incur high overheads. There is very
little focus on cost control and cost reduction. Wastage of resources are rampant.
Many organizations even maintain entire townships and incur high costs.
8. Over-staffing: The salary costs and pension costs of many of these organizations
are high. It is because government considers these organizations as generators of
employment and many of them are overstaffed.
9. Poor productivity: Due to reliance on outdated technology, lack of upgradation and

inefficiencies, low levels of employee motivation and poor work culture, the
productivity of many of these enterprises is quite low.
10. Lack of proper planning: Planning is poor and in some cases even absent. Projects
are commenced without detailed analysis and planning. This results in losses and
delays.
11. Low capacity utilization: Capacity utilization is very low because of inefficiencies
in management, inefficiencies in processes and procedures and low employee
efficiency.
141
12. Poor profitability: The profitability of the enterprises is quite low due to several
Insurance and Risk inefficiencies in the way in which they are managed. Many enterprises incur heavy
losses and the government regularly infuses capital to run them.
NOTES 13. Poor labour management relations: The industrial climate in many of the
enterprises is strained. This results in poor employee productivity. Unions are strong
and strikes, go-slow tactics and agitations are common. This results in low morale and
motivation levels and as a consequence, low output, poor quality of products and
services are common.
14. High employee turnover: There is no incentive for improved performance, very
little freedom to implement innovative ideas and practices, promotions are based on
seniority and not on performance, chance of work in new technologies is very less
with salary levels very low when compared to the private sector. Therefore many
talented employees leave the organization and the rate ofemployee turnover is high.
15. Nepotism and Corruption: Many of these enterprises function according to the
dictates of politicians. There are many instances of corruption and undue favors being
extended to select group of people who enjoy political patronage.
16. Poor work ethic: Employees of the public sector enterprises, enjoy job security. In
many enterprises there are strong labor unions with political affiliations to protect
employee interests. Due to these factors, employees do not feel the need to work in a
dedicated manner and contribute to the growth of the organization. Low productivity,
poor quality of work, absenteeism etc are common in these enterprises.
17. Low quality of output: The output of public enterprises, whether it is a product or
a service, is not of high quality. This is due to lack of investment in technology, low
employee morale, inferior quality of raw materials, poor work culture and lack of
quality focus. Therefore they are not able to compete with the superior quality
products and services offered by the private sector.
18. Uncertain financial allocation: These units are dependent on the government for
funding and the quantum of funds allocation is uncertain. Therefore they are not in a
position to plan for long term investment needs in an efficient manner.

The following point shows the role and importance of insurance:
Insurance has evolved as a process of safeguarding the interest of people from
loss and uncertainty. It may be described as a social device to reduce or eliminate risk
of loss to life and property.
Insurance contributes a lot to the general economic growth of the society by provides
stability to the functioning of process. The insurance industries develop financial
institutions and reduce uncertainties by improving financial resources.

1. Provide safety and security: Insurance and Risk
Insurance provide financial support and reduce uncertainties in business and
human life. It provides safety and security against particular event. There is
always a fear of sudden loss. Insurance provides a cover against any sudden NOTES
loss. For example, in case of life insurance financial assistance is provided to
the family of the insured on his death. In case of other insurance security is
provided against the loss due to fire, marine, accidents etc.
2. Generates financial resources:

Insurance generate funds by collecting premium. These funds are invested in
government securities and stock. These funds are gainfully employed in
industrial development of a country for generating more funds and utilised for
the economic development of the country. Employment opportunities are
increased by big investments leading to capital formation.
3. Life insurance encourages savings:

Insurance does not only protect against risks and uncertainties, but also
provides an investment channel too. Life insurance enables systematic savings
due to payment of regular premium. Life insurance provides a mode of
investment. It develops a habit of saving money by paying premium. The
insured get the lump sum amount at the maturity of the contract. Thus life
insurance encourages savings.
4. Promotes economic growth:

Insurance generates significant impact on the economy by mobilizing
domestic savings. Insurance turn accumulated capital into productive
investments. Insurance enables to mitigate loss, financial stability and
promotes trade and commerce activities those results into economic growth
and development. Thus, insurance plays a crucial role in sustainable growth of
an economy.
5. Medical support:
A medical insurance considered essential in managing risk in health. Anyone
can be a victim of critical illness unexpectedly. And rising medical expense is
of great concern. Medical Insurance is one of the insurance policies that cater
for different type of health risks. The insured gets a medical support in case of
medical insurance policy.
6. Spreading of risk:
Insurance facilitates spreading of risk from the insured to the insurer. The
basic principle of insurance is to spread risk among a large number of people.
A large number of persons get insurance policies and pay premium to the
insurer. Whenever a loss occurs, it is compensated out of funds of the insurer.
7. Source of collecting funds:

Large funds are collected by the way of premium. These funds are utilised in
the industrial development of a country, which accelerates the economic
143
growth. Employment opportunities are increased by such big investments.
Insurance and Risk Thus, insurance has become an important source of capital formation
8.12 Terminologies
NOTES
1) Risk 2) Industry 3)Reforms 4) Problems 5) Privatization 6)
Economic Growth
1. What are the benefits of Insurance to Risk Management?
2. Explain the General Structure of the insurance market?
3. What are the significant aspects of an Industry?
4. State the future of insurance sector in India?
5. Explain the problems faced by public enterprises?

Publishing Company.

UNIT - IX Regulations Relating to Insurance
Accounting and Management
REGULATIONS RELATING TO INSURANCE
ACCOUNTING AND MANAGEMENT
NOTES
Structure
9.1 . Introduction
9.10 Terminologies
9.1 . INTRODUCTION
This module assumes that the reader has an understanding of basic
accounting concepts, along the lines normally included in an introductory
accounting course at the university level. Rather than provide a basic primer
on the subject of accounting, the module describes aspects of accounting that
are specific to the field of insurance and, more particularly, are critical to the
supervisor in understanding and assessing the business and operations of an
insurer. Notwithstanding this general objective, in order to facilitate
understanding, the module also summarizes basic accounting principles
(generally accepted accounting principles, known as GAAP), relates these to
so-called statutory accounting principles (SAP), and summarizes some
advantages and disadvantages of various systems of supervisory reporting.
Deriving from the underlying nature of the insurance business, insurance
accounting exhibits a number of interesting attributes. For example, because
claims are incurred after the insurance contracts have been sold, insurers must
price their product before they know what it will cost them to provide the
service they are selling—an unusual situation for any business. Can you
imagine an automobile manufacturer having to price its new line of cars when
the input costs of labor and material are not only unknown, but are subject to
great and unpredictable variation from period to period? In the life insurance
field, companies routinely issue contracts where a claim may not be made for
40 or 50 years in the future, and yet it is clear, since the company has
undertaken an obligation, that some sort of liability should be reported when
the contract is issued. In the field of general insurance (also known as non-life
insurance), the time period until Insurance Super vision Core Curriculum the
claim occurs may be shorter, but the company does not know how many
claims will be made, when they will be paid, or the ultimate amount that will
be paid. Insurance accounting has to reflect the unique characteristics of the
insurance business, which is why specialized accounting techniques are
required.ICP A: An Introduction to Insurance Accounting
145
Regulations Relating to Insurance 9.2 Systems of Accounting
Insurance supervisors worldwide use two main systems of accounting in
NOTES various combinations: GAAP reporting and statutory reporting. GAAP
constitutes the normal basis of public accounting for most types of business
entities. Statutory reporting is specialized and is designed to highlight the
particular interests and concerns of supervisors. Not every jurisdiction has
separate GAAP and statutory accounting rules; often they are the same in most
respects. Generally accepted accounting principles Not all regions of the world
adhere to exactly the same GAAP rules, but the basic principles included in
most, if not all, GAAP regimes are listed below. In each case, additional
comments are provided to place the principle in the context of insurance
supervision. The business entity concept The accounts of a company are kept
separate and distinct from the accounts of the owners of the company and from
any other legal entities except to the extent that accounts of several entities
may be consolidated subject to certain conditions. When parties that are
related to the insurance company borrow money from the insurer or engage in
other types of transactions with a related insurance company, the business
entity concept is called into question, placing the insurance company
potentially at risk. Related party transactions have been the root cause of many
serious financial problems among insurers. The going concern concept .
This is the underlying assumption that a business will continue to operate
indefinitely into the future, unless there is specific evidence that this may not
be the case. By contrast, in many countries insurance supervisors maintain
their own accounting rules for supervisory purposes. A very conservative
approach is often adopted under statutory accounting rules, which negates the
going concern concept. In other words, statutory accounting rules are often
built on an underlying assumption that the insurer may have to be liquidated in
the near future (the liquidation concept) and that values and transactions
should be accounted for on that basis. Insurance Super vision Core
Curriculum.
Accounting estimates should be fair and reasonable, and while there may
sometimes be a range of options when accounting for a particular transaction,
a conservative approach is favored over an aggressive approach. A common
problem for insurance supervisors is that some insurers adopt aggressive
accounting practices that tend to overstate their income and understate their
liabilities, thus overstating their financial strength and maximizing the
possibility for paying dividends to shareholders and performance bonuses to
management. In recent years, the principle of conservatism may have been less
practiced than in the past—witness current scandals involving financial
reporting of some of the large dot-com companies. The objectivity principle
Accounting entries should be made on the basis of objective evidence.
Objective evidence is evidence that will lead different observers to arrive at
consistent conclusions when they review the transaction independently. For
example, in countries that do not have developed capital markets, real estate
often becomes a major area of investment for insurers. A frequent problem for
supervisors in these jurisdictions is to obtain appropriate valuations of
Self-Instructional Material buildings and properties that are owned by insurance companies. Valuation
approaches that rely on estimates of future cash flows may or may not be
146
objective and have to be analyzed carefully by the supervisor. In contrast, Regulations Relating to Insurance
valuation methods that emphasize the sale of similar properties to independent Accounting and Management
third-party buyers potentially have greater objectivity because they do not

involve estimates by persons who may have an incentive to maximize the
appraisal value. A preferred alternative could involve the use of both methods NOTES
to validate each other.
The revenue recognition concept Normally revenue should be recognized

in a way that corresponds to provision of the service or product to the
customer. Thus when an automobile dealer receives a check and transfers
ownership of a new car to its customer, it immediately recognizes the revenue
in its accounts. In contrast, a company in the business of providing
landscaping services where customers pay in advance should only recognize
revenue as the services are provided over time. Insurance contracts present a
similar situation. The normal convention is for customers to pay their premium
at the beginning of the insurance term (or periodically during that term for
policies with more than one premium expected). However, at this point in time
the insurer has not yet provided any insurance coverage since the term is just
commencing. It would therefore give a misleading picture of an insurer‘s
earnings if premiums were recognized as revenue at the time the customers
ICP A:
An Introduction to Insurance Accounting pay their premiums. Instead,
premiums are ―earned‖ over the term of the policy (or period for which
premiums have been paid). See the detailed discussion on accounting for
premiums in section C.The maTching principleExpenses related to the
generation of revenue should be expensed in the periods that relate to the
corresponding revenue. When a particular expense is incurred, it is usually in
the expectation that it will help the company to earn income in the future. If
there is good evidence that a particular expense will help to generate revenue
over the next three accounting periods, then the expense would normally be
spread over those three periods, matching expenses and revenue. A classic
example of this is the commission paid to an agent or broker on the sale of an
insurance contract. If the contract is for 12 months, then according to the
revenue recognition concept the revenue will be earned over the period of the
contract rather than at the time of selling the contract. Similarly, under the
matching principle, the commission will likewise be spread over the term of
the contract because the expense (the commission) will generate revenue for
12 months into the future (subject to some other considerations such as
recoverability). To be conservative, some statutory accounting regimes do not
follow the matching principle for commissions and other acquisition expenses
but require instead that the entire expense be written off (that is, be fully
expensed) at the time the premium on which it was based is received or the
expense is incurred. The cost principle Assets should be recorded at their
actual cost. This is in keeping with the objectivity concept because cost is a
known and documented amount. If the purchase is from an independent third
party, the cost should be a good estimate of the worth of the asset to the
purchasing company at the time of the purchase: if the value is higher, the
independent seller generally would not be willing to sell it for a lesser amount;
147
Regulations Relating to Insurance
if the asset is worth less to the purchaser than is indicated by its actual cost
Accounting and Management price, then the purchaser presumably would have no reason to make the
expenditure. This is also in keeping with the objectivity principle. The
NOTES
recorded cost of an asset in the company‘s accounts is often referred to as the
book value of the asset (although in some situations book value could be
different than cost). If there is strong, objective evidence that the value of an
asset has permanently changed, then most GAAP regimes permit (subject to
various conditions and safeguards) the company to write up or down the asset
value on its books. Some GAAP regimes require that the current market value
of a security be held. Statutory insurance accounting rules, where they exist,
are usually even more emphatic than GAAP regimes in insisting that assets be
recorded at cost (also in keeping with the principles of con-Insurance Super
vision Core Curriculum servatism and objectivity) or sometimes even at the
lower of cost or market value (to be even more conservative). The cons is
Tency principle Businesses should use the same accounting procedures to
record similar transactions in different periods. If a different treatment is used
from one period to another, the change should be disclosed to the reader of the
financial statements and the impact of the changed procedure should be
indicated. If this principle were not followed, companies would be free to pick
and choose their accounting practices from year to year in ways designed to
maximize their reported earnings. This principle affects insurance companies
in the same way as other businesses. The materiality principle All financial
information deemed to be material (or important) to the users of the
information must be included. Reporting on very minor matters would cause
the accounting reports to become too voluminous, which, in turn, could cause
truly important information to be overlooked. An issue can arise here for
insurers (and supervisors) when the insurers change their assumptions in
several areas at the same time and the effect of any one change would not be
material, but, when taken together, there may be a material impact on earnings.
Guidance is emerging from actuarial organizations and supervisors on the need
to report the source of earnings to deal with concerns in this area (in keeping
with the full disclosure principle). The full disclosure principle all important
matters should be disclosed to the readers of financial statements, even if they
do not affect the ledger accounts directly. In these cases, the disclosure should
be by way of notes to the financial statements. Typical examples are
outstanding law suits, tax disputes with the government, and company
takeover attempts. Insurance companies may be involved with so-called off-
balance-sheet items, such as some derivative instruments, where the insurer
contracts to make certain purchases or sales, depending on specified future
conditions. Where the impact of these off-balance-sheet items are, or
conceivably may be, material, they should be disclosed in the notes to the
financial statements. For greater certainty, many supervisory filings include
specific exhibits where insurers must disclose the nature and potential
financial impacts of these off-balance-sheet items. ICP A: An Introduction to
Insurance Accounting
The balance sheet and income statement format required for a general
insurer under Canadian GAAP is shown in appendix II. The entire financial
filing for both life and general insurers can be downloaded from
148
http://www.osfi-bsif.gc.ca/eng/forms/index.asp.Many countries have an Regulations Relating to Insurance
accounting and auditing institute or association that is responsible for Accounting and Management
establishing specific GAAP standards within the jurisdiction. In some

countries, GAAP standards are established by a standard-setting body that is
independent of the accounting profession. NOTES
While in most cases the specific rules will be based on the

general principles set out above, accounting standards worldwide are in a state
of transition. For example, over the past few years, the cost principle and the
matching principle have come under particular pressure, to the point where the
United States and some other countries have adopted what is known as a fair
value basis for recording certain asset and liability values for financial
instruments. For more discussion of current trends in this area, see section D
on international financial reporting standards. A country‘s institute of
accountants and auditors is generally also responsible for putting in place the
standards of professional practice that apply to its members as they carry out
their responsibilities. Sometimes there are separate associations for the
development of accounting standards and the development of auditing
standards. (Accounting institutes in some smaller countries simply adopt the
professional accounting and auditing standards of a larger country in order to
save time and money.) As is well known, over the last few years there have
been some major corporate scandals as the GAAP framework has been
stretched by aggressive accounting and auditing practices. The resulting
corporate collapses have shaken up the accounting world, and in many
developed countries there has been a move to tighten up accounting principles,
auditing standards, and corporate governance in general.Statutory accounting
principles One can make the case that insurance companies and other types of
financial institutions are fundamentally different from other types of
businesses. For one thing, in addition to having equity financing, insurers are
significantly financed by their customers(policyholders) by means of cash
premiums paid in advance and by claim liabilities that have not yet been
discharged. Thus an unscrupulous insurer or other type of financial institution
has easy access to public funds, which could be misappropriated.
9.3 Framework for IRDAI Rules

A. Organizational Structure of IRDAI:
Composition of IRDAI:
As per Sec. 4 of IRDAI Act, 1999, the composition of the Authority is:
a) Chairman;
b) Five whole-time members;
c) Four part-time members,
(appointed by the Government of India)
IRDAI’s Head Office is at Hyderabad
All the major activities of IRDAI including ensuring financial stability of
insurers and monitoring market conduct of various regulated entities is carried
out from the Head Office.
IRDAI’s Regional Offices are at New Delhi & Mumbai
149
The Regional Office, New Delhi focuses on spreading consumer awareness
Accounting and Management and handling of Insurance grievances besides providing required support for
inspection of Insurance companies and other regulated entities located in the
NOTES
Northern Region. This office is functionally responsible for licensing of
Surveyors and Loss Assessors. Regional Office at Mumbai handles similar
activities, as in Regional Office Delhi, pertaining to Western Region.
B. Insurance Regulatory Framework:

1. Insurance Regulatory and Development Authority of India (IRDAI), is a
statutory body formed under an Act of Parliament, i.e., Insurance Regulatory
and Development Authority Act, 1999 (IRDAI Act 1999) for overall
supervision and development of the Insurance sector in India.
2. The powers and functions of the Authority are laid down in the IRDAI Act,
1999 and Insurance Act, 1938. The key objectives of the IRDAI include
promotion of competition so as to enhance customer satisfaction through
increased consumer choice and fair premiums, while ensuring the financial
security of the Insurance market.
3. The Insurance Act, 1938 is the principal Act governing the Insurance sector
in India. It provides the powers to IRDAI to frame regulations which lay down
the regulatory framework for supervision of the entities operating in the sector.
Further, there are certain other Acts which govern specific lines of Insurance
business and functions such as Marine Insurance Act, 1963 and Public
Liability Insurance Act, 1991.
4. IRDAI adopted a Mission for itself which is as follows:
 To protect the interest of and secure fair treatment to policyholders;
 To bring about speedy and orderly growth of the Insurance industry
(including annuity and superannuation payments), for the benefit of the
common man, and to provide long term funds for accelerating growth of
the economy;
 To set, promote, monitor and enforce high standards of integrity, financial
soundness, fair dealing and competence of those it regulates;
 To ensure speedy settlement of genuine claims, to prevent Insurance
frauds and other malpractices and put in place effective grievance
redressal machinery;
 To promote fairness, transparency and orderly conduct in financial
markets dealing with Insurance and build a reliable management
information system to enforce high standards of financial soundness
amongst market players;
 To take action where such standards are inadequate or ineffectively
enforced;
 To bring about optimum amount of self-regulation in day-to-day working
of the industry consistent with the requirements of prudential regulation.
5. Entities regulated by IRDAI:
a. Life Insurance Companies - Both public and private sector Companies
b. General Insurance Companies - Both public and private sector
Companies. Among them, there are some standalone Health Insurance
Companies which offer health Insurance policies.
Self-Instructional Material c. Re-Insurance Companies
d. Agency Channel
150
e. Intermediaries which include the following: Regulations Relating to Insurance
 Corporate Agents Accounting and Management
 Brokers
 Third Party Administrators
 Surveyors and Loss Assessors. NOTES
6. Regulation making process:

 Section 26 (1) of IRDAI Act, 1999 and 114A of Insurance Act, 1938 vests
power in the Authority to frame regulations, by notification.
 Section 25 of IRDAI Act, 1999 lays down for establishment of Insurance
Advisory Committee consisting of not more than twenty five members
excluding the ex-officio members. The Chairperson and the members of
the Authority shall be the ex-officio members of the Insurance Advisory
Committee.
 The objects of the Insurance Advisory Committee shall be to advise the
Authority on matters relating to making of regulations under Section 26.
 Accordingly the draft regulations are first placed in the meeting of
Insurance Advisory Committee and after obtaining the
comments/recommendations of IAC, the draft regulations are placed
before the Authority for its approval.
 Every Regulation approved by the Authority is notified in the Gazette of
India.
 Every Regulation so made is submitted to the Ministry for placing the
same before the Parliament.
7. The Authority has issued regulations and circulars on various aspects of
operations of the Insurance companies and other entities covering:
 Protection of policyholders‘ interest
 Procedures for registration of insurers or licensing of intermediaries,
agents, surveyors and Third Party Administrators;
 Fit and proper assessment of the promoters and the management
 Clearance /filing of products before being introduced in the market
 Preparation of accounts and submission of accounts returns to the
Authority.
 Actuarial valuation of the liabilities of life Insurance business and forms
for filing of the actuarial report;
 Provisioning for liabilities in case of non-life Insurance companies
 Manner of investment of funds and periodic reports on investments
 Maintenance of solvency
 Market conduct issues
C. Supervisory Role:
1. The objective of supervision as stated in the preamble to the IRDAI Act is
―to protect the interests of holders of Insurance policies, to regulate, promote
and ensure orderly growth of the Insurance industry‖, both Insurance and
Reinsurance business. The powers and functions of the Authority are laid
down in the IRDAI Act, 1999 and Insurance Act, 1938 to enable the Authority
to achieve its objectives.
2. Section 25 of IRDAI Act 1999 provides for establishment of Insurance
Advisory Committee which has Representatives from commerce, industry,
transport, agriculture, consume for a, surveyors agents, intermediaries, Self-Instructional Material
151
organizations engaged in safety and loss prevention, research bodies and
Accounting and Management employees‘ association in the Insurance sector are represented. All the rules,
regulations, guidelines that are applicable to the industry are hosted on the
NOTES
website of the supervisor and are available in the public domain.
3. Section 14 of the IRDAI Act,1999 specifies the Duties, Powers and
functions of the Authority. These include the following:
 To grant licenses to (re) Insurance companies and Insurance
intermediaries
 To protect interests of policyholders,
 To regulate investment of funds by Insurance companies, professional
organisations connected with the (re)Insurance business; maintenance of
margin of solvency;
 To call for information from, undertaking inspection of, conducting
enquiries and investigations of the entities connected with the Insurance
business;
 To specify requisite qualifications, code of conduct and practical training
for intermediary or Insurance intermediaries, agents and surveyors and
loss assessors
 To prescribe form and manner in which books of account shall be
maintained and statement of accounts shall be rendered by insurers and
other Insurance intermediaries;
D. Prudential approach: Reporting, Risk monitoring and

intervention:
1. Reporting Requirements:
Insurers are required to submit various returns like financial statements on
an annual basis duly accompanied by the Auditors‘ opinion statement on the
annual accounts; reports of valuation of assets, valuation of liabilities and
solvency margin; actuarial report and abstract and annual valuation returns
giving information about the financial condition for life Insurance business;
Incurred But Not Reported claims in case of general Insurance business;
Reinsurance plans on an annual basis; and monthly statement on underwriting
of large risks in case of general Insurance companies; details of capital market
exposure on a monthly basis; Investment policy, Quarterly and annual returns
on investments.
2. Solvency of Insurers:
In order to monitor and control solvency requirements, it has been made
mandatory to the insurers to submit solvency report on quarterly basis. In case
of any deviation, the Supervisor initiates necessary and suitable steps so as to
ensure that the Insurer takes immediate corrective action to restore the
solvency position at the minimum statutory level.
Computation of solvency margin takes into account the inherent risk that
respective line of business poses to the insurer. Higher requirements are placed
for risky lines of business compared to others posing less risk to the insurers.
Even though the insurers are required to maintain a minimum solvency ratio of
150% at all times, the actual solvency margin maintained by insurers are well
152
above the required solvency margin leading to the solvency margin ratio Regulations Relating to Insurance
significantly higher than 150% on average. Accounting and Management
Quarterly solvency ratio reports have to be submitted to the Supervisor,

maintaining minimum solvency ratio of 150%. This provides the regular a
mechanism to monitor the solvency position periodically over the financial NOTES
year in order to ensure compliance with the requirements and hence to initiate
suitable action in the event of any early warning signal on the Insurer‘s
financial condition.
3. Asset-Liability Management:
Under Asset-Liability Management reporting, Insurer must provide the year
wise projected cash flows, in respect of both assets and liabilities. Insurers
must maintain mismatching reserves in case of any mismatch between assets
and liabilities as a part of the global reserves. Further, Life insurers are
required to submit a report on sensitivity and scenario testing exercise in the
prescribed format. Non-life insurers must submit a report on ‗Financial
Condition‘ covering the sensitivity analysis of the financial soundness in
meeting the policyholders‘ liabilities.
The supervisor requires management of investments to be within the insurer‘s
own organization. In order to ensure a minimum level of security of
investments in line with Insurance Act Provisions, the regulations prescribe
certain percentages of the funds to be invested in government securities and in
approved securities. The regulatory framework lays down the norms for the
mix and diversification of investments in terms of Types of Investment, Limits
on exposure to Group Company, Insurer‘s Promoter Group Company.
Investment Regulations lay down the framework for the management of
investments. The exposure limits are also prescribed in the Regulations. The
Investment Regulations require a proper methodology to be adopted by the
insurer for matching of assets and liabilities.
4. Reinsurance:
Transfer of risk through Reinsurance is recognized only to the extent specified
in the regulations. Due safeguards are built in to ensure that adjustments are
made to provide for quality of assets held. No other risk transfer mechanism
exists in the current system. In order to minimize the counterparty risk, the re-
insurers with whom business is placed must have the minimum prescribed
rating by an independent credit rating agency as specified in the regulations.
Legislation has specified the minimum capital requirements for an Insurance
company. It further, prescribes that Insurance companies can capitalize their
operations only through ordinary shares which have a single face value.
Reinsurer
General Insurance Corporation of India (GIC of India) is the sole National
Reinsurer, providing Reinsurance to the Insurance companies in India. The
Corporation‘s Reinsurance programme has been designed to meet the
objectives of optimising the retention within the country, ensuring adequate
coverage for exposure and developing adequate capacities within the domestic
market. It is also administering the Indian Motor Third Party Declined Risk
Insurance Pool – a multilateral Reinsurance arrangement in respect of
specified commercial vehicles where the policy issuing member insurers cede
153
Insurance premium to the Declined Risk pool based on the underwriting policy
Accounting and Management approved by IRDAI.
NOTES 5. Corporate Governance:
In order to protect long- terms interests of policyholders, the IRDAI has
outlined appropriate governance practices applicable to Insurance companies
for maintenance of solvency, sound long-term investment policy and
assumption of underwriting risks on a prudential basis from time to time. The
IRDAI has issued comprehensive guidelines for adoption by Insurance
companies on the governance responsibilities of the Board in the management
of the Insurance functions. These guidelines are in addition to provisions of
the Companies Act, 1956, Insurance Act, 1938 and other applicable laws.
Corporate Governance Guidelines issued by IRDAI, requires insurers to
have in place requisite control functions. The oversight of the control functions
is vested with the Boards of the respective insurer. It lays down the structure,
responsibilities and functions of Board of Directors and the senior
management of the companies. Insurers are required to adopt sound prudent
principles and practices for the governance of the company and should have
the ability to quickly address issues of non-compliance or weak oversight and
controls.
The Guidelines mandated the insurers to constitute various committees viz.,
Audit Committee, Investment Committee, Risk Management Committee,
Policyholder Protection Committee and Asset-Liability Management
Committee. These committees play a critical role in strengthening the control
environment in the company.
6. On and off site Supervision:
Onsite Inspections:
The Authority has the power to call for any information from entities related to
insurance business – Insurance companies and the intermediaries, as may be
required from time to time.
On site inspection is normally carried out on an annual basis which includes
inspection of corporate offices and branch offices of the companies. These
inspections are conducted with view to check compliance with the provisions
of Insurance Act, Rules and regulations framed thereunder.
The inspection may be comprehensive to cover all areas, or may be targeted on
one, or a combination of, key areas. When a market-wide event having an
impact on the insurers occurs, the Supervisor obtains relevant information
from the insurers, monitors developments and issues directions as it may
consider necessary. Though there is no specific requirement, events of
importance trigger such action. The supervisor reviews the ―internal controls
and checks‖ at the offices of Insurance companies, as part of on-site
inspection.
Off-site Inspection:
The primary objective of off-site surveillance is to monitor the financial health
of Insurance companies, identifying companies which show financial
deterioration and would be a source for supervisory concerns. This acts as a
trigger for timely remedial action.
154
The off-site inspection conducted by analyzing periodic statements, returns, Regulations Relating to Insurance
reports, policies and compliance certificates mandated under the directions Accounting and Management
issued by the Authority from time to time. The periodicity of these filings is
generally annual, half-yearly, quarterly and monthly and are related to
business performance, investment of funds, remuneration details, expenses of NOTES
management, business statistics, auditor certificates related to various

compliance requirements.
The statutory and the internal auditors are required to audit all the areas of
functioning of the Insurance companies. The particular area of focus is the
preparation of accounts of the company to reflect the true and fair position of
the company as at the Balance Sheet date. The auditors also examine
compliance or otherwise with all statutory and regulatory requirements, and in
particular whether the Insurance company has been compliant with the various
directions issued by the supervisor. In addition, the Authority relies upon the
certifications which form part of the Management Report. The Board is
required to certify that the management has put in place an internal audit
system commensurate with the size and nature of its business and that it is
operating effectively.
All Insurance companies are required to publish financial results and other
information in the prescribed formats in newspapers and on their websites at
periodic intervals.
7. Micro Insurance and Rural & Social Sector Obligations
The IRDAI had issued micro Insurance regulations for the protection of low
income people with affordable Insurance products to help cope with and
recover from common risks with standardised popular Insurance products
adhering to certain levels of cover, premium and benefit standards. These
regulations have allowed Non Governmental Organisations (NGOs), Self Help
Groups (SHGs) and other permitted entities to act as agents to Insurance
companies in marketing the micro Insurance products and have also allowed
both life and non-life insurers to promote combi-micro Insurance products.
The Regulations framed by the Authority on the obligations of the insurers
towards rural and social sector stipulate targets to be fulfilled by insurers on an
annual basis. In terms of these regulations, insurers are required to cover year
wise prescribed targets (i) in terms of number of lives under social obligations;
and (ii) in terms of percentage of policies to be underwritten and percentage of
total gross premium income written direct by the life and non-life insurers
respectively under rural obligations.
9.4 Regulations Regarding General Insurance Investment in
the Country(List of Countries by FDI Abroad)
This is the list of countries by stock of Foreign direct investment (FDI) abroad, that
is the cumulative US dollar value of all investments in foreign countries made directly by
residents - primarily companies - of the home country, as of the end of the time period
indicated. Direct investment excludes investment through purchase of shares.
The list is based on the CIA World Factbook data.[1]
155
Accounting and Management Rank Country Stock of FDI Date of
abroad information
NOTES
— World 34,730,000,000,000 2017 est.
— European Union 16,666,000,000,000 2017 est.
1 Netherlands 5,809,000,000,000 2017 est.
2 United States 5,644,000,000,000 2017 est.
3 Germany 2,074,000,000,000 2017 est.
4 Hong Kong 1,806,000,000,000 2017 est.
5 United Kingdom 1,634,000,000,000 2017 est.
6 Switzerland 1,556,000,000,000 2017 est.
7 Japan 1,548,000,000,000 2017 est.
8 Ireland 1,490,000,000,000 2017 est.
9 France 1,452,000,000,000 2017 est.
10 Canada 1,366,000,000,000 2017 est.
11 China 1,342,000,000,000 2017 est.
12 Belgium 1,035,000,000,000 2017 est.
156
Rank Country Stock of FDI Date of Accounting and Management
abroad information
NOTES
13 Spain 752,400,000,000 2017 est.
14 Singapore 725,900,000,000 2017 est.
15 Italy 607,800,000,000 2017 est.
16 Sweden 495,700,000,000 2017 est.
17 Australia 443,400,000,000 2017 est.
18 Russia 443,000,000,000 2017 est.
19 Taiwan 367,200,000,000 2017 est.
20 South Korea 342,400,000,000 2017 est.
21 Brazil 327,300,000,000 2017 est.
22 Austria 309,800,000,000 2017 est.
23 Denmark 248,000,000,000 2017 est.
24 Hungary 225,300,000,000 2017 est.
25 Norway 205,900,000,000 2017 est.
26 Cyprus 179,800,000,000 2017 est.
157
abroad information
NOTES
27 South Africa 176,300,000,000 2017 est.
28 Finland 169,100,000,000 2017 est.
29 Mexico 160,100,000,000 2017 est.
30 India 156,100,000,000 2017 est.
31 Malaysia 137,900,000,000 2017 est.
32 United Arab Emirates 124,900,000,000 2017 est.
33 Thailand 112,300,000,000 2017 est.
34 Israel 106,900,000,000 2017 est.
35 Chile 97,590,000,000 2017 est.
36 Portugal 89,060,000,000 2017 est.
37 Kuwait 79,620,000,000 2017 est.
38 Poland 68,220,000,000 2017 est.
39 Qatar 59,270,000,000 2017 est.
40 New Zealand 59,080,000,000 2009 est.
158
abroad information
NOTES
41 Saudi Arabia 56,090,000,000 2017 est.
42 Colombia 55,320,000,000 2017 est.
43 Philippines 47,580,000,000 2017 est.
44 Czech Republic 45,790,000,000 2017 est.
45 Turkey 41,810,000,000 2017 est.
46 Argentina 40,940,000,000 2017 est.
47 Kazakhstan 34,740,000,000 2017 est.
48 Greece 33,790,000,000 2017 est.
49 Venezuela 32,470,000,000 2017 est.
50 Angola 23,660,000,000 2017 est.
51 Libya 22,770,000,000 2017 est.
52 Indonesia 19,960,000,000 2017 est.
53 Azerbaijan 19,050,000,000 2017 est.
54 Nigeria 17,040,000,000 2017 est.
159
abroad information
NOTES
55 Ghana 16,620,000,000 2013 est.
56 Tajikistan 16,300,000,000 2010 est.
57 Slovakia 16,260,000,000 2017 est.
58 Iceland 15,540,000,000 2017 est.
59 Panama 11,590,000,000 2017 est.
60 Bahrain 10,660,000,000 2017 est.
61 Estonia 9,771,000,000 2017 est.
62 Ukraine 8,983,000,000 2017 est.
63 Croatia 8,204,000,000 2017 est.
64 Slovenia 8,137,000,000 2017 est.
65 Vietnam 7,700,000,000 2009 est.
66 Egypt 7,547,000,000 2017 est.
67 Ecuador 6,330,000,000 2017 est.
68 Romania 6,263,000,000 2017 est.
160
abroad information
NOTES
69 Bulgaria 5,338,000,000 2017 est.
70 Iran 5,226,000,000 2017 est.
71 Lithuania 4,820,000,000 2017 est.
72 Morocco 4,492,000,000 2017 est.
73 Peru 4,362,000,000 2017 est.
74 Costa Rica 4,327,000,000 2017 est.
75 Cuba 4,138,000,000 2006 est.
76 Belarus 3,547,000,000 2017 est.
77 Latvia 2,755,000,000 2017 est.
78 Georgia 2,505,000,000 2017 est.
79 Pakistan 2,175,000,000 2017 est.
80 Algeria 2,123,000,000 2017 est.
81 Iraq 2,109,000,000 2015 est.
82 Trinidad and Tobago 1,266,000,000 2014 est.
161
abroad information
NOTES
83 Malta 1,213,000,000 2010 est.
84 Macau 1,166,000,000 2012 est.
85 El Salvador 961,400,000 2017 est.
86 North Macedonia 899,100,000 2017 est.
87 Bermuda 889,000,000 2014 est.
88 Kyrgyzstan 675,500,000 2017 est.
89 New Caledonia 658,200,000 2015 est.
90 Jordan 646,500,000 2017 est.
91 Paraguay 641,300,000 2017 est.
92 Dominican Republic 487,800,000 2017 est.
93 Mongolia 475,200,000 2017 est.
94 Maldives 448,000,000 2017 est.
95 Kenya 393,400,000 2017 est.
96 Bangladesh 389,500,000 2017 est.
162
abroad information
NOTES
97 Zimbabwe 294,800,000 2017 est.
98 Tunisia 285,000,000 2017 est.
99 Uruguay 228,900,000 2017 est.
100 Armenia 228,000,000 2015 est.
101 Moldova 206,100,000 2016 est.
102 Liberia 201,000,000 2017 est.
103 Montenegro 133,000,000 2017 est.
104 Fiji 117,100,000 2017 est.
105 Mali 72,200,000 2017 est.
106 Guinea 69,910,000 2017 est.
107 Solomon Islands 50,100,000 2017 est.
108 Vanuatu 26,800,000 2017 est.
109 Rwanda 22,300,000 2017 est.
110 Sierra Leone 9,700,000 2017 est.
163
abroad information
NOTES
2011 est.
111 Bolivia 8,000,000
9.5 Role of Financial Reporting in Managing Insurance

Operations
Chief Manager- Financial Reporting - Life Insurance (8-13 yrs)
Our Clients are a well established Life Insurance Company. They are a
joint venture between a diversified financial services conglomerate in India,
and one of the oldest life insurance companies in the world. Headquartered at
Mumbai, it has Pan India presence through its various branches and currently
has an employee strength of 1500+ employees. The following general role
General Accounting :
a. A full understanding of accruals accounting and the impact of entries on
profit and loss account, the balance sheet and the cash flow statement.
b. Niche around various analytical connections between various accounting
line items and complete accounting framework
c. Interpret and apply existing, new, or revised accounting principles and
concepts to make accounting more accurate and more closely comply with
reporting requirements
d. IGAAP and IFRS/IndAS experience and knowledge
Specialised Insurance Accounting :
Advance understanding to comprehend and translate various features of the
product and funds into Insurance accounting language meeting the accounting
standards, policies and regulatory guidelines.
Accounting Operations :
a. Ability to institutionalise Operational controls (both manual and system
based) along with SLA management on all kind of accounting operations
b. Niche in quick understanding of possible gaps from time to time due to
various dynamics
impacting operational procedures.
c. Ability to bring overall efficiency, productivity and accuracy in all the
accounting operational
procedures / interconnected process.
d. Able to collaborate with various department and stakeholders to streamline
overall accounting
operations
e. Able to build various monitoring control dashboards for management
Self-Instructional Material review
164
f.Good expertise in analysing the data and information from accounting Accounting and Management
system and expertise in filtering the same as per need of various stakeholders
such as auditors, management, regulator etc
g. Very good in managing various external auditors such as Stat Auditors, NOTES
IRDAI and other regulators.

Risk Management :
a. Identifies and manages the risks of failing to detect a misstatement, caused
by inadvertent error or fraud that is material to financial statements.
b.Able to develop RCSA for all kind of processes and procedures being
followed in the domain being managed.
c.Structured documentation (SOPs) to be developed, implemented and timely
updated for bringing in more clarity among all team members and
stakeholders.
d. Manages all actionables (which are arising out of various audit and risk
assessment ) to be implemented as per set out timelines and expectations
Reporting and Analytical Proficiency :
a. Knowledge of entire flow of any accounting transaction and its impact on

FS. Critical review of financials . Must have an eye for details. Deep
understanding of accounting polices and notes to accounts. Understand and
substantiate variances in two periods.
b. Able to put clarity around Expense Management Framework with proper
data and vectors
c. Understanding and application of applicable Accounting standards/Ind AS.
Can design and set up accounting policies. Analysis of all new
pronouncements and pro active impact assessment on ETLI Financials/
Reporting.
d.Good understanding of the reporting requirement and links with various
report and systems, and file all IRDA and regulatory reporting with Zero non
Compliance and with in stipulated time lines.
e. Able to draw conclusions and assess impact from analysis and interpretation
of financial dat a

What Is the Solvency Ratio?
The solvency ratio is a key metric used to measure an enterprise‘s ability
to meet its debt obligations and is used often by prospective business lenders.
The solvency ratio indicates whether a company‘s cash flow is sufficient to
meet its short-and long-term liabilities. The lower a company's solvency ratio,
the greater the probability that it will default on its debt obligations.
The Formula for the Solvency Ratio Is

Liquidity Vs. Solvency
How to Calculate the Solvency Ratio

165
The solvency ratio is calculated by dividing a company's after-tax net
Accounting and Management operating income by its total debt obligations. The net after-tax income is
derived by adding non-cash expenses, such as depreciation and amortization,
NOTES
back to net income. these figures come from the company's income statement.
Short-term and long-term liabilities are found on the company's balance sheet.
What Does the Solvency Ratio Tell You?
The solvency ratio is one of many metrics used to determine whether a

company can stay solvent. Other solvency ratios include debt-to-equity, total-
debt-to-total-assets, and interest coverage ratios.
The solvency ratio is a comprehensive measure of solvency, as it measures

a firm's actual cash flow—rather than net income—by adding back
depreciation and other non-cash expenses to assess the company‘s capacity to
stay afloat. It measures this cash flow capacity in relation to all liabilities,
rather than only short-term debt. This way, the solvency ratio assesses a
company's long-term health by evaluating its repayment ability for its long-
term debt and the interest on that debt.
As a general rule of thumb, a solvency ratio higher than 20% is considered

to be financially sound; however, solvency ratios vary from industry to
industry. A company‘s solvency ratio should, therefore, be compared with its
competitors in the same industry rather than viewed in isolation.
The solvency ratio terminology is also used in regard to insurance

companies, comparing the size of its capital relative to the premiums written,
and measures the risk an insurer faces of claims it cannot cover.

As the owner of a small business, you are the one responsible for
ensuring the company can meet its financial obligations now and into the
future. One tool that can help you do that is known as a solvency ratio.
A key part of a financial analysis, a company‘s solvency ratio determines

whether it has sufficient cash flow to manage its debts as they come due. The
following formula is used to track a business‘ solvency ratio, which is usually
expressed as a percentage:
For the purpose of calculating solvency, net income includes all cash and
holdings that can be easily liquidated. Overall, companies with higher
solvency ratios are viewed as more likely to meet their financial obligations,
whereas those with lower scores are seen as posing a greater risk to banks and
creditors. Although a good solvency ratio varies based on the industry in
question, a company with a ratio at or above 20% is generally considered
healthy. Solvency ratios are sometimes referred to as ―leverage ratios.‖
166
It‘s important to realize that solvency ratios aren‘t the same as liquidity ratios. Regulations Relating to Insurance
Whereas liquidity ratios refer to the capacity of a company to handle short- Accounting and Management
term liabilities, solvency measures the ability to pay long-term debts.

In the long run, keeping an eye on your solvency ratio can help prevent the
company from going bankrupt because of rising debt levels. In other words, NOTES
knowing your ratio should help you determine when you can and can‘t handle
additional debt.
Periodically checking your business‘ solvency ratios can help ensure your
company‘s fiscal health. In addition to helping businesses evaluate their
capital structures, solvency ratios may assist owners in determining whether
internal and external equities must be redistributed. Furthermore, solvency
ratios may affect your decision to take on more debt down the line. Businesses
with excessive debt may struggle to manage cash flow or deal with rising
interest levels.Not only does calculating solvency help companies make
important financial decisions and ensure future profitability, but it also
reassures creditors and shareholders that your business can pay its debts.
Lenders want to know that your company can pay back the loan principle
as well as the interest that accumulates. A poor solvency ratio may suggest that
your company will be unable to meet its obligations in the long term.
A good solvency ratio varies by industry, so it‘s important to compare your
numbers with those of your competitors. Because businesses in some
industries are able to survive with solvency ratios that would be considered
unhealthy in others, companies should refrain from scrutinizing these numbers
in a vacuum. Historically, technology companies tend to boast higher solvency
ratios than those in debt-heavy industries, such as utilities.
Fortunately, most companies can take steps to improve their solvency

ratios and boost profitability in the long term. Along with selling assets to
reduce overall debt, a company may opt to reorganize its business structure,
increase owner equity or reinvest money and assets in the business. And of
course, struggling businesses should try to avoid taking on new debts until
their solvency ratios improve. Finally, companies should also strive to improve
sales, as this will ultimately boost both profitability and solvency.
There are different types of solvency ratios that you can use to track
different elements of your finances. Here are some of the most common types
of solvency ratios that companies track on a regular basis:
Debt-to-Equity
This ratio is a measure of total debt as compared to shareholder equity. As
an equation, you take your business‘ total liabilities and divide them by your
shareholders‘ equity.
167
Whereas a general high solvency ratio tends to indicate that a company is
Accounting and Management fiscally sound, a high debt-to-equity ratio suggests that the company over-
utilized debt to bankroll its growth. As interest levels continue to climb,
NOTES
companies may suffer from volatile earnings. To prevent insolvency, business
owners must focus on deferring costs, reducing debt and boosting overall
profits.
Total-Debt-to-Total-Assets
This refers to the ratio of long-term and short-term liabilities compared to
total holdings. As an equation, it is expressed as your business‘ short- and
long-term liabilities divided by its total assets. As a company‘s total-debt-to-
total-assets ratio increases, it poses a greater financial risk to banks and
creditors.
When calculating total-debt-to-total-assets, it‘s important to take into

account the degree of leverage. While some liabilities, such as supplier costs
and employee bonuses, may be negotiable, companies with high total-debt-to-
total-assets have higher leverages and, as a result, lower flexibility. Because of
this, businesses should strive to raise the value of current assets or reduce their
debt levels moving forward.
Interest-Coverage Ratios
These ratios measure a company‘s ability to keep up with interest payments,
which rise along with outstanding debt. As a business owner, you can calculate
interest-coverage ratio by dividing earnings before interest and tax (EBIT) by
interest expenses.
Typically, a company with an interest-coverage ratio of 1.5 or less is

viewed as financially unstable and may struggle to secure loans from banks
and other lenders. To boost your interest-coverage ratio, strive to reduce debt
and boost overall profits. Solvency ratios don‘t just affect your ability to get
loans from banks and creditors, but they also forecast your company‘s health
in the coming years. By calculating your business‘ ratios often, you can ensure
that you have the most accurate and thorough understanding of your finances,
which will keep you from becoming insolvent.
9.10 Terminologies
1) Insurance Accounting 2) Management3) Rules 4)
Investments5) Financial Reporting6) Insurance operations
1. Explain the System of Accounting
2. What are the role of financial reporting in managing
insurance operations?
3. Discuss the significance of determining solvency margins>
4. What are the importance of Calculting solvency?
5. Explain the types of solvency ratios?
168
9.12 Reference Books Regulations Relating to Insurance
1) Gordon E and Natarajan K, (2010). ― Banking Theory, Law
and Practice‖, Himalaya Publishing House, Mumbai.
2) Dr. Sunilkumar (2016), ―Insurance and Risk Management‖, NOTES

3) Dr. P. Periasamy (2011), ―Principles and Practice of
Insurance‖, Himalaya Publishing House, Mumbai.
169
UNIT – X LIFE INSURANCE
Structure
NOTES
10. 1 Introduction
10.2 Types of Life Insurance In India(Role of Riders in Insurance Policies)
10.3 Indian Life Insurance Industry Overview
10.6 Functions of Insurance Organizations Insurable Interest
10.11 Terminologies
10. 1 Introduction
Insurance in India refers to the market for insurance in India which
covers both the public and private sector organizations. It is listed in the
Constitution of India in the Seventh Schedule as a Union List subject, meaning
it can only be legislated by the Central Government only.
The insurance sector has gone through a number of phases by allowing private
companies to solicit insurance and also allowing foreign direct investment.
India allowed private companies in insurance sector in 2000, setting a limit
on FDI to 26%, which was increased to 49% in 2014.[1]Since the privatization
in 2001, the largest life-insurance company in India, Life Insurance
Corporation of India has seen its market share slowly slipping to private giants
like HDFC Life, Exide Life Insurance, ICICI Prudential Life
Insurance and SBI Life Insurance Company.
History
Insurance in this current form has its history dating back to 1818,
when Oriental Life Insurance Company[2] was started by Anita Bhavsar
in Kolkata to cater to the needs of European community. The pre-
independence era in India saw discrimination between the lives of foreigners
(English) and Indians with higher premiums being charged for the latter. In
1870, Bombay Mutual Life Assurance Societybecame the first Indian insurer.
At the dawn of the twentieth century, many insurance companies were
founded. In the year 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 necessary that the premium-rate
tables and periodical valuations of companies should be certified by
an actuary. However, the disparity still existed as discrimination between
Indian and foreign companies. The oldest existing insurance company in India
is the National Insurance Company, which was founded in 1906, and is still in
business.
170
The Government of India issued an Ordinance on 19 January 1956 Regulations Relating to Insurance
nationalising the Life Insurance sector and Life Insurance Corporation came Accounting and Management
into existence in the same year. The Life Insurance Corporation (LIC)
absorbed 154 Indian, 16 non-Indian insurers and also 75 provident societies—
245 Indian and foreign insurers in all. In 1972 with the General Insurance NOTES
Business (Nationalisation) Act was passed by the Indian Parliament, and

consequently, General Insurance business was nationalized with effect from 1
January 1973. 107 insurers were amalgamated and grouped into four
companies, namely National Insurance Company Ltd., the New India
Assurance Company Ltd., the Oriental Insurance Company Ltd and the United
India Insurance Company Ltd. The General Insurance Corporation of India
was incorporated as a company in 1971 and it commenced business on 1
January 1973.
The LIC had monopoly till the late 90s when the Insurance sector was
reopened to the private sector. Before that, the industry consisted of only two
state insurers: Life Insurers (Life Insurance Corporation of India, LIC) and
General Insurers (General Insurance Corporation of India, GIC). GIC had four
subsidiary companies. With effect from December 2000, these subsidiaries
have been de-linked from the parent company and were set up as independent
insurance companies: Oriental Insurance Company Limited, New India
Assurance Company Limited, National Insurance Company
Limited and United India Insurance Company.
Industry structure
By 2012 Indian Insurance is a US$72 billion industry. However, only two
million people (0.2% of the total population of 1 billion) are covered under
Mediclaim. With more and more private companies in the sector, this situation
is expected to change. ECGC, ESIC and AIC provide insurance services for
niche markets. So, their scope is limited by legislation but enjoy some special
powers. The majority of Western Countries have state run medical systems so
have less need for medical insurance. In the UK, for example, the corporate
cover of employees, when added to the individual purchase of coverage gives
approximately 11–12% of the population on cover [[3]]- due largely to usage of
the state financed National Health Service (NHS), whereas in developed
nations with a more limited state system, like USA, about 75% of the total
population are covered under some insurance scheme.
Insurance repository
On 16 September 2013, IRDA launched "insurance repository" services in

India. It is a unique concept and first to be introduced in India. This system
enables policy holders to buy and keep insurance policies in dematerialised or
electronic form. Policyholders can hold all their insurance policies in an
electronic format in a single account called electronic insurance account (eIA).
Insurance Regulatory and Development Authority of India has issued licences
to five entities to act as Insurance Repository:
 CDSL Insurance Repository Limited (CDSL IR),
171
 SHCIL Projects Limited
 Karvy Insurance repository Limited
NOTES
 NSDL Database Management Limited
 CAMS Repository Services Limited
Legal structure
The insurance sector went through a full circle of phases from being
unregulated to completely regulated and then currently being partly
deregulated. It is governed by a number of acts.
The Insurance Act of 1938[4] was the first legislation governing all forms of
insurance to provide strict state control over insurance business. Life insurance
in India was completely nationalised on 19 January 1956, through the Life
Insurance Corporation Act. All 245 insurance companies operating then in the
country were merged into one entity, the Life Insurance Corporation of India.
The General Insurance Business Act of 1972 was enacted to nationalise about
107 general insurance companies then and subsequently merging them into
four companies. All the companies were amalgamated into National Insurance,
New India Assurance, Oriental Insurance and United India Insurance, which
were headquartered in each of the four metropolitan cities.Until 1999, there
were no private insurance companies in India. The government then
introduced the Insurance Regulatory and Development Authority Act in 1999,
thereby de-regulating the insurance sector and allowing private companies.
Furthermore, foreign investment was also allowed and capped at 26% holding
in the Indian insurance companies.
In 2006, the Actuaries Act was passed by parliament to give the profession
statutory status on par with Chartered Accountants, Notaries, Cost & Works
Accountants, Advocates, Architects and Company Secretaries.A minimum
capital of US$80 million(Rs. 4 billion) is required by legislation to set up an
insurance business.
Authorities
The primary regulator for insurance in India is the Insurance Regulatory and
Development Authority of India (IRDAI) which was established in 1999 under
the government legislation called the Insurance Regulatory and Development
Authority Act, 1999.
The industry recognises examinations conducted by the IAI (for 280
actuaries), III (for 2.2 million retail agents, 361 brokers, 175 bancassurers, 125
corporate agents and 29 third-party administrators) and IIISLA (for 8,200
surveyors and loss assessors). There are 9 licensed web aggregators. TAC is
the sole data repository for the non-life industry. IBAI gives voice to brokers
while GI Council and LI Council are platforms for insurers. AIGIEA, AIIEA,
AIIEF, AILICEF, AILIEA, FLICOA, GIEAIA, GIEU and NFIFWI cater to
the employees of the insurers. In addition, there are a dozen Ombudsman
offices to address client grievances.
172
Insurance education Accounting and Management
A number of institutions provide specialist education for the insurance

industry, these include; NOTES
 National Insurance Academy, Pune, specialized in teaching, conducting

research and providing consulting services in the insurance sector. NIA offers
a two-year PGDM programme in insurance. NIA was founded as Ministry of
Finance initiative with capital support from the then public insurance
companies, both Life (LIC) and Non-Life (GIC, National, Oriental, United &
New India).
 Institute of Insurance and Risk Management, Hyderabad, was established by
the regulator IRDA. The institute offers Postgraduate diploma in Life, General
Insurance, Risk Management and Actuarial Sciences. The institute is a global
learning and research centre in insurance, risk management, actuarial sciences.
They provide consulting services for the financial industry.
 Amity School of Insurance Banking and Actuarial science (ASIBAS) of Amity
University, Noida and established in 2000, offers MBA programmes in
Insurance, Insurance and Banking, and MSc/BSc actuarial sciences to a Post
Graduate Diploma in Actuarial Sciences.
 Pondicherry University offers an MBA in insurance management. Pondicherry
University is the only central university which offers insurance management in
India.
 Birla Institute of Management Technology is a graduate business school
located in Greater Noida, established in 1988, offers a PGDM-IBM
programme in insurance business management. This programme was launched
in 2000 by the Centre for Insurance and Risk Management and is accredited
by the Insurance Regulatory and Development Authority. Life Office
Management Association (LOMA), USA is BIMTECH's educational partner
and BIMTECH is an approved centre for LOMA examination. The Chartered
Insurance Institute (CII), UK has accorded recognition (by way of credits) to
the BIMTECH PGDM-IBM programme. Their two-year PGDM programme
in insurance business has been recognised as equivalent to the Associate level
of the Insurance Institute of India, Mumbai.
 National Law University, Jodhpur offers a two-year MBA and one year MS
(for engineering graduates) programme in insurance.
To become an insurance advisor in India, Insurance Act, 1938 mandates that

the individual has to be "a Major with sound mind". After the advent of IRDA
as insurance regulator, it has framed various regulations, viz. training hours,
examination and fees which are amended from time to time. Since November
2011 IRDA has introduced a syllabus (IC-33) conceived and developed by
CII, London. The syllabus mainly aims to make an Insurance Agent a financial
professional.
173
Regulations Relating to Insurance 10.2 Types of Life Insurance In India(Role of Riders in
Insurance Policies)
NOTES
Life insurance products come in a variety of offerings catering to the
investment needs and objectives of different kinds of investors. Following is
the list of broad categories of life insurance products:
Term insurance policies

The basic premise of a term insurance policy is to secure the immediate
needs of nominees or beneficiaries in the event of the sudden or unfortunate
demise of the policy holder. The policyholder does not get any monetary
benefit at the end of the policy term except for the tax benefits he or she can
choose to avail of throughout the tenure of the policy. In the event of the death
of the policyholder, the sum assured is paid to his or her beneficiaries. Term
insurance policies are also relatively cheaper to acquire as compared to other
insurance products.
Money-back policies
Money back policies are basically an extension of endowment plans wherein
the policyholder receives a fixed amount at specific intervals throughout the
duration of the policy. In the event of the death of the policyholder, the full
sum assured is paid to the beneficiaries. The terms again might slightly vary
from one insurance company to another.
Whole life policies

A whole life insurance plan covers the insured over his life. The primary
feature of this product is that the validity of the policy is not defined so the
policyholder enjoys the life cover throughout his life.
Unit-linked investment policies (ULIP)
Unit-linked insurance policies again belong to the insurance-cum-
investment category where one gets to enjoy the benefits of both insurance and
investment. While a part of the monthly premium pay-out goes towards the
insurance cover, the remaining money is invested in various types of funds
that invest in debt and equity instruments. ULIP plans are more or less similar
in comparison to mutual funds except for the difference that ULIPs offer the
additional benefit of insurance.
Pension policies
Pension policies let individuals determine a fixed stream of income post
retirement. This basically is a retirement planning investment scheme where
the sum assured or the monthly pay-out after retirement entirely depends on
the capital invested, the investment timeframe, and the age at which one
wishes to retire. There are again several types of pension plans that cater to
different investment needs. Now it is recognized as an insurance product and
is regulated by IRDA.
174
10.3 Indian Life Insurance Industry Overview Regulations Relating to Insurance
All life insurance companies in India have to comply with the regulations
laid out by the Insurance Regulatory and Development Authority of India
NOTES
(IRDAI).
Life Insurance Corporation of India (LIC), the state-owned behemoth,

remains by far the largest player in the market. The private companies like
Exide Life Insurance have come out with products called ULIPs (Unit Linked
Investment Plans) which offer both life cover as well as scope for savings or
investment options as the customer desires. These type of plans are subject to a
minimum lock-in period of five years to prevent misuse of the significant tax
benefits offered to such plans under the Income Tax Act. Comparison of such
products with mutual funds would be erroneous.
Commission / intermediation fees
The maximum commission limits as per statutory provisions are:
Agency commission for retail life insurance business:
o
 7- 25% for 1st year premium if the premium paying term is more than 20 years
 7- 10% for 1st year premium if the premium paying term is more than 15 years
 7- 10% for 1st year premium if the premium paying term is less than 10 years
 7% - yr 2 and 3rd year and 3.5% - thereafter for all premium paying terms.
Tax Benefits
 Life insurance not only ensures the well-being of your family, it also brings
tax benefits.
 The amount you pay as premium can be deducted from your total taxable
income.
 However, this is subject to a maximum of Rs 1.5 lakh, under Section 80C of
the Income Tax Act.
 The premium amount used for tax deduction should not exceed 10% of the
sum assured.
A general insurance is a contract that offers financial compensation on

any loss other than death. It insures everything apart from life. A general
insurance compensates you for financial loss due to liabilities related to your
house, car, bike, health, travel, etc. The insurance company promises to pay
you a sum assured to cover damages to your vehicle, medical treatments to
cure health problems, losses due to theft or fire, or even financial problems
during travel.
175
Simply put, a general insurance offers financial protection for all your
Accounting and Management assets against loss, damage, theft, and other liabilities. It is different from life
insurance.
NOTES
Situation 1 Situation 2 Situation 3
You cannot stop

celebrating your
You plan to propose to new car. You hit
your girlfriend on the the roads with
Your daughter wants to
Eiffel Tower. your latest
become a pilot.
You already finalised the possession.
You save all your disposable
deal with a jeweller in Everything goes
income to fund her dreams.
Paris. well until a car
Unfortunately, you fall severely
But, things don’t go as suddenly tries to
ill.
planned and you meet overtake you. It
with an accident there. leaves huge dents
and dislocates
your left mirror.
Your new baby on

Your treatment requires the block needs You need Rs. 2 lakh for your
Rs. 50,000. But, still paid repairs worth Rs. treatment immediately. Yet,
for that dainty piece of 30,000. Yet, you you also easily pay your
jewellery. have a smile on daughter’s course fees.
your face.
HOW?
The dent in your

car didn’t cause a
Your Travel insurance
dent in your
made you ready for
pocket. You didn’t face a dilemma of
emergencies.
Your motor choosing one over the other
It paid for the expenses
insurance’ own and compromise your
related to your accident.
damage cover daughter’s future. Your health
You could, thus, go
paid for your car’s insurance took care of your
ahead and surprise your
damages caused treatment costs. Your savings,
partner with a diamond
by the accident. In thus, remained unaffected by
ring without worrying
fact, the insurer your sudden illness.
about the treatment
settled the bill
costs.
directly at the
garage.
176
As you can see, General Insurance can be the answer to life‘s various Regulations Relating to Insurance
problems. But, for that, you need to select the right insurances from the myriad Accounting and Management
ones available.
NOTES
Types of General Insurance / What all can be insured?
You can get almost anything and everything insured. But there are five key
types available:
1. Health Insurance
2. Motor Insurance
3. Travel Insurance
4. Home Insurance
5. Fire Insurance
Health Insurance
This type of general insurance covers the cost of medical care. It pays for or
reimburses the amount you pay towards the treatment of any injury or illness.
It usually covers:
 Hospitalisation
 The treatment of critical illnesses
 Medical bills prior to or post hospitalisation
 Day care procedures like Cataract operations
You can also opt for add-on benefits like:
 Maternity cover: Your health insurance covers you for the costs related
to childbirth. This includes pre-delivery check-ups, hospitalisation
during delivery, and post-natal care.
 Pre-existing diseases cover: Your health insurance takes care of the
treatment of diseases you may have before buying the health insurance
policy.
 Accident cover: Your health insurance can pay for the medical
treatment of injuries caused due to accidents and mishaps.
Your health insurance can also help you save tax. Your premium payment can
reduce your taxable income.
Tax deduction on the

For Total
premium amount
Rs. 25,000 (Rs. 30,000 if you

Self Rs. 25,000 (or Rs. 30,000)
are a senior citizen)
177
Regulations Relating to Insurance Tax deduction on the
Accounting and Management For Total
premium amount
NOTES
Parents, who are

Rs. 30,000 Rs. 55,000 (or Rs. 60,000)
senior citizens
Senior citizen = Individual aged 60 or over
Motor Insurance
Motor insurance is for your car or bike what health insurance is for your
health.
It is a general insurance cover that offers financial protection to your vehicles

from loss due to accidents, damage, theft, fire or natural calamities
You can also get motor insurance for your commercial vehicles.
In India, you cannot drive or ride without motor insurance.
Let‘s look at the two key types:
1. Car Insurance
It‘s precious—your car. You paid lakhs of rupees to buy that beauty. Even a
single scratch can be painful, forget about bigger damages.
Car insurance can reduce this pain for a few thousand rupees.
How it works:
What the insurer will pay for depends on the type of car insurance plan you
purchase
2. Two-wheeler Insurance
This is your bike‘s guardian angel. It‘s similar to Car insurance.
178
You cannot ride a bike or scooter in India without insurance. Regulations Relating to Insurance
How it works:
NOTES
As with car insurance, what the insurer will pay depends on the type of
insurance and what it covers.
Fire Insurance
Fire insurance pays or compensates for the damages caused to your property or
goods due to fire.
It covers the replacement, reconstruction or repair expenses of the insured

property as well as the surrounding structures.
It also covers the damages caused to a third-party property due to fire.
In addition to these, it takes care of the expenses of those whose livelihood has
been affected due to fire.

As Fire insurance is a contract, it should satisfy all the features of general
contract.
(a) Proposal :- The fire insurance proposal can be made either verbally or in
writing. A printed proposal form is used for this purpose, in which the
proposer furnishes the necessary information of the property to be insured. The
description of the subject matter of insurance is the bases of contract for
assessing the risk and fixing the premium.
(b) Acceptance :- The insurer will assess the risk after receiving the proposal
form. When the contents and the subject matters are not very high amount, the
insurer may accept the proposal. When the subject matters are of larger
amount and where the involvement of hazard is variable or unknown in nature,
the insurer may send his Surveyor to survey the property. Based on the
Surveyor's report the proposal will be accepted. The unknown proposers are
required to submit an evidence of respectability.
(c) Commencement of Risk :- As soon as the proposal is accepted, risk will Self-Instructional Material
commence irrespective of the fact that no policy was issued and no premium
179
was paid. Where risks are unknown and tremendous, the payment of premium
Accounting and Management will be the basis of the completion of the contract. The risk will commence
only when the premium has been paid and not before that.
NOTES
(i) Cover Note :- The insurer issues a 'Cover Note' or 'Interim Protection Note'
whenthe risk was accepted provisionally or subject to the condition of
payment of premium. This note will cover the property so far the final policy
has not been issued. If loss occurs before issue of policy the cover note will be
sufficient to prove insurance. The cover note, however, is not taken at part to
the policy.
Policy
The insurer issues a duty stamped policy which will bear all the terms and
conditions of the contract. Any contract of fire insurance comes within the
meaning of the word 'policy'. It is a statutory and formal document of
insurance contract.
Though there are different forms of policies for different types of policies, a
standard form is also used. The policy contains the name and address of the
insured, the subject-matter of insurance, the sum insured the term and the
premium etc.
10.6 Functions of Insurance Organizations Insurable

Interest
Insurance is defined as a co-operative device to spread the loss caused by
a particular risk over a number of persons who are exposed to it and who agree
to ensure themselves against that risk. Risk is uncertainty of a financial loss. It
should not be confused with the chance of loss which is the probable number
of losses out of a given number of exposures.
It should not be confused with peril which is defined as the cause of loss or
with hazard which is a condition that may increase the chance of loss.
Finally, risk must not be confused with loss itself which is the unintentional
decline in or disappearance of value arising from a contingency. Wherever
there is uncertainty with respect to a probable loss there is risk.
Every risk involves the loss of one or other kind. The function of insurance is
to spread the loss over a large number of persons who are agreed to co-operate
each other at the time of loss. The risk cannot be averted but loss occurring
due to a certain risk can be distributed amongst the agreed persons. They are
agreed to share the loss because the chances of loss, i.e., the time, amount, to a
person are not known.
180
Anybody of them may suffer loss to a given risk, so, the rest of the persons Regulations Relating to Insurance
who are agreed will share the loss. The larger the number of such persons the Accounting and Management
easier the process of distribution of loss, In fact; the loss is shared by them by
payment of premium which is calculated on the probability of loss.
NOTES
In olden time, the contribution by the persons was made at the time of loss.
The insurance is also defined as a social device to accumulate funds to meet
the uncertain losses arising through a certain risk to a person insured against
the risk.
The functions of insurance can be studied into two parts (i) Primary Functions,
and (ii) Secondary Functions.
Primary Functions:
(i) Insurance provides certainty:
Insurance provides certainty of payment at the uncertainty of loss. The
uncertainty of loss can be reduced by better planning and administration. But,
the insurance relieves the person from such difficult task. Moreover, if the
subject matters are not adequate, the self-provision may prove costlier
There are different types of uncertainty in a risk. The risk will occur or not,
when will occur, how much loss will be there? In other words, there are
uncertainty of happening of time and amount of loss. Insurance removes all
these uncertainty and the assured is given certainty of payment of loss. The
insurer charges premium for providing the said certainty.
(ii) Insurance provides protection:

The main function of the insurance is to provide protection against the
probable chances of loss. The time and amount of loss are uncertain and at the
happening of risk, the person will suffer loss in absence of insurance. The
insurance guarantees the payment of loss and thus protects the assured from
sufferings. The insurance cannot check the happening of risk but can provide
for losses at the happening of the risk.
(iii) Risk-Sharing:
The risk is uncertain, and therefore, the loss arising from the risk is also
uncertain. When risk takes place, the loss is shared by all the persons who are
exposed to the risk. The risk-sharing in ancient time was done only at time of
damage or death; but today, on the basis of probability of risk, the share is
obtained from each and every insured in the shape of premium without which
protection is not guaranteed by the insurer.
Secondary functions:
Besides the above primary functions, the insurance works for the following
functions:
(i) Prevention of Los

181
The insurance joins hands with those institutions which are engaged in
Accounting and Management preventing the losses of the society because the reduction in loss causes lesser
payment to the assured and so more saving is possible which will assist in
NOTES
reducing the premium. Lesser premium invites more business and more
business cause lesser share to the assured.
So again premium is reduced to, which will stimulate more business and more
protection to the masses. Therefore, the insurance assist financially to the
health organisation, fire brigade, educational institutions and other
organisations which are engaged in preventing the losses of the masses from
death or damage.
(ii) It Provides Capital:

The insurance provides capital to the society. The accumulated funds are
invested in productive channel. The dearth of capital of the society is
minimised to a greater extent with the help of investment of insurance. The
industry, the business and the individual are benefited by the investment and
loans of the insurers.
(iii) It Improves Efficiency:

The insurance eliminates worries and miseries of losses at death and
destruction of property. The carefree person can devote his body and soul
together for better achievement. It improves not only his efficiency, but the
efficiencies of the masses are also advanced.
(iv) It helps Economic Progress:

The insurance by protecting the society from huge losses of damage,
destruction and death, provides an initiative to work hard for the betterment of
the masses. The next factor of economic progress, the capital, is also
immensely provided by the masses. The property, the valuable assets, the man,
the machine and the society cannot lose much at the disaster.

Your valuable possessions in life - your home, business, and vehicle are
exposed to various hazards. Emergency medical expenses can also put you
under serious financial stress. Traveling too involves risks such as accident,
loss of baggage / passport and medical expenses.
LIST OF NON INSURANCE COMPANIES
Sl.No. Insurer & Address
1 IFFCO TOKIO General Insurance Co. Ltd.

182
IFFCO Sadan, C-1, District Centre, Saket, New Delhi - 110017 Accounting and Management
2 Liberty General Insurance Co. Ltd. NOTES

10th Floor, Tower A, Peninsula Business Park, G.K. Marg, Lower Parel,
Mumbai-400013
3 Shriram General Insurance Co. Ltd.

E-8, EPIP, RIICO Industrial Area, Sitapura, Jaipur-302022(Raj.)
4 Reliance General Insurance Co.Ltd

H Block, 1st Foor, Dhirubhai Ambani Knowledge City, Navi Mumbai -
400 710
5 DHFL General Insurance Co. Ltd

2nd Floor, DHFL House, 19 Sahar Road, Off Western Express Highway,
Vile Parle (East), Mumbai - 400099
6 Bajaj Allianz Allianz General Insurance Co. Ltd

Bajaj Allianz House, Airport Road, Yerawada, Pune – 411006
7 Edelweiss General Insurance Co. Ltd.

Edelweiss House, Off CST Road, Kalina, Mumbai 4000098
8 Kotak Mahindra General Insurance Co. Ltd.

27 BKC, C-27, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051
9 Go Digit General Insurance Co. Ltd

Smartworks Business Center, 1st Floor, Nyati Unitree, West Wing, Samrat
Ashok Road, Yerawada, PUNE - 411006
10 Royal Sundaram General Insurance Co. Ltd.

"Vishranthi Melaram Towers" No.2/319 , Rajiv Gandhi Salai (OMR)
Karapakkam, Chennai - 600 097
11 Exports Credit Guarantee of India Co. Ltd

Express Tower, 10th Floor, Nariman Point,Mumbai-400021
183
Regulations Relating to Insurance 12 The New India Assurance Co. Ltd
87, M.G Road, Fort, Mumbai, Maharashtra – 400 001
NOTES
13 Tata AIG General Insurance Company Limited

Peninsula Business Park, Tower A, 15th Floor, G.K. Marg, Lower Parel,
Mumbai – 400013
14 National Insurance Co. Ltd.

3, Middleton Street, Prafulla Chandra Sen Sarani , Kolkata, West Bengal,
700071.
15 Universal Sompo General Insurance Co. Ltd.

Unit No. 401, 4th floor, Sangam Complex, 127, Andheri Kurla Road,
Andheri (E) , Mumbai – 400059, Maharashtra
16 Agriculture Insurance Company of India Ltd.

13th floor, Ambadeep Building, 14, K.G. Marg, New Delhi-110001
17 Acko General Insurance Co. Ltd.

Unit No. 301 & 302, 3rd Floor, F Wing, Lotus Corporate Park, Off
Western Express Highway, Goregaon East, Mumbai 400 063.
18 SBI General Insurance Co. Ltd.

‗Natraj‘, 101, 201 & 301, Junction of Western Express Highway &
Andheri-Kurla Road, Andheri (East), Mumbai - 400069
19 Bharti AXA General Insurance Co. Ltd.

First Floor, Ferns Icon, Survey No. 28, Doddanekundi, Bangalore-560037
20 ICICI LOMBARD General Insurance Co. Ltd.

ICICI Lombard House, 414, Veer Savarkar Marg Near Siddhivinayak
Temple, Prabhadevi Mumbai 400025, India
21 Magma HDI General Insurance Co. Ltd.

401, 4th Floor, Rustomjee Aspiree, Off. Eastern Express Highway, Imax
Dome Theatre Road, Sion (East), Mumbai-400022
184
22 HDFC ERGO General Insurance Co.Ltd. Accounting and Management
HDFC House, 1st Floor, 165-166, Backbay Reclamation, H.T. Parekh
Marg, Churchgate, Mumbai - 400020
NOTES
23 United India Insurance Co. Ltd.

24,Whites Road, Chennai-600 014
24 The Oriental Insurance Co. Ltd.

The Oriental Insurance Co. Ltd. ―Oriental House‖ A-25/27, Asaf Ali Road
NEW DELHI 110 002
25 Future Generali India Insurance Co. Ltd.

Indiabulls Finance Centre, 6th Floor, Tower 3, Senapati Bapat Marg,
Elphinstone Road (W), Mumbai - 400 013
26 Cholamandalam MS General Insurance Co. Ltd.

Dare House, 2nd floor, No 2. NSC Bose Road, Chennai 600001
27 Raheja QBE General Insurance Co. Ltd.

Raheja QBE General Insurance Co. Ltd. ―Windsor House‖, 5th Floor CST
Road Kalina, Santa Cruz (East) MUMBAI 400 098
28 Star Health & Allied Insurance Co.Ltd.

Star Health & Allied Insurance Co.Ltd. 1, New Tank Street Valluvar
Kottam High Road Nungambakkam CHENNAI 600 034
29 Apollo Munich Health Insurance Co. Ltd

Apollo Munich Health Ins. Co. Ltd. 2nd & 3rd Floor, iLabs Centre Plot no.
404 & 405, Udyog Vihar, Phase – III Gurgaon – 122 016, Haryana
30 Religare Health Insurance Co. Ltd

Religare Health Insurance Co. Ltd. Vipul Tech Square, Tower C, 3rd
Floor, Sector – 43, Golf Course Road, Gurgaon – 122009
31 Max Bupa Health Insurance Co. Ltd

Max Bupa Health Insurance Co. Ltd. Block B1/1-2, Mohan Cooperative
Industrial Estate, Mathura Road, NEW DELHI – 110 044.
185
Regulations Relating to Insurance 32 CIGNA TTK Health Insurance Co. Ltd.
CIGNA TTK Health Insurance Co. Ltd. CIGNA TTK Health Insurance
NOTES Company Limited 401/402 Raheja Titanium, Westren Express Highway,
Goregaon (East), Mumbai – 400063
33 Aditya Birla Health Insurance Co. Ltd.

9th Floor, One Indiabulls Centre, Tower-1,Jupiter Mill Compound,
841,S.B Marg, Elphinstone Road MUMBAI - 400013.
34 Reliance Health Insurance Limited

Reliance Centre, 6th Floor, North Wing, Off Western Express Highway,
Santa Cruz (East) Mumbai – 400055
NON-LIFE INSURANCE COMPANIES

As of October 2018, IRDAI has recognized 34 non-life insurance
companies.[2]
Company Sector Headquarters Founded
1 Acko General Insurance Private Mumbai 2016
2 Aditya Birla Health Insurance Private Mumbai 2015
Agriculture Insurance Company

3 Public New Delhi 2002
of India
4 Apollo Munich Health Insurance Private Gurgaon 2007
5 Bajaj Allianz General Insurance Private Pune 2001
6 Bharti AXA General Insurance Private Mumbai 2008
Cholamandalam MS General
7 Private Chennai 2001
Insurance
186
NOTES
8 Cigna TTK Private Mumbai 1918
9 DHFL General Insurance Private Mumbai 2016
10 Digit Insurance Private Pune 2017
11 Edelweiss General Insurance Private Mumbai 2017
Export Credit Guarantee

12 Private Mumbai 1957
Corporation of India
13 Future Generali India Insurance Private Mumbai 2007
HDFC ERGO General Insurance

Company
15 ICICI Lombard Private Mumbai 2001
IFFCO TOKIO General

16 Private New Delhi 2000
Insurance
Kotak Mahindra General

Insurance
18 Liberty General Insurance Private Mumbai 2013
19 Magma HDI General Insurance Private Mumbai 2009
20 Max Bupa Health Insurance Private New Delhi 2008

187
Accounting and Management Company Sector Headquarters Founded
NOTES
21 National Insurance Company Public Kolkata 1906
22 New India Assurance Public Mumbai 1919
23 Raheja QBE General Insurance Private Mumbai 2007
24 Reliance General Insurance Private Mumbai 2000
25 Reliance Health Insurance Private Mumbai 2017
Religare Health Insurance

26 Private Gurgaon 2012
Company Limited
Royal Sundaram General

27 Private Chennai 2000
Insurance
28 SBI General Insurance Private Mumbai 2010
29 Shriram General Insurance Private Jaipur 2008
30 Star Health and Allied Insurance Private Chennai 2006
31 Tata AIG General Insurance Private Mumbai 2001
The Oriental Insurance

32 Public New Delhi 1947
Company
United India Insurance

33 Public Chennai 1938
Company
188
NOTES
Universal Sompo General 2007
34 Private Mumbai
Insurance Company

The insurer firsts value the property and then undertakes
to pay compensation up to that value in the case of loss
Valued policy
or damage.
It covers the damages to properties lying at different

Floating policy
places.
This is known as an all-in-one policy.

Comprehensive
It has a wide coverage and includes damages due to fire,
policy theft, burglary, etc.
This covers you for a specific amount which is less than

Specific policy the real value of the property.
What does insurance not cover?
Your policy may not cover liabilities in certain situations. These are known as
exclusions.
How much does insurance cost?
Your insurance costs depend on your premium amount. This premium amount
depends on several factors that differ from insurance to insurance. Here‘s a
look:
Life Insurance
 Age
 Health (past and current)
 Your occupation
 The type of coverage/plan
 Your smoking and drinking habits
 The sum assured Self-Instructional Material
189
Motor/Auto Insurance:
 Make-Model of the vehicle
NOTES
 The value, age of your vehicle
 Your claim history
Travel Insurance
 The sum assured

 Age
 Your health
 The location of travel
Health Insurance
 Your family health history

 The sum assured
 Your age and gender
 Your health history
Home Insurance
 The size of your home

 The age of your home and the systems installed therein
 The location of your home
 The sum assured
You can also use online calculators to check the premium amount.
How to use the insurance money?
 You have to make a claim against your insurance policy.

 Give details about the loss you suffered. This differs from insurance to
insurance.
 Submit the bills/proof of damage, loss, hospitalisation, etc.
 The insurance company would verify your claim.
 It will then pay the bill or reimburse you for your loss.
Read informative General Insurance Articles at Acko.
Having a vehicle insurance policy helps protect against damages to your

vehicle under various circumstances. Stay upto date with the latest Car
Insurance Articles and Two Wheeler Insurance Articles here.
190
Nature:
Marine insurance is concerned with overseas trade. International trade NOTES
involves transportation of goods from one country to another country by ships.
There are many dangers during the transhipment. The persons who are
importing the goods will like to ensure the safe arrival of their goods.
The shipping company wants the safety of the ship. So marine insurance
insures the coverage of all types of risks which occur during the transit.
Marine insurance may be called a contract whereby the insurer undertakes to
indemnify the insured in a manner and to the extent thereby agreed upon
against marine losses.
Marine insurance has two branches:

(i) Ocean Marine Insurance
(ii) Inland Marine Insurance.
Ocean marine insurance covers the perils of the sea whereas inland marine
insurance is related to the inland risks on the land. Marine insurance is one of
the oldest forms of insurance. It has developed with the expansion of trade. It
was started during the middle ages in Italy and then in England. The sending
of goods by sea involves many perils; so it was necessary to get the goods
insured. In modern times marine insurance business is well organised and is
carried on scientific lines.
Lloyd’s Association:
This association has played an important role in marine insurance in England.
During the middle of seventeenth century some persons used to assemble in
coffee houses of London and transact marine insurance business. They used to
transact business in their own names. One of the coffee houses was owned by
Edward Lloy
For the facility of his customers he started publishing a paper called Lloyd‘s
News in 1696. This paper contained all types of information about the
movement of ships. The persons who used to assemble in Lloyd‘s Coffee
House formed an association called Lloyd‘s Association.
This association provided only the requisite information, but business was
contracted by the underwriters in their own names. Anybody interested in
entering marine insurance business could become the members of this
association. The member‘s reputation and financial position was scrutinised
properly. The association earned a great name in marine insurance and is
considered one of the best organisations in the world even today.
Subject Matter to be insured: Self-Instructional Material

The marine insurance may cover three types of things:
191
(i) Cargo Insurance:
Accounting and Management The person who is importing the goods and the person who is sending them
are interested in the safety of goods during the sea journey. The goods to be
NOTES
insured are called ‗cargo‘. Any loss of goods during journey is indemnified by
the insurance company.
The goods are generally insured according to their value but some percentage
of profit can also be included in the value. The cargo policies may be special,
reporting and floating. The special policy is only for one shipment. Reporting
or open cargo policy, on the other hand, covers all shipments made by an
exporter over a long period of time.
The floating policy is just similar to open cargo policy but differs from it only
in respect of the method of paying the premium. In floating policies the value
of the future shipments is estimated and premium is deposited with the
company. Later on, actual shipments are compared with the estimates and the
premium is adjusted.
(ii) Hull Insurance:

When the ship is insured against any type of danger it is called Hull Insurance.
The ship may be insured for a particular trip or for a particular period.
(iii) Freight Insurance:

The shipping company has an interest in freight. The freight may be paid in
advance or on the arrival of goods. The shipping company will not get freight
if the goods are lost during transit. The shipping company may insure the
freight to be received which is known as freight insurance.
Principles of Marine Insuranc

Some of the principles related to marine insurance are given as under:
1. Utmost Good Faith:
The marine contract is based on utmost good faith on the part of both the
parties. The burden of this principle is more on the insured than on the
underwriter (insurance company). The insured should give full information
about the subject to the insured. He should not withhold any information. If a
party does not act in good faith, the other party is at liberty to cancel the
contract.
2. Insurable Interest:
Insurable interest means that the insured should have interest in the subject
when it is to be insured. He should be benefited by the safe arrival of
commodities and he should be prejudiced by loss or damage of goods. The
insured may not have an insurable interest at the time of acquiring a marine
insurable policy, but he should have a reasonable expectation of acquiring
such interest. The insured must have insurable interest at the time of loss or
Self-Instructional Material damage otherwise he will not be able to claim compensation.
192
3. Indemnity: Regulations Relating to Insurance
This principle means that the insured will be compensated only to the extent of Accounting and Management
loss suffered. He will not be allowed to earn profit from marine insurance. The
underwriter provides to compensate the insured in cash and not to replace the
cargo or the ship. The money value of the subject matter is decided at the time NOTES
of taking up the policy. Sometimes the value is calculated at the time of loss
also.
There is one exception to the principle of indemnity in marine insurance.

Some profit margin is also allowed to be included in the value of the goods.
The assumption is that the insured will earn profit when goods reach at their
destination.
4. Cause Proxima:
This is a Latin word which means the nearest or proximate cause. It helps in
deciding the actual cause of loss when a number of causes have contributed to
the loss. The immediate cause of loss should be determined to fix the
responsibility of the insurer. The remote cause for a loss is not important in
determining the liability. If the proximate cause is insured against, the insurer
will indemnify the loss.
Different types of marine insurance can be elaborated as follows:
Hull Insurance: Hull insurance mainly caters to the torso and hull of the
vessel along with all the articles and pieces of furniture on the ship. This type
of marine insurance is mostly taken out by the owner of the ship to avoid any
loss to the vessel in case of any mishaps occurring.
Machinery Insurance: All the essential machinery are covered under this
insurance and in case of any operational damages, claims can be compensated
(post-survey and approval by the surveyor).
The above two insurances also come as one under Hull & Machinery (H&M)
Insurance. The H&M insurance can also be extended to cover war risk covers
and strike cover (strike in port may lead to delay and increase in costs)
Protection & Indemnity (P&I) Insurance: This insurance is provided by

the P&I club, which is ship owners mutual insurance covering the liabilities to
the third party and risks which are not covered elsewhere in standard H & M
and other policies.
Protection: Risks which are connected with ownership of the vessel. E.g.
Crew related claims.
Indemnity: Risks which are related to the hiring of the ship. E.g. Cargo- Self-Instructional Material
related claims.
193
Liability Insurance: Liability insurance is that type of marine insurance
Accounting and Management where compensation is sought to be provided to any liability occurring on
account of a ship crashing or colliding and on account of any other induced
NOTES
attacks.
Freight, Demurrage and Defense (FD&D) Insurance: Often referred to as

―FD&D‖ or simply ―Defense,‖ this insurance provides claims for handling
assistance and legal costs for a wide range of disputes which are not covered
under H&M or P&I insurance.
Freight Insurance: Freight insurance offers and provides protection to

merchant vessels‘ corporations which stand a chance of losing money in the
form of freight in case the cargo is lost due to the ship meeting with an
accident. This type of marine insurance solves the problem of companies
losing money because of a few unprecedented events and accidents occurring.
Marine Cargo Insurance: Cargo insurance caters specifically to the marine

cargo carried by ship and also pertains to the belongings of a ship‘s voyages. It
protects the cargo owner against damage or loss of cargo due to ship accident
or due to delay in the voyage or unloading. Marine cargo insurance has third-
party liability covering the damage to the port, ship or other transport forms
(rail or truck) resulted from the dangerous cargo carried by them
The time limit for claims that are right to compensation may vary depending
upon the content of the policy, and action is to be brought within that period
from the date when the damage occurred.
For Newly built ships, the shipowner is under contract with the shipyard to
take out insurance cover for a period (usually one year) from the date of yard
delivery.
In addition to these types of marine insurance, there are also various types
of marine insurance policies which are offered to the clients by insurance
companies so as to provide the clients with flexibility while choosing a
marine insurance policy. The availability of a wide array of marine insurance
policies gives a client a wide arena to choose from, thus enabling him to get
the best deal for his ship and cargo.
Different types of marine insurance policies are detailed below:
 Voyage Policy: A voyage policy is that kind of marine insurance policy

which is valid for a particular voyage.
 Time Policy: A marine insurance policy which is valid for a specified

Self-Instructional Material time period – generally valid for a year – is classified as a time policy.
194
 Mixed Policy: A marine insurance policy which offers a client the Regulations Relating to Insurance
benefit of both time and voyage policy is recognized as a mixed policy. Accounting and Management
 Open (or) Unvalued Policy: In this type of marine insurance policy, the
value of the cargo and consignment is not put down in the policy NOTES
beforehand. Therefore reimbursement is done only after the loss of the

cargo and consignment is inspected and valued.
 Valued Policy: A valued marine insurance policy is the opposite of an

open marine insurance policy. In this type of policy, the value of the
cargo and consignment is ascertained and is mentioned in the policy
document beforehand thus making clear about the value of the
reimbursements in case of any loss to the cargo and consignment.
 Port Risk Policy: This kind of marine insurance policy is taken out in
order to ensure the safety of the ship while it is stationed in a port.
 Wager Policy: A wager policy is one where there are no fixed terms for
reimbursements mentioned. If the insurance company finds the damages
worth the claim then the reimbursements are provided, else there is no
compensation offered. Also, it has to be noted that a wager policy is not
a written insurance policy and as such is not valid in a court of law.
 Floating Policy: A marine insurance policy where only the amount of

claim is specified and all other details are omitted till the time the ship
embarks on its journey, is known as a floating policy. For clients who
undertake frequent trips of cargo transportation through waters, this is
the most ideal and feasible marine insurance policy.
 Single Vessel Policy: This policy is suitable for small shipowner having
only one ship or having one ship in different fleets. It covers the risk of
one vessel of the insured.
 Fleet Policy: In this policy, several ships belonging to one owner are
insured under the same policy.
 Block Policy: This policy also comes under maritime insurance to

protects the cargo owner against damage or loss of cargo in all modes of
transport through which his/her cargo is carried i.e. covering all the risks
of rail, road, and sea transport.
Marine Insurance is an area which involves a lot of thought, straightforward

and complex dealings in order to achieve the common ground of payment and
receiving. But as much as complex the field is, it is nonetheless interesting and
intriguing because it caters to a lot of people and offers a wide range of
services and policies to facilitate easy and uncomplicated business
transactions. Therefore, in the interest of the clients and the insurance
providers, it is beneficial and relevant to have the right kind of marine Self-Instructional Material
195
insurance. It resolves problems not just in the short run, but also in the long
Accounting and Management run as well.
NOTES

The fact that 70% of the population in India lives in rural areas and
contribute to the development of the country in a big way makes it
important for them to avail schemes meant for their welfare. It wouldn’t be
wrong to say that farmers and their agriculture business play an important
part in the growth of our country. Thus, it makes sense for this section to
get coverage as per their needs in the form of rural insurance plans.
What Is Rural Insurance?

Rural insurance ensures that families living in rural areas have a safe and
secure future so that they can lead a happy life. The insurance helps them
to cover risks related to various aspects of their life. Rural Insurance
policies come with the affordable premium rates and faster claim process.
Types Of Rural Insurance

Rural insurance includes a wide range of plans to cover various sections. Some
of them are:
Plans Definition
Comprehensive coverage for agricultural

Motor
vehicles like tractors, cars, scooters, trailers and
Insurance
motorcycles
Property Covers home, shops, retail outlets, schools and

Insurance agricultural equipment
Accident Covers accidental death, partial or total

Insurance disability of the insured
Livestock Insurance coverage for cattle against death or

Insurance disability
Health Personal accident insurance and Mediclaim for

Insurance the insured
Self-Instructional Material Poultry Covers broilers and parent stock of chicken
196
Insurance Accounting and Management
What Rural Insurance Covers?

NOTES
Rural insurance is associated with the lifestyle risks of people residing in

villages. This insurance policy includes:
 Hut insurance
 Poultry insurance
 Cycle rickshaw policy
 Sericulture insurance
 Honey bee insurance
 Failed- well insurance
 Sheep and goat insurance
 Lift irrigation insurance
 Farmers‘ package insurance
 Agricultural pump-set policy
 Animal-driven cart insurance
 Gramin personal accident insurance
 Aqua-culture (prawn/ shrimp) insurance
 Horticulture/ plantation insurance scheme
 Animals included in rural insurance are elephants, rabbits, pigs, birds,
zoo and circus animals.
How Rural Insurance Functions?
In order to get the best deal, it is important to understand rural insurance well
and also, know how it functions:
 Analyse your requirement and the loss associated with your assets so
that you know which type of insurance to opt for
 The analysis will also help in deciding the premium amount
 Check and compare various insurance companies and plans to pick up
the best one for you
 The insurer checks whether the applicant resides in the rural area
 The premium is mutually agreed between the insurer and the insured
after going through the property/ livestock details
 When a risk occurs, the insured immediately informs the bank/insurer
company about the mishap
 Evidence of the event, duly filled claim form and FIR Report (if
needed) are submitted by the insured
 The claim is verified by bank officials. If authentic, the claim is settled,
else it is rejected
Eligibility Criteria
197
According to the Insurance Regulatory and Development Authority of India
Accounting and Management (IRDA), rural sector which is eligible for this insurance has to fulfil the
following categories:
NOTES
 Has a population less than 5,000 people

 Density of population is not more than 400 per square kilometre
 Minimum 75% of male population must be engaged in farming
activities
Claim Process
In case of some eventuality, you can make claims by following a set

procedure. It is important to be aware of the steps in order to avoid any
rejection:
 After the eventuality, inform the insurance company as soon as

possible
 Provide the duly filled in claim form along with the required
documents
 Submit the proofs and certificates
 After an assessment, if the provider finds it fit, your claim will be
accepted and you will receive your compensation, else it will be
rejected
 If you are not satisfied with the decision, you can approach the court of
law
Some of the documents required to be submitted to the insurance company for

making claims are:
 Duly filled in claim form

 Photocopy of insurance policy
 FIR report in case of accidents/ vandalism
 Death certificate (in case of death of the insured)
 Evidence of equipment damage (in case of property insurance)
 Ear tags (in case of cattle insurance)
 Demand draft/cancelled cheque of the bank account where the claim
amount has to be paid
Time Taken to Settle Claims
Rural insurance claim is processed and settled within 30 days of submitting the
supporting documents. If further investigation is needed, the insurance
company can take maximum of 3 months.
Exclusions
Though rural insurance has different sets of exclusions, which are:

198
Plans Exclusions
NOTES
· Death/ disability caused by neglect, overloading or
treatment by unskilled people
Cattle
Insurance · Intentional slaughter without permission of government
authorities
· Theft/clandestine sale
· Death caused by overcrowding
· Transit by any transport
Poultry
Insurance · Theft/clandestine sale
· Intentional slaughter without the permission of government

authority
Motor · Loss/damage from theft
Insurance
· Vehicle confiscated/destroyed by government body
· Cost of dismantling to and from transport to workshop
Property · Faults existing at the time of commencement of the policy
Insurance
· Damage for which the supplier/ manufacturer is
responsible
Moreover, the claim is not payable if the claim amount does not exceed 10%
of the total insured sum per acre/ Rs 1000 per affected acre, whichever is
lower.
Companies Offering Rural Insurance in India
Rural insurance is a specially designed insurance, keeping in mind various

sections of rural India. Some of the companies providing rural insurance in
India are:
 TATA AIG
 Aviva India
 Cholamandalam
 Oriental Insurance
 IFFCO Tokio
Advantages of Buying Rural Insurance

199
It is important to spread awareness about various types of rural insurance so
Accounting and Management that people residing in rural areas get to benefit from schemes meant for them.
Some of the benefits of purchasing rural insurance are:
NOTES
 Easy to understand plans

 People have to pay low premium which can be affordable
 The plan can compensate for monetary losses covered under the plan
 The plan can help people in rural areas become independent
10.11 Terminologies
1)Life Insurance 2) Influencing 3) Organizations4) policies 5) fire 6) Rural
1)Explain the types of life insurance in India?
2) state the General Insurance?
3) What are the futures of fire insurance contract?
4) Explain the functions of insurance organization?
5) Explain the rural insurance?
1) Gordon E and Natarajan K, (2010). ― Banking Theory,
Law and Practice‖, Himalaya Publishing House, Mumbai.
200
UNIT – XI NON- LIFE INSURANCE Non-Life Insurance
NOTES
Structure
11.1 Introduction
11.3 Indian Insurance Industry Overview ( Market Development Analysis)
11.7 Components of The Distribution Channels(System) of Life Insurance
Companies in the Country
11.9 Important Activities Carried Out In A Life Insurance Organization:
Marketing, Underwriting, And Administration
11.11 Terminologies
11.1 Introduction
Non-Life Insurance is a policy that provides compensation for losses incurred
from a specific financial event. This type of policy is also known as general
insurance, or property and casualty insurance. Examples of non-life insurance
policies include automobile policies, home-owners policies, damage cover
from fire, marine accidents, travel, theft and any catastrophe etc. Since the
probability of occurrence of these risks is very difficult to ascertain, it thereby
is an extremely difficult task to measure the amount of damage they would do,
on their incidence.
The Firm strives towards providing solutions for these risks so that you can
have an appropriately measured risk quantum that could have an effect on your
business. We understand that it is very important for every business to
appropriately book their liabilities whilst meeting the regulatory requirements
that are dictated upon them while simultaneously being able to make profits on
their businesses and our team endeavours to provide support for the same.
The Firm has been instrumental in Initial Product Pricing and Certification of
some of the big players in India.

The primary objective of a two wheeler insurance is to offer protection
against damage to the vehicle and liability to third party. But when you start to
consider the various types of auto insurance available in the country today, it
can get quite overwhelming. How do you assess the amount of coverage you
require? Are there ways to protect your vehicle with the necessary coverage in
an economical manner? Below we detail the various types of two-wheeler
insurances available for your two-wheeler.
201
Non-Life Insurance
based on the coverage
NOTES
Motor insurance policies can be classified into the following types, based on
the coverage they offer:
 Third-party Liability Insurance - This type of insurance policy is
mandated by law for all vehicles plying on the roads. This insurance
provides protection to third-party for damages to property or injuries to
individual, where the policyholder is accountable for the accident. Third-
party liability insurance only covers minimal risks, and it does not protect
the policyholder for damage or theft of the insured vehicle, or injuries that
he suffers.
 Comprehensive Insurance - This type of insurance policy covers third-
party liability, and the expenses incurred by the policyholder in the event of
damage or theft of the insured vehicle. The policyholder also benefits from a
personal accident cover that offers compensation if he is injured or faces
death in an accident. The comprehensive insurance policy can be enhanced
through add-on covers that offer extended benefits.
 Add-on Covers - Some of the add-on insurance covers that supplement a
comprehensive insurance plan are as follows:
 Zero Depreciation Cover - This is one of the most popular add-on covers
in motor insurance. This policy ensures that the policyholder receives the
full claim amount on the value of replaced parts, following an accident.
However, this cover is available only for vehicles that are less than three
years old.
 Roadside Assistance Cover - In the event of an emergency such as a flat
tyre, battery issues, or an empty fuel tank, this cover provides you assistance
even if you are stranded at a remote location. Policyholders can benefit from
services like fuel assistance, battery recharge, taxi, or even accommodation
assistance.
 Engine and Electronic Circuit Cover - This insurance covers expenses
incurred when there is a damage to the insured vehicle‘s engine or electronic
circuits.
 NCB Protection Cover - The No Claim Bonus is a reward given to a
policyholder for not making any claims during the policy term. The NCB
can amount to a significant reduction in premium for the following year.
However, when the policyholder makes a claim in the subsequent years, he
stands to lose the accrued NCB. The NCB Protection cover, as the name
suggests, does not nullify the NCB in the event of a claim; it just brings
down the slab at which the NCB discount is given on premium.
 Key Replacement Cover - In the case of a lost ignition key, this insurance
cover offers reimbursement for a part of the cost of a substitute key.
based on purpose of use
Vehicles can be used for private or commercial purposes, and the type of
insurance that the owner purchases depends on the intended use of the vehicle.
Self-Instructional Material  Private Motor Insurance - This type of insurance policy is purchased by
owners of two-wheelers who intend to use the vehicle for private purposes.
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A comprehensive private insurance and its owner in the event of accidents, Non-Life Insurance
and also offers third-party liability protection.
NOTES
 Commercial Motor Insurance - This is an insurance policy that prevents a
business from suffering financial loss from damages to the commercial
vehicle. It offers third-party liability protection, and accident cover for the
driver of the vehicle.
It is possible to strengthen your two-wheeler insurance by opting for sufficient
additional coverages. These days, insurance companies also provide you the
convenience of purchasing and renewing insurance policies online. So it is
advisable to compare policies and choose one that is appropriate for your
needs.
11.3 Indian Insurance Industry Overview ( Market

Development Analysis)
The insurance industry of India consists of 57 insurance companies of
which 24 are in life insurance business and 33 are non-life insurers. Among
the life insurers, Life Insurance Corporation (LIC) is the sole public sector
company. Apart from that, among the non-life insurers there are six public
sector insurers. In addition to these, there is sole national re-insurer, namely,
General Insurance Corporation of India (GIC Re). Other stakeholders in Indian
Insurance market include agents (individual and corporate), brokers, surveyors
and third party administrators servicing health insurance claims.
Market Size
Government's policy of insuring the uninsured has gradually
pushed insurance penetration in the country and proliferation
of insurance schemes.
Gross premiums written in India reached Rs 5.53 trillion (US$ 94.48 billion)
in FY18, with Rs 4.58 trillion (US$ 71.1 billion) from life insurance and Rs
1.51 trillion (US$ 23.38 billion) from non-life insurance. Overall insurance
penetration (premiums as % of GDP) in India reached 3.69 per cent in 2017
from 2.71 per cent in 2001.
In FY19 (up to October 2018), premium from new life insurance business
increased 3.66 per cent year-on-year to Rs 1.09 trillion (US$ 15.46
billion). In FY19 (up to October 2018), gross direct premiums of non-life
insurers reached Rs 962.05 billion (US$ 13.71 billion), showing a year-on-
year growth rate of 12.40 per cent.
Investments and Recent Developments
The following are some of the major investments and developments in the
Indian insurance sector.
 As of November 2018, HDFC Ergo is in advanced talks to acquire

Apollo Munich Health Insurance at a valuation of around Rs 2,600
crore (US$ 370.05 million).
 In October 2018, Indian e-commerce major Flipkart entered the
insurance space in partnership with Bajaj Allianz to offer mobile Self-Instructional Material
insurance.
 In August 2018, a consortium of WestBridge Capital, billionaire
investor Mr Rakesh Jhunjunwala announced that it would acquire
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Non-Life Insurance India‘s largest health insurer Star Health and Allied Insurance in a deal
NOTES estimated at around US$ 1 billion.
 In September 2018, HDFC Ergo launched ‗E@Secure‘ a cyber
insurance policy for individuals.
 Insurance sector companies in India raised around Rs 434.3 billion
(US$ 6.7 billion) through public issues in 2017.
 In 2017, insurance sector in India saw 10 merger and acquisition
(M&A) deals worth US$ 903 million.
 India's leading bourse Bombay Stock Exchange (BSE) will set up a
joint venture with Ebix Inc to build a robust insurance distribution
network in the country through a new distribution exchange platform.
Government Initiatives
The Government of India has taken a number of initiatives to boost the
insurance industry. Some of them are as follows:
 In September 2018, National Health Protection Scheme was launched

under Ayushman Bharat to provide coverage of up to Rs 500,000 (US$
7,723) to more than 100 million vulnerable families. The scheme is
expected to increase penetration of health insurance in India from 34
per cent to 50 per cent.
 Over 47.9 million famers were benefitted under Pradhan Mantri Fasal
Bima Yojana (PMFBY) in 2017-18.
 The Insurance Regulatory and Development Authority of India
(IRDAI) plans to issue redesigned initial public offering (IPO)
guidelines for insurance companies in India, which are to looking to
divest equity through the IPO route.
 IRDAI has allowed insurers to invest up to 10 per cent in additional
tier 1 (AT1) bonds that are issued by banks to augment their tier 1
capital, in order to expand the pool of eligible investors for the banks.
Road Ahead
The future looks promising for the life insurance industry with several changes
in regulatory framework which will lead to further change in the way the
industry conducts its business and engages with its customers.
The overall insurance industry is expected to reach US$ 280 billion by 2020.
Life insurance industry in the country is expected grow by 12-15 per cent
annually for the next three to five years.
Demographic factors such as growing middle class, young insurable
population and growing awareness of the need for protection and retirement
planning will support the growth of Indian life insurance.
Exchange Rate Used: INR 1 = US$ 0.0159 as on March 31, 2019
The necessity for insurance today is paramount and this is due to the fact
that we live in an economically uncertain world and one never knows when
financial help is required. Insurance acts as a safety blanket and protects
customers from various issues that may arise. Insurance plans are of various
204
types based on the requirement. The most commonly acquire policies are Life Non-Life Insurance
Insurance policies, Health Insurance Policies, among others.
NOTES
However, there are other insurance policies that are quite specific in nature
and correspond to certain unique requirements. These types of policies are
procured by customers who require cover only for certain issues and not for
generic ones life life and health. One of this is the Liability Insurance.
Liability Insurance Overview:

Liability insurance is a policy that offers protection to businesses and
individuals from risk that they may be held legally or sued for negligence,
malpractice or injury. This insurance policy protects the insured from legal
payouts and costs for which the policyholder is deemed to be responsible.
However, contractual liabilities and intentional damage are usually not
covered as part of this policy.
This policy was originally created by companies or individuals who
experienced common risks and hence created a fund to help pay for each
other‘s issues regarding this. These policies offer cover against their party
claims as the payment will not be for the insured to the person who has been
affected by the damage caused. In case a claim is made then the policy
provider will have to defend the policyholder.
Why is Liability Insurance Required?
This type of an insurance policy is generally procured by companies or
individuals who may be held liable, legally for injuries or other issues. This
especially the case for hospitals, doctors or even business owners. An example
would be, if a product manufacturer sells products that have been faulty or
causes damage to other‘s products, then he/she may be sued for the damages
caused. Procuring a liability insurance will cover the manufacturer from
ensuing legal costs.
Liability insurance is one part of the general insurance policy itself under the
risk transference category. In many countries, liability insurance is mandatory
especially for drivers of public transport vehicles. The scope of this form of
insurance in India has been defined by the Public Liability Insurance Act of
1991.

There are number of liability insurance policies available for customers based
on their line of work and requirements. The most common forms of Liability
insurance are Public,Product, Employers and Third-party liability.
 Public Liability Insurance
Although only certain countries have made this type of an insurance
mandatory, most industries, especially those that have an affect on third
parties such as visitors, trespassers, etc. Regardless of whether it is
mandatory or not, most companies procure it so as to avoid unnecessary
risk.
205
Non-Life Insurance Certain small industries do not procure liability insurance policies as the
NOTES premium is quite high, however, in the event of any claims, the legal costs
will usually outweigh the premium costs. Therefore, procuring this policy is
usually more prudent. This risk increases exponentially when these locations
are shopping centres, theatres, clubs etc and areas where sporting events are
held and places that allow consumption of alcohol.
In cases where the risk is extremely high, policy providers either refuse to
insure these liabilities or charge an exorbitant premium.
 Product Liability
This is again not a compulsory insurance requirement in many countries, but
it is highly important. This is procured by companies whose products are
widely used such as chemicals, tobacco, medical products, food, recreational
products and others.
 Employer Liability
This type offers cover to liabilities that an employer may incur if an
employee is injured during his/her employment due to the job. Sometimes,
companies do not deem this as important but if faced with a claim, they
might be driven to bankruptcy.
 Third-Party Liability
This policy covers damages caused by the insured to another. The insured is
considered as the first party, the insurance company is the second and the
third is the injured or the person/company making the claims.
 How is the Premium Amount Decided?
The premium that is to be paid by the insured will be worked out using the
base rate based on the insurance company‘s needs and assessments. Another
factor that is taken into consideration is the amount of risk that the company
and its products come with. Higher the risk, higher is the premium to be
paid.
Claim history, size of the risk and the company‘s approach to the risk are
additional factors.
While deciding the premium amount, insurance companies take into
consideration the environment, number of claims made previously and their
business record.

There are a number of companies within India that provide different forms of
liability insurance covers. Some of these are -
 HDFC Ergo Commercial General Liability - this insurance policy
provides protection against claims of property damage or bodily injury for
which the company is liable.
 ICICI Lombard offers numerous liabilities insurance covers to suit
business requirements.
Self-Instructional Material  Bharti AXA Commercial General Liability Policy offers cover for
liabilities that are a result of business processes and operations.
206
 TATA AIG offers a Commercial General Liability Insurance Policy that Non-Life Insurance
covers third party liabilities that are a result of business operations.
NOTES
Liability Insurance Claim Process:
The claims process varies from one company to the other. There is
generally a form to be filled for the same post which all necessary documents
will have to be provided. However, when it comes to liabilities it is not as
simple. There may be court cases or an out-of-court settlement. The claims
process will be different based on what the claim is being made for.
11.7 Components of The Distribution Channels(System) of

Life Insurance Companies in the Country
Insurers and underwriters need to decide on the way, or channel through
which, their products are distributed. The aim of a distribution channel is to
allow customers to access and purchase products in the most efficient way for
the business.
A variety of distribution channels are available, and the business's choice
will be determined by its structure, strategy and position in the market. Each
channel requires different resources to be effective and will impact the pricing
structure.
Distribution channels can be divided into two categories:
 Direct channels- these give the insurer direct contact with the customer. The
business employs sales personnel with the skills to provide the product to the
customer.
 Indirect channels - these contain a break in the link between the customer and
the business. The break is filled by a skilled intermediary with a customer
base that is the insurer's target audience.
Direct channels
Call centres
Call centres provide insurance companies with an efficient method of

transacting insurance with customers. Their sales activities are focused on
achieving specific targets, such as defined sales volumes, call queuing times
and numbers' of customers purchasing. The popularity of call centres has
grown out of the competitive market as their efficiency reduces the transaction
costs of policies.
Call centres can be located in any place where employees may be trained. This
includes countries such as India where employee costs are much lower than in
the UK. However, some customers now prefer call centres to be operated in
their own country as a result of poor past experiences.
When a business is considering how much investment is necessary for the
operation, it is important that it takes the design and cost of the technology
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Non-Life Insurance which will be used into account. To reduce the call centre's set-up costs, the
NOTES business can operate a virtual call centre, where employees are home based
and calls are routed to them from a central point. These can be set up quickly
using secure networks.
Employees, who are often referred to as agents or operators, are guided by the
software through a series of question prompts to ask customers. Telephone
calls are held in a queue until one of the agents is ready to handle the call. The
process is automated with the caller hearing an introductory message before
the agent begins the conversation.
Call centres may collate data that can be used to improve the efficiency of
their operations. For example, this could help the business to provide ways of
ensuring that the centre has a sufficient number of employees available in peak
times. Another way of increasing operational efficiency is to use computer-
based, rather than paper-based, records when answering customer queries.
In addition to making new business sales, call centres are often used to support
and develop the customer relationship. Outbound calls can promote the
benefits of alternative products to existing customers; for example, motor
insurance customers usually require home insurance as well. The more
products that a customer buys from a certain organisation, the more likely they
are to remain with it. Customers are also likely to become less price-sensitive
as they associate themselves with a brand. Where insurers provide white label
products (i.e. products provided by an insurer that are promoted using the
branding of another organisation), call centres often divide themselves into
different teams representing the different brands.
Insurance agents
An agent is an individual who acts on behalf of another person or group. For

example, a call centre employee. Some insurers use external sales employees
to act as agents and visit customers; they are paid a commission based on sales
in addition to a basic salary. In Britain, insurance agents were a popular
method for selling home and accident insurance, and life assurance. However,
with the introduction of other channels, such as the internet, the administration
costs of using agents were too high in the competitive market and customers
began choosing other channels with lower priced offerings. This is partly
because customers are now better educated in insurance products as a result of
the discussions often had across various media, such as magazines, radio, TV
and websites.
Lloyd's agents
These agents are appointed by Lloyd's as marine service providers to supply

local shipping and casualty information. They also carry out pre- and post-loss
Self-Instructional Material marine cargo surveys, so are specialists in hull and machinery surveys. They
perform a number of claims activities as well. There are approximately 300
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agents worldwide in major ports and commercial centres, with a similar Non-Life Insurance
number of sub-agents, and they carry out around 100,000 surveys each year.
NOTES
Appointed representatives
An agent can be appointed to provide advice and sell insurance products for a
particular insurance company, but be independent of that company. These
agents are referred to as appointed representatives, and may be an individual
or a business which is representing another Financial Conduct Authority
(FCA) regulated business. The appointed representative is only able to operate
within the regulated activity of that insurer. If it carries out any other activities
outside of its appointed representative status, it must be registered directly
with the FCA. The insurer that grants appointed representative status is known
as the 'principal' and is responsible for the activities of the appointed
representative. The principal must monitor the appointed representative's
activities to ensure that it acts in accordance with the regulations at all times.
Mutual organisations
In the past, tradesmen grouped together to form mutual organisations which

provided protection for the risks that insurance companies were not willing to
cover. For example, risks such as liability insurance or accident and injury
benefits may be too high for an insurer's portfolio. Members own the mutual
organisation and receive a variety of financial benefits, so it is in their best
interests to support the organisation that represents them. Examples include
the following:
 P&I clubs - offer marine liability cover

 National Farmers' Union - represents the agricultural and horticultural
industries; provides a variety of financial services products
 DG Mutual - originally formed to provide injury and accident benefits
to dentists, now represents most professional persons.
Indirect channels
Insurance brokers
Insurance brokers are independent of any insurance company and therefore

able to provide advice and products to the customers from a variety of
companies. Brokers select a panel of insurers they would like to represent and
which meets the needs of their customers. The FCA requires brokers to have
access to a sufficient number of insurers on their panel so that customers can
make an informed choice. Some markets may be limited as a result of their
specialist nature with few insurers offering cover. In these circumstances, the
broker will advise the customer on why only these insurers may be
approached.
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Non-Life Insurance Brokers may specialise in a segment of the market that they have knowledge
NOTES and expertise in. This is attractive for customers, as they feel more confident
that the broker will be able to identify their risks and source an insurer to
provide cover. Brokers are responsible for collecting premiums from
customers and have a credit agreement with insurers. As part of this
agreement, brokers receive commission from insurers when placing risks with
them. Some brokers charge customers a fee for their services in addition to or
instead of the commission received from insurers. For example, when a
customer, such as a manufacturing business, has several insurance policies
arranged through a broker, the broker may charge a fee for placing the risk
with a number of insurers instead of receiving a commission. Larger risks
attract competition from other brokers and so the broker may charge customers
a fee instead of receiving commission to keep the overall insurance cost at a
competitive level.
Some brokers offer additional services to customers, such as business

continuity planning or risk management advice. As no insurance product is
provided with these services, the broker charges a fee for their use so that they
create an additional revenue stream. Offering such services helps the broker to
negotiate terms with the insurer, as the additional details supplied by
customers can be used to help the underwriter understand their risks.
Large groups of people, such as a car club, are attractive to insurers because
they offer a high premium volume and are more likely to be retained by a
broker. The insurer benefits from the broker's knowledge, relationship with the
group and processing of documents.
The insurer can reduce the cost of providing and administering the product
further when it delegates an agreed authority to the broker. This is where an
insurer gives the broker the authority to carry out certain actions; for example,
relating to the types of risks that the broker can accept without referral to an
underwriter, or to the premium rates and limits of cover that it can authorise.
Whether the insurer chooses to delegate an agreed authority depends on the
broker's expertise and the profitability of the scheme. The insurer will receive
a monthly bordereau of the risks placed, premiums collected and details of any
claims made. The broker benefits from having a stable and loyal customer
base that it can cross-sell other products to, such as home insurance in the
example of a car club. Some schemes may be available to another broker on a
shared commission basis, creating a new link in the chain between the insurer
and the customer.
Reinsurance brokers
An insurer may place a proportion of its risk with reinsurers in order to reduce
the possibility of it suffering a major loss or catastrophe to its own account.
Spreading the risk in this way allows the insurer to write higher limits of
Self-Instructional Material cover. Reinsurance brokers have specialist knowledge of which reinsurers an
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insurer may share its account with or place one-off risks with under a Non-Life Insurance
facultative facility.
NOTES
The amount that can be reinsured depends on the account and the risk, and the
cover may be proportional or non-proportional. Proportional reinsurance can
be provided on a quota share basis where the insurer and reinsurer share an
agreed quota of the premium and claims. It can also be provided on a surplus
basis where the insurer requires reinsurance above a set limit, known as a
'line'; the reinsurance is arranged on the basis of a number of these lines which
add up to the overall limit required by the insurer.
Non-proportional risks can be covered on an excess of loss, stop loss or

catastrophe excess of loss basis:
 Excess of loss basis - the reinsurer is responsible for any claim amount
above an agreed limit
 Stop loss basis - applies across the account and stops account loss at an
agreed level, so that the reinsurer is responsible for losses above that
limit
 Catastrophe excess of loss basis - provides protection when a
catastrophe occurs on the account as a result of an event which has
caused an accumulation of losses, such as storm damage.
As well as having a risk management team, major corporations often appoint a

captive insurer. Captive insurers offer a number of benefits; for example, they
can provide wider cover than that given by the risk management team and
retain premiums that would normally be passed to the insurance market. They
are usually based in regions with lower tax rates, such as Bermuda. A
reinsurance broker may then help to provide the captive insurer with
reinsurance cover in order to protect it from catastrophic loss.
Independent financial advisers (IFAs)
Independent financial advisers (IFAs) provide advice to customers and

businesses on life assurance, pensions and investments, and are regulated in
the UK by the FCA. IFAs may also offer products that contain no investment
element, such as personal accident insurance, permanent health insurance and
medical insurance. They may belong to an insurance broking firm and use
their specialist knowledge to provide non-life insurance products in addition to
financial advice. Broking firms can also refer their customers to IFAs for
financial advice.
Financial organisations
Financial organisations, such as banks and building societies, provide

insurance to their customers in various ways. For example, a bank may have
its own insurance broking firm. If a bank has provided a loan for premises or
equipment, it will have an interest in making sure that adequate cover is
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Non-Life Insurance arranged to protect the item. The bank's broking team will be able to assist
NOTES with arranging insurance to protect both the customer's and the bank's
interests.
'Bancassurance' refers to when a bank owns an insurer or works directly with

an insurer through an affinity group. When a bank incorporates an insurance
company into part of its group, this creates a direct relationship between the
customer and the insurer. Not all banks have their own insurance company or
broker; some have an affinity group, discussed later in this fact file, which are
operated by their employees or white label products provided by an insurer for
the bank.
Managing general agents (MGAs)
According to the Managing General Agents' Association, a managing general

agent (MGA) is 'an agency whose primary function and focus is the provision
of underwriting services and whose primary fiduciary duty is to its insurer.' As
an underwriting facility, MGAs focus on the small medium enterprise (SME)
sector of the market. They provide either a package of cover or specific
insurance such as property owners' liabilities and professional indemnity
covers.
MGAs are operated by experienced underwriters with underwriting knowledge

and expertise of risks, who have the authority to write risks. This underwriting
capacity may have been given by one insurer or a panel of insurers, which
wants to enter the market but does not have the resources to do so. For
example, this could be appealing to an overseas insurer which would like to
enter the SME market by using another organisation's brand and management,
or to an underwriting team which has chosen to leave an insurer and start its
own underwriting agency. MGAs also have claims authority, and act as a link
in the chain between the insurer which is providing the capacity and the
customer. They seek business from insurance brokers.
Retail organisations
When a customer acquires a retailer's loyalty card, the retailer gains

information about the customer which enables it to target them with other
branded products. Customers are more likely to buy products, such as
insurance policies, from brands they trust. Retailers selling insurance policies
offer white label products that are administered by an insurer through a call
centre. The call centre may either have a team which is dedicated to that
insurer or answer calls in the name of the retailer, having identified which is
being used by the specific telephone number that callers have been given.
Selling insurance in this way provides the retailer with an additional revenue
stream in a short period of time, without the costs of setting up an insurance
company.
Affinity groups
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An affinity group is a group of people with similar or common interests. It Non-Life Insurance
may use its customer buying power to obtain insurance cover through a
NOTES
broker. For example, members of a car club are likely to support its
promotions, as the commission that the club receives when they place
insurance through the scheme will provide it with a revenue stream which
supports members' interests. In addition, sports organisations can use their
membership volume to arrange cover for particular risks that may not be
available to individuals. This cover is then received by members as part of
their membership; it could include liability cover for injury to another
member. An affinity group can use a broker to obtain specific wording in their
cover which is underwritten by a specialist underwriter. The group handles the
scheme's administration, adding another link between the insurer and the
customer.
Peer-to-peer (P2P) groups
Peer-to-peer (P2P) group insurance is a recent innovation which has created

interest in the USA, UK and Germany. It aims to save money by removing
inefficiencies and the conflicts of interest that arise between the insurer and
customer at the time of a claim. A P2P group is made up of people who share
similar characteristics; its premiums are calculated by assessing a number of
factors that are common to all members. A motor insurer, for example, will
consider a driver's age, location, car and experience, and then add them to a
group of similar motorists, or peers.
Half of the premium paid by the group's members contributes to its

management and the other half is injected into the premium pool. Claims made
during the year are paid from the pool; if funds become depleted, they are
topped up by the group's fees. Any premium in the pool that is not used will be
carried forward to the next year, when the group's members will pay premiums
to top up the pool again. The group's members have an interest in keeping
claims low so that they will benefit from lower premiums.
Broker networks
A broker network is made up of predominantly small, independent insurance

brokers who join to form a club. The network uses its collective buying power
to obtain terms of cover, premiums, facilities and commissions that are
normally only available to larger broking organisations. The network requires
its members to commit a level of premium to a panel of partner insurers. This
enables members to demonstrate their support for the panel and network
without compromising their customer relationships.
Additional services provided by broker networks include marketing advice and

business planning support, which can help to increase brokers' incomes, and
regulatory support and advice, which helps brokers to remain compliant.
Insurers may review their agency network with the aim of reducing their
overall operating costs; however, broker networks are protected by their
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Non-Life Insurance collective relationships with insurers. Networks charge a fee to brokers for the
NOTES support they provide, which may be based on either the volume of premium
income arranged with the insurers or an agreed fixed charge for services.
Aggregators
Aggregators are online quotation services that can calculate premiums in

minutes from a number of different insurers on to one website. Customers are
prompted by selected questions to enter the details of their insurance
requirements, and the aggregator website then calculates and displays a range
of premiums and terms. Aggregators compete with each other, relying on their
technology systems to provide fast quotations from a variety of providers. The
premiums are displayed in ascending order, allowing the customer to select a
quotation based on price. Quotation terms are also shown to help the customer
in their comparison. If the customer selects a quotation, they will be
transferred to the insurer's website for confirmation of the quotation and
processing of documentation. To complete the purchase, the premium is paid
online and the policy documents are sent electronically to the customer.
An advantage of aggregators is that they are available at all times, so the

customer can make their choice at a time convenient to them. The aggregator
is paid a fee for each customer purchase. Quotations are available on motor,
home, personal accident, travel, van and tradesman liability insurance, but
aggregators' systems are adaptable and other financial services, utilities and
communication quotations are sometimes provided. However, not all insurers
are quoted by aggregators; some choose to promote their products directly so
that they can control the purchasing process without being compared to other
insurers. These insurers encourage customers to make decisions based on the
services provided and other benefits, rather than on price.
► Needs to have good relationship including good rapport with his/her existing and
prospective clients
► General awareness about the markets
► Promotion of insurance brands needs to have a carefully drawn roadmap.
► Marketing strategies needs to be drawn and re-drawn from time to time, keeping in
mind the customer preferences.
► Well-planned strategies and plans needs to be chalked out.
► Public-relation (PR) building exercise should be given significant importance
► Business Development tactics needs to be pursued aggressively.

A life insurance agent in addition to the life insurance policies, can sell general
214
insurance (non-life) policies viz. casualty insurance, health insurance, disability Non-Life Insurance
insurance, long-term care insurance, burglary insurance etc. In addition to the life
insurance policies a life insurance agent can also be selling other financial packages NOTES
like variable annuities, mutual funds and other securities. There are many avenues for
opportunities as well as earning potential available for a life insurance agent and there
are no limits or boundaries regarding this. The earning potential of an insurance agent
may vary from one agent to another. Based on the outcome of the sales and targets
achieved by an insurance agent, he or she can earn accordingly and there are no
limitations or upper ceiling regarding the earning potential for an insurance agent. An
insurance agent must be well aware about the market conditions to guide their
customers accordingly.
If a client has asked for the best or economical insurance products

and services, the insurance agent must strive hard to deliver the insurance
products and services as desired by the customer, based on his/her
requirements. Respecting the sentiments of the customer is an essential aspect
and important, too. Using force to purchase insurance policies may not
produce the desired results. Many times, it has been noticed that the customers
may not be able to afford to pay the heavy premiums for certain insurance
policies and may instead settle for a cheaper one that satisfies their
requirements. The main goal of an insurance agent is to sell the insurance
policy that is appropriate for a particular customer, based on his/her
requirements. An insurance agent who is talented in marketing various
insurance policies will not find it difficult to sell a term life insurance. Selling
of term insurance policies is made relatively easy because of the low-term life
insurance prices. But even the best or an experienced insurance agent may
fumble or get tense when the clients ask regarding the investment in insurance
products and services since there is no monetary value accumulated at the end
of the period upon the expiry of a policy. In a tricky situation like this an
insurance agent should be ready to offer a solution of miscellaneous saving
schemes. An insurance agent should be taught the promotion and selling
techniques regarding handling of customers who are apprehensive and are
confused if they really want a policy or not, or have not yet arrived at a
conclusion as to which policy should be purchased by him/her. The insurance
agent should be taught the finer nuances about healthcare insurance business
and the selling strategies and should be clever enough as to convert enquiries
or objections into deals. The terms and conditions of these policies should be
conveyed to the customer.
An insurance agent‘s role is primarily that of a communicator, counselor and

facilitator. The prospective customer can buy the best insurance products and
services for his/her varied requirements viz. life, property, health, burglary
insurance from the insurance agent. As a customer, when an insurance product
is being purchased, let the insurance agent know beforehand regarding his/her
budgetary allocation towards insurance coverage. The insurance agent in turn
will help his/her clients to get the cheapest or the best insurance product
prices. If the concerned individual has selected an independent insurance agent Self-Instructional Material
then, then he/she can expect to get best deals on insurance products and
services from across different insurance companies. The customer can discuss
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Non-Life Insurance with his/her insurance agent insurance plan suited for him/her as per the
NOTES requirements or customized based on the client‘s needs. During the
presentation process, the insurance agent will explain the client regarding the
rates and what he/she will benefit from that particular insurance policy.
When the individual or the prospective client has decided to buy an insurance
product or service from a particular insurance agent, the next step in the
process is to check and make sure to have all the personal financial and
investment data ready with him/her. While the agent asks for the financial
data, the concerned individual should be able to furnish the details to his or her
insurance agent so that the processing of the policy process can be carried out
in a smooth manner. Nowadays, most insurance agents carry personal laptops
that are directly connected to the insurance carriers or the insurance companies
through the Internet. Because of this advancement, the prospective clients can
get the instant quotes within 10 - 15 minutes.
Till recently, an insurance agent had many tasks to be carried out and
completed in a prompt manner. When there was no internet facility, the
insurance agents would have to fill out the application forms, submit the
reports and make the payments. Thus, the insurance agents had a lot of manual
work to be done and this included extensive paper-work. But now, with the
internet connectivity, the tasks for insurance agents have become much easier
wherein they have to switch on to their laptops and all the aforesaid mentioned
tasks are completed within minutes. This not only helps the insurance agents
to hasten the processing procedure, but also provide their prospective clients
with the best insurance rates, as per the client‘s requirements.
In return for their services, an insurance agent gets commission. The

commission is taken out from insurance premiums that the customer pays to
the insurance company. But always beware incase, if there is any insurance
agent who is asking additional cash for the services rendered by him/her, the
prospective customer should be vigilant and will have to negotiate well.
11.9 Important Activities Carried Out In A Life Insurance

Organization: Marketing, Underwriting, And
Administration
Marketing
We begin with marketing despite the fact that it is not the first step in
starting a business. From a consumer‘s point of view, it is the first glimpse into
the operations of an insurer. Insurance may be bought through agents, brokers,
or (in some cases) directly from the insurer (via personal contact or on the
Internet). An agent legally represents the company, whereas a broker
represents the buyer and, in half of the states, also represents the insurer
because of state regulations.. The compensation issue was brought to the
limelight in 2004 when New York State Attorney General Eliot Spitzer opened
an investigation of contingent commissions that brokers received from
216
insurers; these contingent commissions were regarded as bid rigging. Non-Life Insurance
Contingent commissions are paid to brokers for bringing in better business and
NOTES
can be regarded as profit sharing. As a result of this investigation, regulators
look for more transparency in the compensation disclosure of agents and
brokers, and major brokerage houses stopped the practice of accepting
contingency commission in the belief that clients view the practice negatively.
In many states, producer is another name for both agents and brokers. This
new name has been given to create some uniformity among the types of
distribution systems. Because life/health insurance and property/casualty
insurance developed separately in the United States, somewhat different
marketing systems evolved. Therefore, we will discuss these systems
separately.
Life/Health Insurance Marketing
Most life/health insurance is sold through agents, brokers, or (the newest term)
producers, who are compensated by commissions. These commissions are
added to the price of the policy. Some insurance is sold directly to the public
without sales commissions. Fee-only financial planners often recommend such
no-load insurance to their clients. Instead of paying an agent‘s commission,
the client pays the planner a fee for advice and counseling and then buys
directly from the no-load insurer. Unlike the agent, the planner has no
incentive to recommend a high-commission product. Whether your total cost
is lower depends on whether the savings on commissions offsets the planner‘s
fee.
Some companies insist that their agents represent them exclusively, or at least
that agents not submit applications to another insurer unless they themselves
have refused to issue insurance at standard premium rates. Others permit their
agents to sell for other companies, though these agents usually have a primary
affiliation with one company and devote most of their efforts to selling its
policies.
The two dominant types of life/health marketing systems are the general
agency and the managerial (branch office) system.
General Agency System
A general agent is an independent businessperson rather than an employee of

the insurance company and is authorized by contract with the insurer to sell
insurance in a specified territory. Another major responsibility is the
recruitment and training of subagents. Subagents usually are given the title
of agent or special agent. Typically, subagents are agents of the insurer rather
than of the general agent. The insurer pays commissions (a percentage of
premiums) to the agents on both new and renewal business. The general agent
receives an override commission (a percentage of agents‘ commissions) on all Self-Instructional Material
business generated or serviced by the agency, pays most of it to the subagents,
217
Non-Life Insurance and keeps the balance for expenses and profit. Agent compensation
NOTES agreements are normally determined by the insurer.
In most cases, the general agent has an exclusive franchise for his or her
territory. The primary responsibilities of the general agent are to select, train,
and supervise subagents. In addition, general agents provide office space and
have administrative responsibilities for some customer service activities.
A large number of life/health insurers use personal producing general agents.

A personal producing general agent sells for one or more insurers, often with a
higher-than-normal agent‘s commission and seldom hires other agents. The
extra commission helps cover office expenses. The trend is toward an agent
representing several different insurers. This is desirable for consumers because
a single insurer cannot have the best products for all needs. To meet a client‘s
insurance needs more completely, the agent needs to have the flexibility to
serve as a broker or a personal producing general agent for the insurer with the
most desirable policy.
Managerial (Branch Office) System
A branch office is an extension of the home office headed by a branch

manager. The branch manager is a company employee who is compensated by
a combination of salary, bonus, and commissions related to the productivity of
the office to which he or she is assigned. The manager also employs and trains
agents for the company but cannot employ an agent without the consent of the
company. Compensation plans for agents are determined by the company. All
expenses of maintaining the office are paid by the company, which has
complete control over the details of its operation.
Group and Supplemental Insurance Marketing
Group life, health, and retirement plans are sold to employers by agents in one
of the systems described above or by brokers. An agent may be assisted in this
specialized field by a group sales representative. Large volumes of group
business are also placed through direct negotiations between employers and
insurers. A brokerage firm or an employee benefits consulting firm may be
hired on a fee-only basis by the employer who wishes to negotiate directly
with insurers, thus avoiding commissions to the agent/broker. In these direct
negotiations, the insurer typically is represented by a salaried group sales
representative.
Supplemental insurance plans that provide life, health, and other benefits to
employees through employer sponsorship and payroll deduction have become
common. These plans are marketed by agents, brokers, and exclusive agents.
The latter usually work on commissions; some receive salaries plus bonuses.
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Property/Casualty Insurance Marketing Non-Life Insurance
NOTES
Like life/health insurance, most property/casualty insurance is sold through
agents or brokers who are compensated on a commission basis, but some is
sold by salaried representatives or by direct methods. The independent
(American) agency system and the exclusive agency system account for the
bulk of insurance sales.
Independent (American) Agency System
The distinguishing characteristics of the independent (American) agency

system are the independence of the agent, the agent‘s bargaining position with
the insurers he or she represents, and the fact that those who purchase
insurance through the agent are considered by both insurers and agents to be
the agent‘s customers rather than the insurer‘s. The independent agent usually
represents several companies, pays all agency expenses, is compensated on a
commission plus bonus basis, and makes all decisions concerning how the
agency operates. Using insurer forms, the agent binds an insurer, sends
underwriting information to the insurer, and later delivers a policy to the
insured. The agent may or may not have the responsibility of collecting
premiums. Legally, these agents represent the insurer, but as a practical matter
they also represent the customer.
An independent agent owns the x-date; that is, he or she has the right to
contact the customer when a policy is due for renewal. This means that the
insured goes with the agent if the agent no longer sells for the insurance
company. This ownership right can be sold to another agent, and when the
independent agent decides to retire or leave the agency, the right to contact
large numbers of customers creates a substantial market value for the agency.
This marketing system is also known as the American agency system. It is best
recognized for the Big I advertisements sponsored by the Independent
Insurance Agents & Brokers of America. These advertisements usually
emphasize the independent agent‘s ability to choose the best policy and insurer
for you. (
Direct Writers and Exclusive Agents
Several companies, called direct writers, The term direct writer is frequently
used to refer to all property insurers that do not use the Independent Agency
System of distribution, but some observers think there are differences among
such companies. market insurance through exclusive agents. Exclusive
agents are permitted to represent only their company or a company in an
affiliated group of insurance companies. A group is a number of separate
companies operating under common ownership and management. This system
is used by companies such as Allstate, Nationwide, and State Farm. These
insurers compensate the agent through commissions that are lower than those
paid to independent agents, partly because the insurer absorbs some expenses
that are borne directly by independent agents. The insurer owns the x-date.
219
Non-Life Insurance The customer is considered to be the insurer‘s rather than the agent‘s, and the
NOTES agent does not have as much independence as do those who operate under the
independent agency system. Average operating expenses and premiums for
personal lines of insurance tend to be lower than those in the independent
agency system.
Some direct writers place business through salaried representatives, who are
employees of the company. Compensation for such employees may be a salary
and/or a commission plus bonus related to the amount and quality of business
they secure. Regardless of the compensation arrangement, they are employees
rather than agents.
Brokers
A considerable amount of insurance and reinsurance is placed through brokers.

A broker solicits business from the insured, as does an agent, but the broker
acts as the insured‘s legal agent when the business is placed with an insurer. In
about half the states, brokers are required to be agents of the insurer. In the
other states, brokers do not have ongoing contracts with insurers—their sole
obligation is to the client. When it appears desirable, a broker may draft a
specially worded policy for a client and then place the policy with an insurer.
Some property/casualty brokers merely place insurance with an insurer and
then rely on this company to provide whatever engineering and loss-
prevention services are needed. Others have a staff of engineers to perform
such services for clients. Modern brokerage firms provide a variety of related
services, such as risk management surveys, information systems services
related to risk management, complete administrative and claim services to
self-insurers, and captive insurer management.
Brokers are a more significant part of the marketing mechanism in commercial

property, liability, employee benefits, and marine insurance than in personal
lines of insurance. Brokers are most active in metropolitan areas and among
large insureds, where a broker‘s knowledge of specialized coverages and the
market for them is important. Some brokerage firms operate on a local or
regional basis, whereas others are national or international in their operations.
With today‘s proliferation of lines and services, it is extremely difficult for

brokers to understand all the products completely. Brokers are always looking
for unique product designs, but gaining access to innovative products and
actually putting them into use are two different things. Generally, each broker
selects about three favorite insurers. The broker‘s concern is the underwriting
standards of their insurers. For example, a broker would like to be able to
place a client who takes Prozac with an insurer that covers such clients.
Internet Marketing
Self-Instructional Material With today‘s proliferation of Internet marketing, one can select an insurance
product and compare price and coverage on the Internet. For example,
220
someone interested in purchasing a life insurance policy can click on Non-Life Insurance
Insweb.com. If she or he is looking for health insurance, ehealthinsurance or
NOTES
other such Web sites present information and a questionnaire to fill out. The
site will respond with quotes from insurers and details about the plans. The
customer can then send contact information to selected insurers, who will
begin the underwriting process to determine insurability and appropriate rates.
The sale is not finalized through the Internet, but the connection with the agent
and underwriters is made. Any Internet search engine will lead to many such
Web sites.
Most insurance companies, like other businesses, set up their own Web sites to
promote their products‘ features. They set up the sites to provide consumers
with the tools to compare products and find the unique characteristics of the
insurer.
Mass Merchandising
Mass merchandising is the selling of insurance by mail, telephone, television,

or e-mail. Mass merchandising often involves a sponsoring organization such
as an employer, trade association, university, or creditor; however, you are
likely to be asked to respond directly to the insurer. Some mass merchandising
mixes agents and direct response (mass mailing of information, for example,
that includes a card the interested person can fill out and return); an agent
handles the initial mailing and subsequently contacts the responding members
of the sponsoring organization.
In some cases, you can save money buying insurance by mass merchandising
methods. Direct response insurers, however, cannot provide the counseling
you may receive from a good agent or financial planner.
Financial Planners
A financial planner facilitates some insurance sales by serving as a consultant

on financial matters, primarily to high-income clients. An analysis of risk
exposures and recommendations on appropriate risk management techniques,
including insurance, are major parts of the financial planning process. A fee-
only financial planner, knowledgeable in insurance, may direct you to good-
quality, no-load insurance products when they are priced lower than
comparable products sold through agents. You are already paying a fee for
advice from the financial planner. Why also pay a commission to an insurance
agent or broker?
In many instances, it is appropriate for the financial planner to send you to an

insurance agent. Products available through agents may have a better value
than the still limited supply of no-load products. Also, your financial planner is
likely to be a generalist with respect to insurance, and you may need advice
from a knowledgeable agent. In any event, financial planners are now part of
the insurance distribution system.
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Non-Life Insurance
Shopping for Insurance on the Internet
NOTES
True to its name, Progressive was the first large insurer to begin selling
insurance coverage via the Internet in the late 1990s. Other well-known names
like Allstate and Hartford quickly followed suit. So-called aggregator sites like
Insure.com, Quotesmith.com, Ehealthinsurance.com, and InsWeb.com joined
in, offering one-stop shopping for a variety of products. To tap the potential of
e-commerce, insurers have had to overcome one big challenge: how to sell
complex products without confusing and driving away the customer.
Therefore, the sale is not finalized on the Internet. The glimpse into the
product is only the first step for comparative shopping.
An insurance application can be frustrating even when an agent is sitting

across the desk explaining everything, but most people don‘t walk out in the
middle of filling out a form. On the Internet, however, about half of those
filling out a quote request quit because it is too complicated or time-
consuming. Most of those who do finish are ―just looking,‖ comparing prices
and services. Twenty-seven million shoppers priced insurance online in 2001,
according to a recent study by the Independent Insurance Agents of America
and twenty-six insurers, but less than 5 percent closed the deal electronically.
As shopping on the Internet becomes a boom business, each state department

of insurance provides guidelines to consumers. For example, the Texas
Department of Insurance issued tips for shopping smart on the Internet, as
follows:
Insurance on the Internet—Shopping Tips and Dangers
 Be more cautious if the type of insurance you need recently became

more expensive or harder to get and the policy costs far less than what
other insurers charge.
 Don‘t succumb to high-pressure sales, last-chance deals of a lifetime,
or suggestions that you drop one coverage for another without the
chance to check it out thoroughly.
 Check with an accountant, attorney, financial adviser, a trusted friend,
or relative before putting savings or large sums of money into any
annuity, other investment, or trust.
 Get rate quotes and key information in writing and keep records.
 If you buy coverage, keep a file of all paperwork you completed online
or received in the mail and signed, as well as any other documents
related to your insurance, including the policy, correspondence, copies
of advertisements, premium payment receipts, notes of conversations,
and any claims submitted.
 Make sure you receive your policy—not a photocopy—within thirty
days.
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Professionalism in Marketing Non-Life Insurance
NOTES
Ideally, an agent has several years of experience before giving advice on
complicated insurance matters. You will be interested in the agent‘s
experience and educational qualifications, which should cover an extensive
study of insurance, finance, and related subjects. A major route for life/health
agents to gain this background is by meeting all requirements for the Chartered
Life Underwriter (CLU) designation.
11.10 UNDERWRITING
Underwriting is the process of classifying the potential insureds into the

appropriate risk classification in order to charge the appropriate rate.
An underwriter decides whether or not to insure exposures on which
applications for insurance are submitted. There are separate procedures for
group underwriting and individual underwriting. For group underwriting, the
group characteristics, demographics, and past losses are judged. Because
individual insurability is not examined, even very sick people such as AIDS
patients can obtain life insurance through a group policy. For individual
underwriting, the insured has to provide evidence of insurability in areas of
life and health insurance or specific details about the property and automobiles
for property/casualty lines of business. An individual applicant for life
insurance must be approved by the life insurance company underwriter, a
process that is sometimes very lengthy. It is not uncommon for the application
to include a questionnaire about lifestyle, smoking habits, medical status, and
the medical status of close family members. For large amounts of life
insurance, the applicant is usually required to undergo a medical examination.
Once the underwriter determines that insurance can be issued, the next
decision is to apply the proper premium rate. Premium rates are determined for
classes of insureds by the actuarial department. An underwriter‘s role is to
decide which class is appropriate for each insured. The business of insurance
inherently involves discrimination; otherwise, adverse selection would make
insurance unavailable.
Some people believe that any characteristic over which we have no control,
such as gender, race, and age, should be excluded from insurance underwriting
and rating practices (although in life and annuity contracts, consideration of
age seems to be acceptable). Their argument is that if insurance is intended in
part to encourage safety, then its operation ought to be based on behavior, not
on qualities with which we are born. Others argue that some of these factors
are the best predictors of losses and expenses, and without them, insurance can
function only extremely inefficiently. Additionally, some argument could be
made that almost no factor is truly voluntary or controllable Over the years,
insurers have used a variety of factors in their underwriting decisions. A Self-Instructional Material
number of these have become taboo from a public policy standpoint. Their use
may be considered unfair discrimination. In automobile insurance, for
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Non-Life Insurance instance, factors such as marital status and living arrangements have played a
NOTES significant underwriting role, with divorced applicants considered less stable
than never-married applicants. In property insurance, concern over redlining
receives public attention periodically. Redlining occurs when an insurer
designates a geographical area in which it chooses not to provide insurance, or
to provide it only at substantially higher prices. These decisions are made
without considering individual insurance applicants. Most often, the redlining
is in poor urban areas, placing low-income inner-city dwellers at great
disadvantage. A new controversy in the underwriting field is the use of genetic
testing. t‘s medical history.
Keeping Score—Is It Fair to Use Credit Rating in Underwriting?
Body-mass index, cholesterol level, SAT score, IQ: Americans are accustomed
to being judged by the numbers. One important number that you may not be as
familiar with is your credit score. Determined by the financial firm Fair, Isaac,
and Co., a credit score (also known as a FICO score) is calculated from an
individual‘s credit history, taking into account payment history, number of
creditors, amounts currently owed, and similar factors.
Like your grade point average (GPA), your credit score is one simple number
that sums up years of hard work (or years of goofing off). But while your GPA
is unlikely to be important five years from now, your credit score will affect
your major financial decisions for the rest of your life. This number
determines whether you‘re eligible for incentive (low-rate) financing on new
cars, how many credit card offers get stuffed in your mailbox each month, and
what your mortgage rate will be. The U.S. Federal Trade Commission (FTC)
issued a directive to consumers about the handling of credit scores. If you are
denied credit, the FTC offers the following:
 If you are denied credit, the Equal Credit Opportunity Act

(ECOA) requires that the creditor give you a notice that tells you the
specific reasons your application was rejected or the fact that you have
the right to learn the reasons if you ask within sixty days. If a creditor
says that you were denied credit because you are too near your credit
limits on your charge cards or you have too many credit card accounts,
you may want to reapply after paying down your balances or closing
some accounts. Credit scoring systems consider updated information
and change over time.
 Sometimes, you can be denied credit because of information from a
credit report. If so, the Fair Credit Reporting Act (FCRA) requires the
creditor to give you the name, address, and phone number of the
consumer reporting company that supplied the information. This
information is free if you request it within sixty days of being turned
down for credit. The consumer reporting company can tell you what‘s
in your report, but only the creditor can tell you why your application
Self-Instructional Material was denied.
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 If you‘ve been denied credit, or didn‘t get the rate or credit terms you Non-Life Insurance
want, ask the creditor if a credit scoring system was used. If so, ask
NOTES
what characteristics or factors were used in that system, and the best
ways to improve your application. If you get credit, ask the creditor
whether you are getting the best rate and terms available and if you are
not, ask why. If you are not offered the best rate available because of
inaccuracies in your credit report, be sure to dispute the inaccurate
information in your credit report.
Your credit score may also affect how much you‘ll pay for insurance. About
half of the companies that write personal auto or homeowner‘s insurance now
use credit data in underwriting or in setting premiums, and the bad credit
penalty can be 20 percent or more. But it‘s not because they‘re worried that
poor credit risks won‘t pay their insurance premiums. Rather, it‘s the strong
relationship between credit scores and the likelihood of filing a claim, as study
after study has borne out. Someone who spends money recklessly is also likely
to drive recklessly, insurers point out; someone who is lazy about making
credit card payments is apt to be lazy about trimming a tree before it causes
roof damage. Often, a credit record is the best available predictor of future
losses. Insurers vary on how much they rely on credit scoring—most consider
it as one factor of many in setting premiums, while a few flat out refuse to
insure anyone whose credit score is below a certain number—but almost all
see it as a valuable underwriting tool. It‘s only fair, insurers say, for low-risk
customers to pay lower premiums rather than subsidizing those more likely to
file claims.
Consumer advocates disagree. Using credit scores in this manner is

discriminatory and inflexible, they say, and some state insurance
commissioners agree. Consumer advocate and former Texas insurance
commissioner Robert Hunter finds credit scoring ludicrous. ―If I have a poor
credit score because I was laid off as a result of terrorism, what does that have
to do with my ability to drive?‖ he asked at a meeting of the National
Association of Insurance Commissioners in December 2001. Therefore, in
2004, twenty-four states have adopted credit scoring legislation and/or
regulation that is based on a National Conference of Insurance Legislators
(NCOIL) model law.
The debate over the use of credit scoring has spread across the country. More
states are considering regulations or legislation to curb its use by insurers.
Administration
After insurance is sold and approved by the underwriter, records must be

established, premiums collected, customer inquiries answered, and many other
administrative jobs performed. Administration is defined broadly here to
include accounting, information systems, office administration, customer
service, and personnel management.
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Non-Life Insurance
Service
NOTES
Service is the ultimate indicator on which the quality of the product provided
by insurance depends. An agent‘s or broker‘s advice and an insurer‘s claim
practices are the primary services that the typical individual or business needs.
In addition, prompt, courteous responses to inquiries concerning changes in
the policy, the availability of other types of insurance, changes of address, and
other routine matters are necessary.
Another service of major significance that some insurers offer, primarily to

commercial clients, is engineering and loss control. Engineering and loss
control is concerned with methods of prevention and reduction of loss
whenever the efforts required are economically feasible. Much of the
engineering and loss-control activity may be carried on by the insurer or under
its direction. The facilities the insurer has to devote to such efforts and the
degree to which such efforts are successful is an important element to consider
in selecting an insurer. Part of the risk manager‘s success depends on this
element. Engineering and loss-control services are particularly applicable to
workers‘ compensation and boiler and machinery exposures. With respect to
the health insurance part of an employee benefits program, loss control is
called cost containment and may be achieved primarily through managed care
and wellness technisque.
11.11 Terminologies
1) Motor Insurance 2) Aviation Industry 3) Liability 4)
Organization 5)Agents 6) Company
1.Explain the types of motor insurance policies in India?
2. Bring out the Indian insurance Industry.
3. State the significance of liability insurance in India.
4. Explain the role of Agents in the life insurance sector in
India?
5. Explain the Underwriting
1) Gordon E and Natarajan K, (2010). ― Banking Theory, Law
and Practice‖, Himalaya Publishing House, Mumbai.
226
Financial Management in Insurance
BLOCK III: CLAIM MANAGEMENT companies and Insurance Ombudsman
AND FINANCIAL MANAGEMENT IN

INSURANCE NOTES
UNIT – XII PRODUCT DESIGN AND

DEVELOPMENT
Structure
12.1 Product Development in the Life
12.2 Software do Insurance Companies Use- Types, Features, Benefits
12.8 Future Trends In The Domain of Insurance Product Design And
Development
12.10 Factors That Affect The Activities Performed By The Underwriter
12.11 Steps Involved In The Process Of Insurance Underwriting
12.12 Terminologies
12.1 PRODUCT DEVELOPMENT IN THE LIFE
Today, companies providing life insurance coverage tend to have
high-level services backed with a robust software system. Modern
people don‘t want to spare their time on emailing, calling, or visiting
their agents. They need clear and user-friendly systems allowing them
to get relevant services online. Thus, along with new policies,
products, and pricing, companies modernize or build brand new
insurtech platforms. In this article, you can learn more about
life insurance product development process and its peculiarities.
Life Insurance Product

According to AccuQuote, there are two types of life insurance
products: term and permanent. Both types come in different subtypes
to satisfy different needs. Permanent type is aimed to provide
coverage for as long as you need. There are many kinds of permanent
life insurance but the key categories include whole life and universal
life.
Term life insurance is temporary insurance which may last for 10-30
years, typically. It can provide coverage for the only limited period of
time. The policies are quite clear and, usually, cheap. Insurance
227
companies, as a rule, guarantee that each year you will pay the same
companies and Insurance Ombudsman cost for your coverage. The rates may vary from $25 to $200 per
month. Once your term comes to an end, you will get a notice about
the increased costs for life insurance.
NOTES
When comparing two types of insurance, we may admit that universal
life and whole life cost more than temporary insurance. Unlike term,
permanent insurance lasts forever. As long as you pay your
premiums, your family members are guaranteed to get the death
benefit, no matter when you die. Permanent insurance provides cash
value which may be accessed at any time for any reason.
As insurance agencies strive to become more flexible to meet ever-
changing market demand and conditions, they constantly look for
innovation and ways to improve their products. In terms of better
services and products, these companies, usually, choose two ways.
Firstly, they can provide better services and products for their
customers with the help of new software. Secondly, they can design
new types of insurance products.
Before proceeding to software solutions, let‘s talk about the
traditional insurance life cycle. Usually, people may plan their life
insurance according to definite periods of their lives. Thus, according
to Lenox Advisors, there are the following stages of life insurance
cycle.
Life Insurance Cycle-Stages
25-35 years old clients – starting a career and/or marriage – during
this period of life people need the highest level of insurance which
covers basic protection like life value and general family income
35-45 years old clients – growing income and/or family – on this
stage, people usually need insurance for business planning purposes
like buying/selling, deferred compensation, business succession, etc.
It also comprises tax-advanced strategies, private placement life
insurance, and access to an increase in policy cash value, etc.
45-55 years old clients – estate/retirement planning includes
retirement planning strategies, whole life, supplemental retirement
stream, asset, and creditor protection.
55-64 years old clients – highest earnings/taxes – charitable giving,
planned giving, charitable lead trust.
65+ years old clients – estate planning – estate equalization, liquidity
to offset, special needs children planning.
12.2 Software do Insurance Companies Use- Types, Features,
Benefits
If you own an insurance agency or deal with CEOs, you probably
know that there are two types of software – prepackaged and custom-
Self-Instructional Material designed. The former type is usually built for sale to any company to
228
serve a great number of users. The latter type is typically built Financial Management in Insurance
companies and Insurance Ombudsman
specially for one single company that needs a completely
customizable solution. Unlike custom software, prepackaged systems
cannot be as customized individually as bespoke systems. NOTES
The privilege of bespoke software is in its unique set of features
and functionalities that face users‘ needs and requirements. When you
create a system from scratch, you can get as many features as you
need. And what is more important – you can get only those features
your users need. Let‘s take a closer look at the core features your life
insurance software should have.
Feature 1 – Life insurance product definition module
This feature is aimed to provide a definition of new products, edit and
modify the existing definition, store and transfer product‘s data.
Feature 2 – Policy management
This feature is designed to manage the group or individual policies. It
provides capabilities to register applications, assess risks, present
information, modify insurance conditions, handle claims, etc.
Feature 3 – Fund management
This feature ensures automatic reports/orders generation. It also offers
the following options: accounts management, operations, and orders
handling, fund registries, etc.
Feature 4 – Accounting and finance
This feature is designed to categorize different events (taxable/non-
taxable). It offers reminders of premium underpayment or
nonpayment, cash flow management, and other important options.
To understand what other features you can get with custom
development, let‘s take a look at Insubiz company. Our company
developed a fully customizable solution which offers a lot of options
for its users:
 CRM
 Assets
 Claims
 Risks
 Insurance
 Reports
 Analysis
The solution is extra user-friendly as it provides all the initial wants
and needs of all the stakeholders. Insubiz is easily implemented,
provides fast support and regular updates. As you can see, bespoke
platforms are able to ensure more functionalities and more options for
their users as compared with the prepackaged ones.
Speaking about the benefits of implementing a comprehensive
software system for managing life insurance policies, we should
distinguish the following:
229
With a well-built system in place, you can enhance customer service
companies and Insurance Ombudsman and support, manage Big Data, and create large client databases.
Custom-designed software is also able to automate data processing,
sharing, and analyzing. Automation allows eliminating human errors
NOTES
and making insurance processes more efficient and streamlined. All
the information is kept in one system and easily accessible. We can
mention a lot of other advantages of insurtech solutions, however,
you can read about an overall view of the insurance product
development topic in our latest article.

If you made up your mind to develop a custom system for managing
your life insurance products, you should know how to build it from
scratch. In our development best practices, we follow seven basic
steps. Here is more information about software development phases.
Step 1 – Brainstorming
During the first stage of SDLC, a team must gather all the initial
requirements and come up with innovative ideas. This analysis is
performed by senior team members having extensive experience in
creating similar products in a given industry. Once all the details are
collected, the team can proceed to planning and feasibility analysis.
Step 2 – Feasibility analysis
During the second stage of SDLC, all the stakeholders should
undertake a feasibility analysis. In-depth research can demonstrate
how profitable a project could be. It also incorporates all the factors
affecting development. These factors include technical and economic
risks. As a result of the feasibility analysis, all the team members
should present their estimations regarding time, costs, and resources
needed to accomplish the project.
Step 3 – Design
Basing on initial requirements, the team writes a detailed SRS
documentation (software requirements and specifications). It serves a
basis for the product architecture and is usually tightly connected with
design document specification (DDS). It is based on various
parameters as risk assessment, product robustness, design modularity,
budget and time constraints, the best design approach is selected for
the product. A design approach clearly defines all the architectural
modules of the product along with its communication and data flow
representation with the external and third-party modules.
Step 4 – Programming
During this stage of SDLC, developers write code according to DDS.
The team follows the coding guidelines defined beforehand. The tools
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and programming languages, which actually make up the technology Financial Management in Insurance
stack, are also selected in advance.
Step 5 – Integration
The objective of this phase is to perform system integration testing NOTES
and get ensured that the developed systems meet all the requirements
with the components and subsystems integrated. The system test may
require any number of additional tests depending on the scope and
complexity of the requirements; examples include
security, conformance, accessibility, performance, stress,
compatibility, and regression tests.
Step 6 – Quality assurance and testing
This stage is usually a subset of all the stages of SDLC. However, it
refers to the testing only stage of the product where product defects
are reported, tracked, fixed and retested, until the product reaches the
quality standards defined in the SRS.
Step 7 – Release
In the software development life cycle, a release is a final stage. It‘s
all about launching a new product for a target audience on a specific
market. Sometimes, it can be a beta version of the product or an
MVP. With the help of key features going live, developers can
evaluate performance and get some valuable feedback from the first
users of the product.
At first glance, it seems that a seven-step process is very simple. Keep
in mind though that dedicated developers put a lot of efforts into the
development process, especially if projects are long-term.
Of course, you can buy an off-the-shelf product with a ready set of
features. However, if you need a customizable solution, consider
custom design.
Besides, anybody in need of life insurance product can choose
between in-house development and outsourcing. Let‘s compare these
alternatives.
Insurance companies include broad market leaders, niche leaders,
low-cost leaders in the market, and moreover, there are those who
have no clearly defined strategies. According to the Society of
Actuaries, the most prolific companies were those which completed
their product development efforts in 2014. The research also shows
that the fastest companies were those having the shortest product
development time, from generating the idea until launching the
product.
With regard to this data, we can admit that it‘s important for
insurance agencies to have a defined strategy and know definitely
231
how to market a new insurance product. Here are some steps to
companies and Insurance Ombudsman follow before launching a new product:
1. Analyze market.
2. Get a company license.
NOTES
3. Develop a product and pricing.
4. Review compliance.
5. Perform state filing.
Surely, product development is one of the most time-consuming
steps. This process includes idea generation, product feasibility,
underwriting guidelines, product planning, and design, pricing,
reinsurance, state filings, marketing campaign planning, etc. Once,
you complete all these steps, you‘ll be able to go live with your
insurance product.
In this article, we offered responses to some of the most frequent

questions about life and medical insurance product development
process. You know what types of products are offered in the market,
what types of software insurance agencies use, what features are
crucial to have. Yet, if you need to get more detailed information
about how to improve your existing systems, or modernize legacy
software, we are here to help you. Moreover, our dedicated team has a
strong background in creating sophisticated insurtech solutions from
scratch.
Insurance industry in India has seen a major growth in the last decade along
with an introduction of a huge number of advanced products. This has led to a
tough competition with a positive and healthy outcome.
Insurance sector in India plays a dynamic role in the wellbeing of its economy.
It substantially increases the opportunities for savings amongst the individuals,
safeguards their future and helps the insurance sector form a massive pool of
funds.
With the help of these funds, the insurance sector highly contributes to the
capital markets, thereby increasing large infrastructure developments in India.
Indian Insurance Sector
The Indian Insurance Sector is basically divided into two categories – Life
Insurance and Non-life Insurance. The Non-life Insurance sector is also termed
as General Insurance. Both the Life Insurance and the Non-life Insurance is
governed by the IRDAI (Insurance Regulatory and Development Authority of
Self-Instructional Material India).
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The role of IRDA is to thoroughly monitor the entire insurance sector in India Financial Management in Insurance
and also act like a custodian of all the insurance consumer rights. This is the companies and Insurance Ombudsman
reason all the insurers have to abide by the rules and regulations of the IRDAI.
The Insurance sector in India consists of total 57 insurance companies. Out of NOTES
which 24 companies are the life insurance providers and the remaining 33 are
non-life insurers. Out which there are seven public sector companies.
Life insurance companies offer coverage to the life of the individuals, whereas
the non-life insurance companies offer coverage with our day-to-day living
like travel, health, our car and bikes, and home insurance. Not only this, but
the non-life insurance companies provide coverage for our industrial
equipment‘s as well. Crop insurance for our farmers, gadget insurance for
mobiles, pet insurance etc. are some more insurance products being made
available by the general insurance companies in India.
The life insurance companies have gained an investment prospectus in the

recent times with an idea of providing insurance along with a growth of your
savings. But, the general insurance companies remain reluctant to offer pure
risk cover to the individuals.
Present of Insurance Sector In India
So far as the industry goes, LIC, New India, National Insurance, United
insurance and Oriental are the only government ruled entity that stands high
both in the market share as well as their contribution to the Insurance sector in
India. There are two specialized insurers – Agriculture Insurance Company
Ltd catering to Crop Insurance and Export Credit Guarantee of India catering
to Credit Insurance. Whereas, others are the private insurers (both life and
general) who have done a joint venture with foreign insurance companies to
start their insurance businesses in India.
Life Insurance Companies:
Private Sector Companies
 Aegon Life Insurance Co. Ltd.

 Aviva Life Insurance Co. India Ltd.
 Bajaj Allianz Life Insurance Co. Ltd.
 Bharti AXA Life Insurance Co. Ltd.
 Birla Sun Life Insurance Co. Ltd.
 Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd.
 DHFL Pramerica Life Insurance Co. Ltd.
 Edelweiss Tokio Life Insurance Co. Ltd
 Exide Life Insurance Co. Ltd.
 Future Generali India Life Insurance Co. Ltd.
 HDFC Standard Life Insurance Co. Ltd.
 ICICI Prudential Life Insurance Co. Ltd.
 IDBI Federal Life Insurance Co. Ltd. Self-Instructional Material
233
 IndiaFirst Life Insurance Co. Ltd
 Kotak Mahindra Old Mutual Life Insurance Ltd.
 Max Life Insurance Co. Ltd.
 PNB MetLife India Insurance Co. Ltd.
NOTES  Reliance Life Insurance Co. Ltd.
 Sahara India Life Insurance Co. Ltd.
 SBI Life Insurance Co. Ltd.
 Shriram Life Insurance Co. Ltd.
 Star Union Dai-Ichi Life Insurance Co. Ltd.
 Tata AIA Life Insurance Co. Ltd.
General Insurance Companies:
Private Sector Companies
 Aditya Birla Health Insurance Co. Ltd.

 Bajaj Allianz General Insurance Co. Ltd.
 Bharti AXA General Insurance Co.Ltd.
 Cholamandalam General Insurance Co. Ltd.
 Future Generali India Insurance Co.Ltd.
 HDFC ERGO General Insurance Co. Ltd.
 ICICI Lombard General Insurance Co. Ltd.
 IFFCO-Tokio General Insurance Co. Ltd.
 Kotak General Insurance Co. Ltd.
 L&T General Insurance Co. Ltd.
 Liberty Videocon General Insurance Co. Ltd.
 Magma HDI General Insurance Co. Ltd.
 Raheja QBE General Insurance Co. Ltd.
 Reliance General Insurance Co. Ltd.
 Royal Sundaram Alliance Insurance Co. Ltd
 SBI General Insurance Co. Ltd.
 Shriram General Insurance Co. Ltd.
 TATA AIG General Insurance Co. Ltd.
 Universal Sompo General Insurance Co.Ltd.
Health Insurance Companies
 Apollo Munich Health Insurance Co.Ltd.

 Star Health Allied Insurance Co. Ltd.
 Max Bupa Health Insurance Co. Ltd.
 Religare Health Insurance Co. Ltd.
 Cigna TTK Health Insurance Co. Ltd.
This collaboration with the foreign markets has made the Insurance Sector
in India only grow tremendously with a high current market share. India
allowed private companies in insurance sector in 2000, setting a limit on FDI
to 26%, which was increased to 49% in 2014. IRDAI states – Insurance Laws
(Amendment) Act, 2015 provides for enhancement of the Foreign Investment
234
Cap in an Indian Insurance Company from 26% to an Explicitly Composite Financial Management in Insurance
Limit of 49% with the safeguard of Indian Ownership and Control. companies and Insurance Ombudsman
Private insurers like HDFC, ICICI and SBI have been some tough competitors
for providing life as well as non-life products to the insurance sector in India. NOTES
Future of Insurance Sector In India
Though LIC continues to dominate the Insurance sector in India, the

introduction of the new private insurers will see a vibrant expansion and
growth of both life and non-life sectors in 2017. The demands for new
insurance policies with pocket-friendly premiums are sky high. Since the
domestic economy cannot grow drastically, the insurance sector in India is
controlled for a strong growth.
With the increase in income and exponential growth of purchasing power as

well as household savings, the insurance sector in India would introduce
emerging trends like product innovation, multi-distribution, better claims
management and regulatory trends in the Indian market.
The government also strives hard to provide insurance to individuals in a

below poverty line by introducing schemes like the
 Pradhan Mantri Suraksha Bima Yojana (PMSBY),

 Rashtriya Swasthya Bima Yojana (RSBY) and
 Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY).
Introduction of these schemes would help the lower and lower-middle income
categories to utilize the new policies with lower premiums in India.
With several regulatory changes in the insurance sector in India, the future
looks pretty awesome and promising for the life insurance industry. This
would further lead to a change in the way insurers take care of the business
and engage proactively with its genuine buyers.
Some demographic factors like the growing insurance awareness of the

insurance, retirement planning, growing middle class and young insurable
crowd will substantially increase the growth of the Insurance sector in India.
Having a vehicle insurance policy helps protect against damages to your

vehicle under various circumstances. Stay upto date with the latest Car
Insurance Articles and Two Wheeler Insurance Articles here.
12.7 Role of Risk Evaluation in the Process of Insurance Product

Formation
Risk insurance is at the heart of what Standard & Poor's Ratings Services does
when analyzing insurers and reinsurers. Within each category of analysis used
to evaluate insurers, Standard & Poor's implicitly and explicitly evaluates risk
and how risks are managed. With the new risk-management evaluation process Self-Instructional Material
235
described in this article, risk management will become a separate, major
category of our analysis. In our published full analyses, the new category will
be titled "Enterprise Risk Management." The companies that are seen to be the
best performers in this category will be those that have robust risk-
NOTES management processes that are carried across the entire enterprise and that
form a basis for informing and directing the firm's fundamental decision
making. Specifically, enterprise risk management (ERM): • Allows a more
prospective view of an insurer's risk profile and capital needs. • Is a highly
tailored analytic process that recognizes each insurer's unique structure,
products, mix of business, potential earnings streams, cash flows, and
investment strategy. • Is a process that recognizes the benefits and risks of a
diversified base of products, investments, and geographic spread of risk that
can quantify the benefits of uncorrelated or partially correlated risks. The
ERM evaluation will provide a more disciplined tool to bring information
about this major aspect of management and corporate strategy into the rating
rationale. The quality of management in the area of risk and the strategic
choices relating to risk and return will be emphasized. Unfavorable operating
performance will be viewed in the light of risk choices and risk tolerances that
are a part of the ERM evaluation. Favorable operating performance that is
driven by higher risk taking will be distinguished from higher returns for the
same levels of risk within the ERM evaluation process. Current levels of
capitalization have always been compared with risks, but with the ERM
evaluation, future comparisons of risk and capital will be emphasized as well
as the reasoning for the choices that will determine the future positions.
12.8 Future Trends In The Domain Of Insurance Product
Design And Development
Welcome to the future of insurance, as seen through the eyes of Scott, a
customer in the year 2030. His digital personal assistant orders him an
autonomous vehicle for a meeting across town. Upon hopping into the arriving
car, Scott decides he wants to drive today and moves the car into ―active‖
mode. Scott‘s personal assistant maps out a potential route and shares it with
his mobility insurer, which immediately responds with an alternate route that
has a much lower likelihood of accidents and auto damage as well as the
calculated adjustment to his monthly premium. Scott‘s assistant notifies him
that his mobility insurance premium will increase by 4 to 8 percent based on
the route he selects and the volume and distribution of other cars on the road.
It also alerts him that his life insurance policy, which is now priced on a ―pay-
as-you-live‖ basis, will increase by 2 percent for this quarter. The additional
amounts are automatically debited from his bank account.
When Scott pulls into his destination‘s parking lot, his car bumps into one of
several parking signs. As soon as the car stops moving, its internal diagnostics
determine the extent of the damage. His personal assistant instructs him to take
three pictures of the front right bumper area and two of the surroundings. By
the time Scott gets back to the driver‘s seat, the screen on the dash informs
him of the damage, confirms the claim has been approved, and that a mobile
response drone has been dispatched to the lot for inspection. If the vehicle is
drivable, it may be directed to the nearest in-network garage for repair after a
Self-Instructional Material replacement vehicle arrives.
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While this scenario may seem beyond the horizon, such integrated user stories Financial Management in Insurance
will emerge across all lines of insurance with increasing frequency over the companies and Insurance Ombudsman
next decade. In fact, all the technologies required above already exist, and
many are available to consumers. With the new wave of deep learning
techniques, such as convolutional neural networks,1 artificial intelligence (AI) NOTES
has the potential to live up to its promise of mimicking the perception,

reasoning, learning, and problem solving of the human mind (Exhibit 1). In
this evolution, insurance will shift from its current state of ―detect and repair‖
to ―predict and prevent,‖ transforming every aspect of the industry in the
process. The pace of change will also accelerate as brokers, consumers,
financial intermediaries, insurers, and suppliers become more adept at using
advanced technologies to enhance decision making and productivity, lower
costs, and optimize the customer experience.
Insurance underwriters are professionals who evaluate and analyze the risks
involved in insuring people and assets. Insurance underwriters establish
pricing for accepted insurable risks. The term underwriting means receiving
remuneration for the willingness to pay a potential risk. Underwriters use
specialized software and actuarial data to determine the likelihood and
magnitude of a risk.
Meaning
Insurance underwriters evaluate the risks involved in insuring people and

assets and establish pricing for a risk. Underwriters in investment banking
guarantee a minimum share price for a company planning an IPO (initial
public offering).Commercial banking underwriters assess the risk of lending to
individuals or lenders and charge interest to cover the cost of assuming that
risk. Insurance underwriters assume the risk of a future event and charge
premiums in return for a promise to reimburse the client an amount in the
event damage or occurs.
Need for insurance underwriting
 Reviews specific information to determine what the actual risk is

 Determines what kind of policy coverage or what perils the insurance
company agrees to insure and under what conditions
 May restrict or alter coverage by endorsement
 Looks for proactive solutions that may reduce or eliminate the risk of
future insurance claims
 May negotiate with your agent or broker to find ways to insure you
when the issue isn't so clear-cut or there are insurance issues.
237
Underwriters are trained insurance professionals who understand risks and
how to prevent them. They have specialized knowledge in risk assessment and
use this knowledge to determine whether they will insure something or
someone, and at what cost the insurance underwriter is the insurance
NOTES company's appointed risk taker, the one who decides to take on the financial
responsibility to the insured if he believes in the risk. He or she reviews all the
information your agent provides and decides if the company is willing to
take a gamble on you.
A lot of underwriting is automated, so in cases where the situation doesn't have

a special circumstance, the underwriting may be programmed into computer
programs, similar to the kind of quoting systems you might see when you get
an online insurance quote.
12.10 Factors That Affect The Activities Performed By The

Underwriter
Using an insured‘s loss history in combination with group data and models are
the best ways to ensure profitable underwriting.
Underwriting is an art, and the best underwriters know it‘s best to filter out
unrelated data that could result in an unprofitable decision.
Anyone who has looked incredulously at the latest fad, whether it‘s buying
$350 ripped jeans or frenzied Beanie Babies collecting, knows that long-term
trends are better predictors of behavior.
An insured‘s history of losses, in combination with modeling and group data,

should be the primary factors in any analysis of risk from an underwriting
perspective. History has shown that it‘s nearly always useless to try to predict
future behavior. Vague gut feelings are frequently wrong, and this is true for
underwriters as well as for most individuals.
In fact, underwriting is a perfect example of collective intelligence being able

to produce better results than any one individual, as most recently outlined in
James Surowiecki‘s The Wisdom of Crowds.
In that book‘s opening anecdote, he writes of an experiment where the

aggregate guesses of a crowd at a county fair, many of whom had no
knowledge of the subject, more accurately guessed the weight of an ox than
the individual estimates of experts who were asked.
What is underwriting other than a collection of the wisdom of crowds? The

collected history of insureds is the best predictor of what the future will hold.
Adding in unrelated data that purports to predict behavior creates a flawed
calculation.
Even the attempt to add in that data can put carriers in a potentially risky
situation. Such is the case when underwriting specific, individual risks butts up
against the strict laws against the use of health-related data in workers‘
compensation, for example,
238
In addition, the use of genetic testing results raises serious ethical, and Financial Management in Insurance
potentially legal, questions if used to underwrite group life-insurance policies. companies and Insurance Ombudsman
How can an insurance carrier really calculate the best price if the underwriting
is flawed by using unrelated data? New underwriting factors, unrelated to the NOTES
specific risk should be ignored, especially if the data invades the privacy of the
insured.
Using past history of an insured in combination with modeling and group data
is the prudent way to analyze risk and underwrite.
12.11 Steps Involved In The Process Of Insurance

Underwriting
life insurance is easy. It takes only a few minutes to apply. Once you have
life insurance, if you die during the policy‘s term then your loved ones will
receive a death benefit to help pay for the expenses you paid for while alive.
But to determine how much your life insurance policy costs, an underwriter
will issue you an insurance classification. The underwriter is someone who
works on behalf or for the life insurance company figures out if you actually
get the rate you were originally quoted by looking at your health information.
He or she will determine how likely you are to die before the end of your
policy‘s term is up and offer you a premium based on that.
Going through this process is called underwriting. All insurance products
involve some degree of underwriting, which is used to get a picture of who
you are based on your characteristics and how they relate to the kind of
insurance you‘re purchasing. For life insurance, the underwriter looks at data
like your health and medical history as well as lifestyle information like your
hobbies and driving ability.
Some parts of the underwriting process require action on your part, while
others require the input of someone else, such as your doctor. Although
underwriting can take several weeks and potentially even longer,
Policygenius can make the process easier by shopping around your
underwriting results to different carriers to get you the best rate.
Read on to learn more about:
 The underwriting manual
 Step 1: application quality check
 Step 2: paramedical exam
 Step 3: attending physician statement
 Step 4: Medical Information Bureau check
 Step 5: prescription check
 Step 6: motor vehicle report
 Step 7: actuarial tables
 Step 8: credit system
 Step 9: your final rating
The underwriting manual

Every carrier has its own underwriting manual. This defines the guidelines
that an individual carrier will use to determine your final premium rates.
239
An underwriting manual will state things like what service a carrier‘s
underwriters should use for ordering an attending physician statement online,
when they require a prescription history report, how height and weight
correlate to health classifications, and more.
NOTES Of course, since each carrier has their own guidelines, that means that the
other steps of the underwriting process – which tests are ordered, what tools
are used, and what all of this ultimately means for your final life insurance
rates – varies, too. Everything that follows is a pretty standard set of tools
and tasks for an underwriter, but the specifics of what‘s used, when, and how
won‘t be the same across companies.
Step 1: application quality check

Before life insurance underwriting even begins, the carrier will go through
your application to make sure all of the correct information is there. Your
application is the first step in actually getting life insurance, so it‘s
something you want to get right.
It‘s not uncommon for applications to be accidentally incomplete. The carrier
is looking to make sure that all of the information is accurate and completely
filled out. Fortunately, unless the missing information is related to medical
history, most changes that need to be made to an application won‘t slow
down the underwriting process.
Depending on the carrier, you may need to do a phone interview as well.
You‘ll usually need to do this if you only gave the most basic information on
your application, like your date of birth, address, and coverage needs, and the
carrier needs to dig a little deeper into things like your hobbies.
After that, you‘ll go into the official underwriting process. Each of the
following checks can add some time to your application, but it‘s important in
getting you the premium price you‘ll need to pay over the life of your policy.
Step 2: paramedical exam

One of the first steps of the underwriting process involves looking at the
results of your paramedical exam.
The medical exam is like a checkup with your doctor, except it‘s free to you.
You‘ll have to go to a lab where a medical technician will perform the exam.
The tech can also come to your home or work.
After the paramedical exam, the results will be sent to the underwriter. The
information an underwriter uses falls into three main categories:
 Basic measurements. Height, weight, blood pressure – the boring
things that you get a report on at a typical physical. Your height-to-
weight ratio plays a big role in how you‘ll be classified and,
ultimately, what you‘ll pay for your life insurance policy. High blood
pressure, which becomes a particular concern as you get older, is also
required for setting your rates.
 Blood test. You can get a lot of information on potentially risky
health concerns with a simple blood test. Heart disease, stroke,
diabetes, blood-borne illnesses, and more can all be found out with a
few vials of blood.
 Drug test. A urine test for a full drug panel will alert the carrier to the
Self-Instructional Material use of drugs like amphetamines, cocaine, barbiturates, and more.
240
Generally speaking, drug use makes you riskier to insure and raises Financial Management in Insurance
your premiums (unless it‘s marijuana, which is in a legal, social, and companies and Insurance Ombudsman
insurance grey area at the moment).

You can reuse the results of your paramedical exam to apply for other types
of insurance, like disability insurance, or even for life insurance from another NOTES
carrier. You‘re under no obligation to go with a particular life insurance

company just because they paid for your medical exam.
Step 3: attending physician statement

If there are red flags coming out of your paramedical exam, the underwriter
will order an attending physician statement, or APS, to answer some
remaining questions.
An APS is a summary of your medical history from your doctor‘s point of
view. It provides the status of each condition your doctor is treating and
information about the condition such as how long you‘ve been treating it,
how long symptoms have been present, and your prognosis.
Say you‘re showing signs of high blood pressure. An APS can let an
underwriter know that the high blood pressure is a temporary side effect of
medication you‘re taking and not necessarily indicative of a larger problem.
In that way, it complements the paramedical exam by getting down into the
finer details of your health.
This step can skew the timeline for the life insurance underwriting process,
adding anywhere from a few days to a few months depending on how long it
takes for a doctor‘s office to comply with the request.
Step 4: Medical Information Bureau check

The Medical Information Bureau (MIB) is a trade group that helps insurers
share medical data, which helps a carrier fend off fraud by seeing where and
when you‘ve previously applied for life insurance in a general window of six
months.
It‘s not a bad thing if you‘ve applied for life insurance with different carriers
in the past, but the MIB will let carriers see what sort of information you‘ve
been disclosing on some applications that you may have accidentally left off
others. Tested positive for drug use on a previous test but failed to disclose it
on your current application? They‘ll find out.
Step 5: prescription check

The underwriter will check all the medication prescribed to you over the past
five to seven years. As with the paramedical exam and APS, the prescription
check will confirm the information in your application: the prescriptions you
say you‘re on or if you‘ve omitted any medication up to this point.
Whether your underwriter requires this step depends on what he or she finds
in other areas of investigation. Life insurance policies with higher coverage
amounts may also require a prescription check.
Step 6: motor vehicle report

The underwriter will receive a motor vehicle report, or MVR, detailing your
driving history. Just like your health history, your driving history plays a role
in your life insurance rates because it helps determine how risky you are to
insure.
241
An MVR notes driving violations like traffic citations (think speeding or
reckless driving tickets), vehicular crimes, accident reports, driving record
points, and DUI convictions. It can look as far back as five to seven years.
If you have a tendency to speed, drink and drive, or engage in other
NOTES dangerous driving habits, you‘re riskier, and your rates will be higher than
someone who‘s not.
You can request to see your MVR from your state. It‘s also used when
determining your auto insurance rates, so a copy of your MVR can be nice to
have.
Step 7: actuarial tables

Underwriters use a number of different actuarial tables to determine what
risk you pose to the insurer and how much the insurer needs to charge to
offset that risk.
 Mortality table. This table shows the mortality probability for a
given population, usually based on age and gender and assuming all
other things being equal. Think of it as a baseline for when,
statistically speaking, you‘re most likely to die.
 Build table. This table takes your body mass index (BMI) based on
your height and weight and translates it into information that‘s
relevant to setting your insurance classification. A poor build can
automatically set your classification to Standard, meaning you‘ll pay
more for your life insurance policy than someone with a Preferred
classification.
Step 8: credit system

After the underwriter has gone through all of the tests, tool, and checks
needed to set your insurance classification, the last thing he or she may do is
use a credit system to give you a little bump to help you get better rates.
If a chronic illness you have results in a Standard (or worse) classification,
the underwriter‘s credit system can make your premium more affordable if
you‘re actively taking steps to improve your health and undergoing
preventative care.
The APS and prescription check will let an underwriter know what you‘re
doing to keep health problems from getting worse, which can be a boost to
both your health and your wallet.
Step 9: your final rating

Once underwriting is complete, you‘re now the proud owner of a life
insurance policy. The whole process can take anywhere from three to eight
weeks , and relying on outside sources – like a doctor‘s office for an APS –
can add time. All that‘s left is to confirm the premium rate, sign the policy to
put it in force, and your family is protected.
If that was a lot to digest, you could consider getting simplified-issue life
insurance, which skips the paramedical exam and the attending physician
statement. But simplified-issue offers lower coverage amounts and isn‘t
available to people with certain health profiles.
12.12 Terminologies
242
1)Product Design2) Development3) Formation4) Financial Management in Insurance
Underwriting5)Activities6)Process companies and Insurance Ombudsman
NOTES
1. Explain the product development in the life?
2. Explain the Non-life insurance sectors in India?
3. State the future trends in the domain of insurance product design?
4. What are the need for insurance underwriting?
5. What are the factors affecting the activities performed by the

Underwirter?

Publishing Company.
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UNIT – XIII CLAIMS MANAGEMENT
Claims Management
13.1 Introduction
NOTES 13.2Factors affecting the Insurance Claims Management Systems
13.3 Types of documents needed in various types of claim
13.4 Cause Proxima
13.5 Insurance Pricing and marketing
13.6 Principles of Insurance pricing and Marketing
13.7 Insurance Pricing methods
13.8 Seven ways to improve claimsout comes
13.9 Health Insurance
13.10 Terminologies
13.1 INTRODUCTION
Claims management is a collective term for all work that Van Ameyde carries
out for people or companies that suffer damage, as well as for the insurance
provider. What does this work involve?
 Registering the claim notification (by telephone, e-mail, post or online), which
automatically opens the client file.
 Checking the cover: is the damage insured and up to what amount? Asking for
documents such as police reports of road accidents, medical reports in case of
injury, invoices, etc.
 Determining which party is liable for the damage if another party is involved.
 Determining the amount of the claim and engaging a loss adjuster if necessary.
 Arranging for the damage to be repaired or for transport back home if the
damage occurs abroad.
 Paying the claim to the insured party.
 Recovering losses from liable (responsible) third parties, if applicable.
 Reporting to our client (the insurance provider), including management
information, showing e.g. the progress of all their claims files and the total
amounts to be reserved and paid.
 Fraud prevention checks.
13.2 FACTORS AFFECTING THE INSURANCE CLAIM
MANAGEMENT SYSTEM
1. NEW ENTRANTS
Insurance companies have remained relatively constant. Most of them have
been in business for a good hundred years. Recently, however, there has been
a rise in the number of new entrants marketing, selling or servicing insurance
products or providing new capital. A range of new companies is coming in,
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redefining how insurance is done, and reshaping the economics of the industry Claims Management
in the process. NOTES

Many of these new entrants are interesting organizations with great
capabilities. Google, which entered the UK market in 2011 as an insurance
aggregator, is perhaps the most formidable new entrant, from the perspective
of a traditional insurer. The technology giant joined the emerging insurance
aggregation market, significantly disrupting competitive market conditions
and, by some accounts, subsequently helping lower insurance premiums by
roughly 30% over the last 5 years.
Introducing that sort of intense price competition into an industry which is not
overly profitable to begin with, has changed the dynamics of the market
substantially. To compound the issue, other companies are entering the fray as
well, including retailers and their strong brand names, and telecommunications
companies boasting telematics capabilities. Even car manufacturers are
starting to embed telematics capabilities into vehicles and, in some cases, to
sell insurance directly.
2. SOCIAL AND ECONOMIC DYNAMICS

We‘ve moved into a very low interest rate period, and those low rates are
putting a lot of pressure on the profitability of insurance companies. Insurance
is an industry that, essentially, takes in money and invests that money before
subsequently paying claims. So, with lower investment returns, there‘s less
profit being generated by the insurance sector.
And it‘s a sector that doesn‘t really generate a lot of profit to begin with. Over
the last 30 years, many U.S.-based insurance companies have failed to return
their cost of capital. On top of low interest conditions, there has also been a lot
of volatility on those returns, especially since the financial crash of 2007 and
2008.
On the plus side, insurers have rebuilt their balance sheets. However, market
volatility makes it much harder to run their business. It‘s much more difficult
to find stable, growing assets to match against long-term liabilities, for
example.
The most obvious societal shift, and one that is certainly impacting developed
countries, is the retirement of baby boomers. As they retire, they are taking
money out of their accumulation products to provide an ongoing source of
income; trillions of dollars are going to flow out of these products over the
next 5 to 10 years. Self-Instructional Material
245
Claims Management On the other hand, this growing section of the retired population has more
wealth than people who retired previously, and they‘re also living longer. That
means they‘re generating new and different insurance needs, necessitating
NOTES
different types of insurance products — particularly around payouts and long-
term care.
Of course, there‘s also growth related to Generation Y, which is largely

composed of consumers who are unlikely to buy insurance in the same way
that their parents would have. They‘re unlikely to walk down to the local
broker and sit down to have a discussion over a cup of coffee to buy what is, in
essence, a commodity product. Instead, they want everything now, everything
mobile, everything available by text.
Meanwhile, it‘s in developing countries that we clearly see most of the growth.
There‘s a move to urbanization, which is creating a much larger and more
affluent middle class. And clearly, where there are assets, there is also income.
There are families emerging that have started to drive a lot of new insurance
needs. As a result, in the developing world, we‘re seeing a lot of demand for
insurance products. This is driving growth for domestic companies, but it‘s
also acting as a magnet for some of the global insurers. Examples like AXA,
MAPFRE and Prudential UK have all moved aggressively into the Asian and
the Latin American markets.
3. THE DATA REVOLUTION

Insurance companies have always made use of substantial amounts of data, but
how they leverage data is changing in significant ways. It used to be that, if an
insurer had an efficient operation and a large volume of risk data, it could find
success by comparing, pooling and underwriting similar risks. Now, data is
everywhere. It‘s pervasive, and it‘s immediately available. The whole concept
of pooling risks may end up disappearing because, in effect, the data
revolution will actually enable insurers to underwrite down to the individual
level.
Historically, insurance has been about pricing a risk. Going forward though,
the industry might be moving into a new realm that places more value on
managing a risk. For example, telematics can be leveraged to give people
driving scores — getting them to drive more slowly, brake more effectively,
corner less aggressively, leave more distance between the car in front of them.
On the life side, wearable technology and analytics can combine to create
compelling wellness programs for clients. These programs are, in effect,
Self-Instructional Material enabling insurers to manage the risks they are writing — by rewarding good
behavior and penalizing bad behavior.
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Claims Management
4. THE DIGITAL MANDATE NOTES

The convenience and efficiency of online and mobile channels, coupled with
the commoditization of the core insurance product, has led insurance
customers to seek a new experience.
The digital insurance trend, then, is really about the way consumers will
choose to interact with an insurance company, as opposed to the way today‘s
insurance companies try to dictate interactions with consumers. Going
forward, insurers will need to focus far more on the consumer as an individual.
In this environment, an effective omnichannel strategy will be key, as will an
insurer‘s capabilities around self-service.
THE CASE FOR TRANSFORMATION

Together, these four factors combine to create a compelling case for digital
insurance transformation. If traditional insurers expect to remain competitive,
they must become more:
• Agile, as they respond to new and increasing competitive threats
• Efficient, as they address profitability challenges
• Customer-centric, as they respond to social changes and increasing consumer

expectations
• Even more advanced in terms of data and analytics, as the industry moves
from just pricing and pooling risks to truly managing individual risks
Addressing these four business imperatives is a complex effort that will

require insurers to both transform their legacy operations and build out new
operations. As insurers consider their next move, they‘ll need to ask
themselves: How do we reduce our ―run and maintain‖ costs in order to build
the kinds of new capabilities necessary to stay competitive? How do we enable
or evolve our legacy systems to support today‘s digital imperatives? How do
we accept new sources of data and analyze that data properly? And, perhaps
most importantly, how do we do it all simultaneously?
At DXC, we feel strongly that these challenges are best met through a
technology-agnostic approach supported by strong partnerships. A partner
with deep industry expertise and knowledge of back-office systems can help
guide the move to a service-enabled environment, which brings new
capabilities while significantly lowering costs. With these updates, insurers
can invest more heavily in building for the future, while paying special Self-Instructional Material
attention to evolving cybersecurity and regulatory compliance requirements, as
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Claims Management well as big data and analytics opportunities, and capitalizing on new and
emerging channels.
NOTES
13.3 TYPES OF DOCUMENTS NEEDED IN VARIOUS TYPES OF
CLAIMS
a) Insurance Policy: The insurance policy sets out all the terms and conditions
of the contract between the insurer and insured.
(b) Certificate of Insurance: It is an evidence of insurance but does not set out
the terms and conditions of insurance. It is also known as ‗Cover Note‘.
(c) Insurance Broker‘s Note: It indicates insurance has been made pending
issuance of policy or certificate. However, it is not considered to be evidence
of contract of insurance.
13.4 CAUSE PROXIMA
Principle of Causa Proxima (a Latin phrase), or in simple english words,
the Principle of Proximate (i.e Nearest) Cause, means when a loss is caused
by more than one causes, the proximate or the nearest or the closest cause
should be taken into consideration to decide the liability of the insurer.
Cause proxima in insurance claim settlement

proximate cause.
1. Lord Bacon in his Maxims of Law has said,

―it was infinite for the law to consider the cause of causes, and their
impulsions one of another; therefore it contenteth itself with the immediate
cause, and judgeth of acts by that, without looking to any further degree‖.
2. In Leyland Shipping Co. V. Norwich Union Fire Insurance Society

(1918), the maxim laid down was,
―To treat the proximate cause as if it was the cause which is proximate in time
is out of the question. The cause which is truly proximate is that which is
proximate inefficiency. That efficiency may have been preserved although
other causes may meantime have sprung up, which have yet not destroyed it or
truly impaired it, and it may culminate in a result of which it still remains the
real efficient cause to which the event can be ascribed‖.
3. In YORKSHIRE DALE S.S. Co. V. MINISTER OF WAR TRANSPORT

(1942), the statement made was,
―Choice of the real or efficient cause from out of the whole complex of the
Self-Instructional Material facts must be made by applying commonsense standards. Causation is to be
understood as the man in the street, and not as either scientist or the
metaphysician would understand it‖.
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Proximate Cause Examples Claims Management
NOTES
It is only by considering a number of propositions and examples that the
doctrine of proximate cause can best be understood.
A man goes to a late night cinema and whilst returning home from the show he
is attacked by a group of vandals, stabbed and killed.
The proximate cause of his death is stabbing and certainly not going to the
cinema, although it may be wrongly argued that has he not had gone to cinema
he would not have met the vandals and got killed in this way.
Here, going to cinema may be simply a remote cause without proximately

causing his death.
To take another example, a man riding a horse in a lonely hilly place falls from
the horseback, gets an injury and remains unconscious the whole night under
exposure to severe cold. The following morning he is discovered by some
persons.
In the meantime, due to the severe exposure, the contracts pneumonia and
dies.
Here the proximate cause of his death is accident or falling from the
horseback, the reason being that injury leading to unconsciousness, exposure
to severe cold and then pneumonia are all natural events developing gradually
one after another without really being intervened by a new or independent
source (The example is based on a judgment given in etherington v. lancashire
and yorkshire accident insurance co., 1909)
For finding out the proximate cause we shall have to watch closely the chain
of events, leading ultimately to a result, and out of such events whether in
broken or unbroken sequence, interrupted or uninterrupted, the cause
proximate to the result must be established.
So long the first cause retains its identity and efficiency until the result we may
say that it is the proximate cause.
If, however, the chain of causation is broken so that the first cause loses its
identity, and a new cause develops bringing about the result actively and
efficiently then we may tag the result to have been proximately caused by the
new intervening cause.
To give an example, let us take 10 bricks arranged in a lined standing order

one after another keeping a gap of say 6 Inches in between. Somebody gives a
kick on the first brick and gradually the last brick in the line also falls. Self-Instructional Material
249
Claims Management Here the proximate cause of falling off the last brick is certainly the kick
because the strength of the kick was such that it could effectively make the last
brick fall without the intervention of any new force started.
NOTES
Let us, however, assume that as a result of the kick only 6 bricks fall but
suddenly a man throws a stone on the 7th brick and gradually falls the 7th, 8th,
9th and 10th brick.
In this case, the proximate cause of falling the last brick is throwing the stone
and not the kick because the kick was not efficient enough to cause the last
brick to fall.
On the other hand, a new and intervening force developed (throwing of the
stone) which was active, efficient and potent enough to cause the result, i. e.,
falling off the last brick. Let us take another example.
A policy covers- accidental fire but specifically excludes earthquake fire.

There is an earthquake fire somewhere near the insured building. Due to the
prevailing wind, the fire spreads gradually to neighboring buildings one after
another and ultimately sets the insured building into the fire.
The claim is not payable because the proximate cause of loss is earthquake fire
and not ordinary fire even though the earthquake had nothing to do with the
insured building.
This is so because throughout the spread and travel, with the help of natural
wind, the fire retains its identity as earthquake fire. The situation would have
been different had the spread of fire been interrupted by a new and
independent cause.
If, in the same example, it so happens that from mid-journey of the fire
somebody lights a candlestick, carries this fire and sets the property of
somebody under fire then that resultant fire shall be accidental fire or
malicious fire and certainly not earthquake fire as the chain of events has been
broken by a new and independent force, which is active, efficient and potent
enough to bring about the result. (This example is based on a Morgan Owen
prize paper, C. 1.1, journal No. 42, 1939)
From all the examples explained hereinbefore the readers would possibly
appreciate that it is indeed the Common Sense that is required most to find out
the proximate cause of a result. We should not try to find out the cause of
causes thereby getting mixed up and complicating the issue.
A learned judge, therefore, rightfully commented with confidence, ―if you

want to find out the proximate cause, do not ask a scientist or a lawyer, ask a
man from the street. Probably his answer will be the correct one‖.
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This comment certainly conveys the feeling of the learned judge as to how he Claims Management
feels the importance of common sense in finding out the proximate cause.
NOTES
13.5 INSURANCE PRICING AND MARKETING

1. There is increased price and value transparency. A fast-growing collection
of price and feature-comparison websites empowers consumers to compare
and contrast hundreds of insurance products by price, value, and benefits.
These sites are also educating consumers on how to more effectively match a
product choice with their unique needs and willingness to pay, as are insurance
brokers.
2. Consumers are more informed and sophisticated. As prices have become
more transparent, consumers are increasingly open to new propositions based
on different variables—such as security, mobility, and different types of
coverage—and these propositions require new, dynamic pricing structures.
3. Regulations are putting pressure on profitability. New regulations,
including Solvency II, require insurers to maintain higher capital levels
without decreasing overall returns, and to do that, insurers must either reduce
costs or increase pricing.
4. New entrants are bringing focused, superior propositions. The insurance
industry is diversifying, with e-commerce, automotive OEMs, retailers, and
other nontraditional players offering new, innovative business models and
products.
5. New technology disruptors are enabling new pricing models. Big data, the
Internet of Things, and predictive data analysis tools are giving insurance
companies an advanced and broad ability to design usage-based and other
innovative pricing models; draw data from new, external sources and estimate
risk or consumer willingness to pay, buy, or churn more accurately; and more
accurately identify—during the underwriting phase—those applicants likely to
commit fraud.
Insurers that do not recognize these factors and fail to pursue and adopt
new pricing models will end up playing a guessing game, which will further
diminish their pricing capabilities. Those insurers will quickly lose
competitive edge to rivals that better understand what is driving their clients‘
needs and willingness to pay—and as such are able to design more attractive
propositions at lower prices or at higher margin at the same prices.
Further, those insurers who continue to rely solely on a traditional actuarial
model with a cost-based perspective and a limited set of risk differentiators
will eventually end up with a larger pool of relatively riskier and less
profitable clients. This will negatively impact profitability and, ultimately,
market share.
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Claims Management
13.6 PRINCIPLES OF INSURANCE PRICING AND
MARKETING
NOTES The two main trade bodies for UK insurance firms have adopted a set of
guiding principles for the pricing of several types of personal insurance. It‘s
long overdue recognition that the market has a pricing problem. Yet do these
pricing principles offer the necessary commitment to drive change on a well
established practice across a diverse market?
There‘s been a pricing problem in UK personal insurance for several years
now. It started out with discounts for new customers being funded by increase
prices for existing customers – so called dual pricing. That has since evolved
into something much more sophisticated. Insurers have invested huge
resources into price optimisation, whereby prices are set according to how
much the consumer might be willing to pay. After all, the logic goes, why
offer people an introductory discount when they would have given us their
business on normal rates (more here and here)
Recognising the Problem

So the publication by the two trade bodies for insurers and brokers of a set of
guiding principles and action points should be good news. And it is, to an
extent. Yes – it is recognition that there is a problem that needs fixing. And
yes, given their roles as trade bodies, the ABI and BIBA were only ever going
to present principles that reflected the minimum their members would jointly
commit to. Yet for all their well manicured narrative , these pricing principles
are a disappointment.
The pricing principles signal a commitment to do better, but give little
substance as to how much that better will be, what it will look like or how it
will be achieved. And the pricing problem that needs fixing is portrayed more
as down to customer inertia than to insurer and broker behaviour. It‘s almost
as if the sector is saying ‗it is not our fault; they made us do it.‘ That lack of
reflective honesty could point to a culture that would prefer to resist change.
The Focus Remains on Insurance Firms
So while they engage as a nice piece of public relations, these pricing

principles are not where attention should be focused. The spotlight must
remain on the insurers and brokers who make the real, tangible
Self-Instructional Material pricing decisions. Those firms now have to respond, on the one hand, to the
commitments made on their behalf by their trade body, and on the other hand,
252
to the expectations of a regulator who has made clear that each firm‘s pricing Claims Management
strategy needs to be based around a clear set of principles. NOTES
The worst thing those insurers and brokers could do would be to rehash the
ABI/BIBA pricing principles into a localised version. That would be a mistake
because the ABI/BIBA principles are amorphous and unclear; more like
statements of broad intent. So where should insurers and brokers look for the
template upon which they can start working out their own principles?
The FCA is looking for principles that link, in a specific pricing way, with
their Principles for Businesses. Those principles talk about acting with
integrity, about fair treatment of consumers and about addressing conflicts of
interest. So an insurer should have a principle relating to the fairness of its
pricing that resonates with key audiences like investors, regulators and
business partners.
Colossal Differences in Price

And of course, insurers also need to show how their pricing principles are
being implemented. Take the current position in the UK household market. A
customer who stays with their existing insurer for 5 years will, on average ,
pay 70% more than a new customer (more here). That‘s a colossal difference.
Clearly, a pricing principle that addresses fairness needs to address that scale
of premium differential. Yet by how much? What does a ‗marked
improvement‘ mean?
And will be the impact for that insurer, on rates, on competitiveness, on
profitability? Confidence in the sector (think investors, regulators and
consumers) will be threatened if an unravelling of price optimisation doesn't
go well. One scenario that is more than a little possible would involve an
initially subdued response by insurers to these pricing problems, followed by a
more significant response being forced on the sector by a regulator. The more
the sector treats these pricing problems as a public relations exercise, the more
likely that scenario becomes.
These pricing principles have emerged because the sector read the regulator's
warning signs that they needed to get their pricing strategies in order. Yet will
these principles be enough for the sector to gain the initiative? I doubt it – it
feels too little, too late. Before insurers can offer something substantive, the Self-Instructional Material
regulator will take control of this pricing debate. They will present evidence of
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Claims Management
the detriment that price optimisation can cause and draw a line from it straight
to an individual on the SMCR responsibility map.
NOTES
Banned
Consider for a minute events in the US insurance market. There, in over 20
states, price optimisation has been labelled as unfairly discriminatory and
banned where based upon any of the following mechanisms:
 price elasticity of demand;

 propensity to shop for insurance;
 retention adjustment at an individual level;
 a policyholder‘s propensity to ask questions or file complaints.
What this tells us is that some quite significant regulators are prepared to
tackle pricing practices head on. Will the FCA be prepared to do the same?
Time will tell, but what I am sure of is that they have been assembling an
evidence base that gives them that option, should they wish to do so.
13.7 INSURANCE PRICING METHODS
The premium rates set by insurance companies involve calculation methods
that incorporate the costs of insuring a person or business while generating
some sort of profit in the process. Insurance pricing methods can vary in
terms of the types of variables considered when determining pricing rates.
Methods used may consider risk factors, probability factors and individual
claims histories depending on the type of insurance involved.
Schedule Rating Method
Insurance pricing methods--also known as rate making--provide baseline or

standard rates that form the basis for pricing individual case scenarios.
Different pricing methods may rely more heavily on baseline rates when
other factors like risk and claims history are involved. The schedule rating
method uses baseline rates as a starting point and then factors in other
variables depending on the degree of risk they carry, according to
ThisMatter, a financial planning resource site. Schedule rating methods are
used within the commercial property insurance industry, where factors like
location, size and business purpose provide baseline indicators for
Self-Instructional Material determining pricing rates. Baseline indicators rely on identified risk factors
found within a group or class of policyholders that have similar
254
characteristics such as age, sex and line of work. These indicators provide Claims Management
the starting points, or baseline rates, used to calculate a premium rate for NOTES
individual policyholders.
Retrospective Rating Method
Some types of insurance provide protection against risks that are less
predictable than the risks covered by other types of insurance. An example of
this would be burglary insurance where the odds of predicting how often a
business would be burglarized are more difficult than predicting health risks,
such as heart disease or diabetes with health insurance ratings. According to
ThisMatter, the retrospective rating method relies more on a policyholder‘s
actual claims experience when setting pricing rates as opposed to baselines,
or standard pricing rates. In order to do this, a company may require
premium payments be made in increments, with a portion due at the start of a
policy term and the remainder due at the end of a policy term. In the case of
burglary insurance, the amount of the remaining premium payment is based
on whether a burglary occurred since the start of the policy period.
Experience Rating Method
Experience rating pricing methods rely more heavily on a policyholder‘s

past claim experience when determining what premium rates to charge. The
types of insurance that use this method include automobile, workers
compensation and general liability insurance. Price rates are determined
according to a credibility factor, which uses a person‘s past claim history as
an indication of the level of risk involved and the likelihood that future
claims will be filed. Once a risk level is determined, the credibility factor is
measured against a baseline pricing rate that represents to average rate
charged to a class of policyholders that have similar characteristics.
Adjustments are then made to the baseline pricing rate based on each
policyholder‘s credibility rating.
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Claims Management
13.8 SEVEN WAYS TO IMPROVE CLAIMS OUTCOMES:
1. Make good use of your claims data. Claims generate a lot of data – and the
NOTES right technology can tell you what it means. Artificial intelligence combined
with big data can help you identify:
Complex claims that would benefit most from early involvement and an
experienced adjuster
Claims with high fraud potential so those can be quickly referred to an

investigator
Claims with high litigation potential so defense counsel can immediately start
building a case
Claims that need additional medical resources to determine if the current

treatment follows best practices
2. Institute a comprehensive task-management system. There are a lot of

moving parts with a claim, so diligently record everything you can within the
claim file – including adjuster notes, medical diagnosis, reserves, and
settlement authority. That way, everyone involved knows exactly what was
done and who did it. And if an action isn‘t recorded, don‘t consider it done.
3. Follow the 24-hour rule. Claims that drag on cost more – and that‘s
particularly true with workers‘ compensation claims. Any lag in response time
sends a message to the injured employee that you don‘t care. To increase your
odds of a good outcome, aim for making initial contact within 24 hours.
4. Have a strong return-to-work program. The longer an employee stays out,

the more expensive it is. Establish clear return-to-work policies and guidelines
– and apply them consistently across your organization.
5. Know when to bring in outside help. Analytics can help you determine
when to bring in outside help to manage work levels, add expertise, or get
someone geographically closer to the situation.
6. Make vendors an integral part of your team. Vendors – including attorneys,

medical professionals, auto-repair shops, contractors, medical case managers,
and TPAs – are an extension of your risk management team, whether you like
it or not. Strengthening vitally important relationships can balance workloads,
control costs, and drive efficiency. Get to know your vendors personally,
establish clear performance expectations – and hold them accountable.
7. Use dashboards extensively. A well-executed dashboard shows you

everything you need to assess the health of your claims operation at a glance.
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Keep your dashboard focused on the six to eight metrics you need to do your Claims Management
job effectively. And if the C-suite calls, you‘ll be ready. NOTES
13.9 HEALTH INSURANCE
Health is wealth. Never have truer words been spoken. If you are healthy,
you find yourself in the right frame of mind to tackle any hurdles that are
thrown your way. However, just like life that has its ups and downs, your
health too is not always predictable. You may make healthy choices every day,
follow a good diet and exercise regularly, but may still find yourself falling
sick once in a while. Situations like accidents come as a surprise and can never
be planned for. Even while you are in the best of health, it is important that
you visit a medical professional for regular check-ups. In any given case, it is
always advantageous for you to have a health insurance plan. You may be
selecting a health insurance plan through an employer or independently.
Whatever the case may be, most people require some guidance on how to
choose the right health insurance plan. Here are three important things to
consider before you pick a health insurance plan.
1. Financial Stability
When it comes to healthcare, the costs are rising. A health insurance plan
or a mediclaim policy offers you some degree of financial protection. One of
the perks of a health insurance plan is that most plans offer a tax-savings
incentive. However, do not make tax savings the sole objective when you
purchase a health/medical insurance plan. A detailed health plan is the best
route to achieving financial stability in the long run. A medical emergency can
quickly escalate into a financial crisis if you do not have health insurance. If
you or an earning member of your family falls ill, it becomes a double
whammy. This is because the ill individual requires funds for healthcare while
losing the ability to earn an income. Almost nobody can be productive while
they are sick. Having a health insurance plan is like paying a small price for
long-term fiscal benefits.
2. An Employers Plan
Receiving a health insurance plan through your employer is a wavering
situation. There might be instances where the medical insurance your
employer offers is optimal. However if you are self-employed, then an
employer‘s health insurance plan is not even a consideration. Once you retire,
an employer may not continue to provide you with health insurance. If you
have a family, your employer‘s plan may not cover the insurance expense for
all your family members. You need to do some research here about what the
best way forward is while considering a health insurance plan through an
employer. Simply tagging along with your employer‘s health insurance plan in Self-Instructional Material
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Claims Management India may not be the best decision for you. Make an educated decision about
whether to pursue a health insurance plan through your employer or not.
3. Premium
NOTES
Often while considering health insurance plans, the tendency is to look at
just the monthly premiums. However, a monthly premium could turn out to be
the least of your costs. A co-payment could be a major expense. A co-payment
is the amount that you will pay out of pocket before the insurance covers costs.
Here is where you want to make a practical decision regarding how high or
low a health insurance premium you can afford. Simply comparing premiums
could be misleading. Based on your budget, you want to find a fine balance
between out of pocket expenses and your health insurance plan premium.
When it comes to your health, the stakes are high. You want a holistic health
insurance plan. Hence, you should pick a plan only after you carefully think
over all aspects of the health insurance plan in question. Do not get befuddled
by the unfamiliar terminologies or diversity of mediclaim policies available.
The great news is that HDFC Life offers a set of health insurance plans that
are tailored to your needs. Just think of the aforementioned simple
considerations and you are on the correct path to picking the right health
insurance plan for yourself and your family. Once you are insured, you can
have a sense of security and lay any uncertainties to rest. Having a health
insurance plan is a good boost to having peace of mind.
4. Tax Benefits with health insurance plan

Yes, you may be eligible for tax benefits under section 80D of the Income
Tax Act 1961. Please note that the above mentioned benefits are as per the
current tax laws. Your tax benefits may change if the tax laws are changed. It
is advisable to re-confirm the same with your tax consultant.
5. Can I Nominate or Assign
As per Section 39 of the Insurance Act, 1938, you can nominate a person to
receive the benefits under this health insurance policy. During your lifetime
and while your policy is in force, you may at any time, by written notice to us,
designate any person or persons as a nominee to whom we shall pay benefits
under this health insurance policy upon your unfortunate death. In case the
nominee so named is a minor, then the policyholder is required to name an
appointee (other than himself) for the minor nominee. Assignment shall be
subject to Section 38 of the Insurance Act 1938.
6. How can I pay the Health Insurance Premium
You can pay your health insurance/mediclaim policy premiums online via:
Net banking
Credit card/ Debit card
Self-Instructional Material Debit Card with PIN
SI on card
258
Claims Management
13.10 Terminologies NOTES

1)Claims2) Documents 3) Causa Proxima 4) Pricing 5) Marketing
6)Health

1. Explain the Claim Management?
2. Bringout the types of documents needed in the claims?
3. Explain the Causa Proxima in insurance claim settlement?
4. Explain the Insurance pricing and marketing?
5. Explain the health Insurance?

Publishing Company.
259
Financial Management In Insurance
Companies And Insurance
UNIT -XIV FINANCIAL MANAGEMENT
Ombudsman
IN INSURANCE COMPANIES AND
NOTES
INSURANCE OMBUDSMAN
14.1 Introduction
14.2 Importance of financial management in Insurance companies
14.3 Tools managing expenses in the Insurance companies
14.4 Modes used by the Insurance companies in channelizing their funds
14.5 Reinsurance
14.6 Areas of the application of Reinsurance
14.7 Information Technology in Insurance
14.8 Application of information technology in the Insurance Sector
14.9 Role of Insurance companies in Insurance Security
14.10 Contours of the future of Insurance in rural areas
14.11 Terminologies
14.1 INTRODUCTION
If you are not satisfied with the grievance redressal mechanism of your
insurer or bank, you can lodge a complaint with the relevant ombudsman. And
for property related issues, you can approach the Real Estate Regulatory
Authority that comes under the purview of the real estate Act.
ET Wealth lists the step by step process of how you can file a complaint
with a banking ombudsman, insurance ombudsman, and the Real Estate
Regulatory Authority.
1. Banking Ombudsman
Approach bank first and allow them a period of 30 days to respond
 If the bank does not respond or fails to meet your expectations, approach
the banking ombudsman (BO) office under whose ambit your case falls.
Now you can do so through cms.rbi.org.in.
 Do not delay escalation beyond a year of having received the bank's
response or a year and a month of having fi led the complaint
 You can file a written complaint after downloading the form available on
the Banking Ombudsman portal (https://bankingombudsman.rbi.org.in),
along with relevant documents
 You can also take the online route to register your grievance
(https://secweb. rbi.org.in/BO/precompltindex.htm)
 The BO will either facilitate a settlement through conciliation or pass an
award
 If ombudsman fails to meet expectations, approach the appellate authority
ƒÞƒnƒnIf all else fails, move the consumer courts
2. Insurance Ombudsman
Insurer should be first port of call; do not approach ombudsman offices
directly. The complaint should be in writing with supporting documents.
260
 If insurer fails to respond or response is unsatisfactory, escalate the Financial Management In Insurance
complaint through Irdai¡¦s integrated grievance management system Companies And Insurance Ombudsman
(igms.irda.gov.in) NOTES
 You can also approach ombudsman under whose jurisdiction your case
falls
 If you feel let down by ombudsman too, approach consumer courts
3. Real Estate Regulatory Authority (RERA)

Log on to the RERA authority's website and register as a complainant
 You will need to provide details like email ID and mobile number
 Go to Accounts >> My Profile and enter the details asked for
 Click on 'Complaint Details' tab and choose 'Add New Complaints'
 Provide details asked for, including project's registration numbers, and the
respondent's antecedents
 Upload the relevant project-related documents and share the facts of your
case
 Specify the nature of relief you are seeking, explaining the grounds and the
relevant legal provisions
 Make a declaration of having provided accurate information and pay the
requisite fees online
 RERA adjudicating officer will hear the case and issue an order
 If you are dissatisfied, you can approach the appellate tribunal within 60
days from receipt of the order; next stop is the High Court.
14.2 IMPORTANCE OF FINANCIAL MANAGEMENT IN

INSURANCE COMPANIES
 It's important to have business insurance because the financial

consequences of a potential mishap could easily wipe out the
assets of a small business. Insurance provides protection in case
customers or passersby experience harm at the hands of your company,
or if your company is harmed by an incident such as a fire.
 In addition to protecting yourself, it's also important to have business

insurance so you can protect others. If you own a food business and a
customer becomes ill after eating one of your products or if you own a
delivery business and one of your vehicles hits a pedestrian, you need
to be able to pay for the damage you've caused.
14.3 TOOLS OF MANAGING EXPENSES IN THE

INSURANCE COMPANIES
The Insurance Regulatory and Development Authority of India (Irdai) has Self-Instructional Material
brought out a new set of norms on expenses of management for general
261
Financial Management In Insurance insurance and standalone health insurance companies, based on the line of
Companies And Insurance business. These take effect from this financial year.
Ombudsman
NOTES
In the segments of motor, health retail and miscellaneous retail (like public
liability), the expenses allowed are higher. There would be penalties if the
expense limits are exceeded.
Expenses of management would include all those in the nature of operating

expenses — commission, brokerage, remuneration to agents and to
intermediaries, charged to the revenue account.
No general insurance or health insurance business can exceed the amount

stipulated. In motor insurance, the allowable expense is 37.5 per cent of gross
premium for the first Rs 500 crore. It is 32.5 per cent for the next Rs 250 crore
and 30 per cent for the balance.
Any violation of the limits on an overall basis could even lead to restriction on
performance incentives for the managing director, chief executive officer,
wholetime directors and key management. Also, possible restrictions on
opening of new places of business and removal of managerial personnel and/or
appointment of administrator.
Irdai said it may also direct the insurer to not underwrite new business in one
or more segments in case of persistent violation of these regulations. It has
also asked insurers to ensure that at the segment level, the deviation between
actual incurred claim ratio and that projected at the time of filing of a product
be not more than 10 per cent.
If there be a deviation higher than this over a period of three years, an

exception report and a plan of action, specifying the reasons, has to be sent to
it.
14.4 MODES USED BY THE INSURANCE COMPANIES IN

CHANNELIZING THEIR FUNDS
When you purchase life insurance, you agree to pay a specific sum of
money, or premium, to the insurance provider at regular intervals. The
frequency or period of your payments depends on your mode of premium.
Most insurance providers offer several modes of premium, the most common
of which come annually, semi-annually, quarterly or monthly.
Determining Mode of Premium
The mode of premium payment is not the same as your mode of payment.
Your mode of premium payment determines the frequency with which
262
payments are made. It also determines the way in which you make payments, Financial Management In Insurance
Companies And Insurance Ombudsman
such as by cash, check, credit card or another option.
NOTES
Policyholders select their mode of premium when they sign their policy. It is
common practice to make your first premium payment to activate the coverage
on your policy. The insurance agent should highlight the possible frequency of
premium payments before you sign your policy.
Many insurers allow policyholders to change the mode of premium to a higher

or lower frequency during the life of the policy. Dates of change normally
coincide with pre-existing payment dates, meaning if you want to change from
a semi-annual to a monthly premium, then you will likely make your first
monthly payment on the date of your next scheduled semi-annual payment.
The payment schedule would switch to monthly from that point forward.
Why Mode of Premium Matters
As a general rule, more frequent modes of premium payments tend to cost less
per payment. However, more frequent payments also tend to cost more in
total. For instance, an insurer might charge you $150 per month, $400 per
quarter, $700 per semi-annual payment or $1,250 per year for your policy. The
up-front costs of the annual payment are much higher than the others, but it is
actually the cheapest mode for an entire year's worth of coverage. The
monthly, quarterly and semi-annual modes would cost $1,800, $1,600 or
$1,400 per year, respectively, versus the $1,250 annual payment.
The reason more frequent payment modes tend to cost more is that insurance
companies need to offset the uncertainty and higher collection costs. Imagine
you are the insurance provider. You are very likely to place added value on
receiving a full year's worth of payments up front, because this means you
have to worry about fewer late or missing payments in the future. Higher
payments improve cash flow right away and make it easier to predict your
future financial status. You can also use the extra money to make larger,
earlier investments.
Think of modes of payments like the payments on a loan. In a loan scenario,

borrowers who take a long time to pay back their principal usually end up
paying more in interest. Similarly, the longer it takes a policyholder to pay the
full cost of his annual life insurance coverage, the more it costs. Life insurance
is not a debt and policyholders are not borrowers, but the relationships
between time and cost of payment are comparable. Some insurance providers
even offer an annual percentage rate (APR) calculator on their website to see
how mode of premium payment influences the final cost.
263
Financial Management In Insurance Picking Your Mode of Premium
Companies And Insurance To secure the lowest overall cost for your life insurance, pick a less frequent
Ombudsman mode of premium payment. Ignoring other considerations, the annual costs of
NOTES less frequent payment modes are often substantially discounted, compared to
more frequent modes.
Do not forget to consider two factors: opportunity costs and liquidity. Your
liquidity is the amount of cash you have ready to make premium payments. If
you only have $50 in the bank, it is probably unwise to choose a $1,250 annual
premium payment option.
Even if you have the money for an annual payment, the opportunity cost of
choosing a $1,250 annual payment over a $150 monthly payment is everything
else you could have done with $1,100 in the short term. It may be possible to
invest that money and earn more than the added cost of the monthly payment
option.
Another consideration is that, if you terminate your policy early, many

insurance providers do not refund portions of premiums already paid. Suppose
you purchase life insurance and pay an annual premium on Jan. 10.
Unfortunately, your insurable interests change midyear, and you decide to
terminate your contract on July 10. Even though you only used 50% of your
annual coverage, your insurance provider does not have to refund you the
remaining 50%.
14.5 RE INSURANCE
Reinsurance is a form of insurance purchased by insurance companies in
order to mitigate risk. Essentially, reinsurance can limit the amount of loss an
insurer can potentially suffer. In other words, it protects insurance companies
from financial ruin, thereby protecting the companies' customers from
uncovered losses.
Re insurance in the insurance sector
 Reinsurance occurs when multiple insurance companies share risk by
purchasing insurance policies from other insurers to limit their own
total loss in case of disaster.
 By spreading risk, an insurance company takes on clients whose
coverage would be too great of a burden for the single insurance
company to handle alone.
 Premiums paid by the insured is typically shared by all of the insurance
companies involved.
 U.S. regulations require reinsurers to be financially solvent so they can
meet their obligations to ceding insure.
264
14. 6 AREAS OF THE APPLICATION OF REINSURANCE Financial Management In Insurance
Reinsurance in Fire Insurance Business
The surplus treaty is most widely used. Quota share treaties are used by the NOTES
newly established companies or with regard to the new business of established

companies.
The service of facultative reinsurance is also occasionally utilized, particularly
with regard to bigger risks, wher
Excess of loss treaties is utilized for catastrophe risks or where there is a

possibility of accumulation of risks leading to conflagration fire, or where fire
policies provide additional covers such as cyclone, hurricane flood etc.
Reinsurance in Marine and Aviation Insurance Business

Quota share and surplus are quite common even though the facultative method
is still very widely used.
Excess of loss and stop loss arrangements are also made in catastrophe
hazards, such as general average, the total loss to hull etc.
Reinsurance in Accident Insurance Business

All types of treaties are commonly used.
In cases of hazardous elements or where accumulation and catastrophe are
apprehended or in cases of liability insurances, an excess of loss or stop loss is
most favored. Pools are considered in special types of risks, such as crop
insurance.
The facultative method is not much used unless the business is beyond the
absorption capacity of the treaty.
The facultative method is also used when the ceding company does not wish to
interest the treaties for some obvious reasons.
Reinsurance in Life Insurance Business

The most commonly used type is the surplus treaty. The facultative cover is
also still in use although in a very limited degree.
Pools are used for various types of impaired lives, such as lives suffering from
heart disease, blood pressure, diabetes etc.
14.7 INFORMATION TECHNOLOGY IN INSURANCE

Information technology has impacted our lives and businesses. Insurance is no
different. If we have to assess the scope of technology in this business , we
need to understand its impact across the value chain.
Every business is dependent on customers. Satisfying their needs through

products and services is their main objective. Insurers are better positioned
today by using technology for lead generation, requirement gathering/analysis,
specific targeting based on sagacity segmentation, and fulfilment through Self-Instructional Material
paperless, online purchase process. Customers are able to buy insurance
265
Financial Management In Insurance suiting to their requirements with tremendous ease and convenience using
Companies And Insurance technology.
Ombudsman
The purchase decision above is highly influenced by the knowledge customers
NOTES
are gathering from the internet. Online comparison engines are offering wide
array of options and are enriching customers with requisite knowledge. Hence,
taking a decision even for a complex product like insurance has become quiet
easy.
Policy issuance and management has become very convenient with technology
has enabled insurers to issue policies on a real-time basis. Claims management
has also been impacted with technological advancements like e-filling, online
upload of documents, approval controls internally with technology based
work-flow models and transfer of claim proceeds online using internet
banking. It is uncommon now to get your claim amount by any other means
than a wire transfer.
Technology has helped insurers achieve operational efficiency in every aspect

of the value chain.
Insurance business is highly data centric. It captures huge amount of data at

various stages in the value chain. Technology is going to play a dominant role
in data analytics to provide a competitive advantage for business. Please also
refer my blog on ―insurtech and broking‖ for more details.
14.8 APPLICATION OF INFORMATION TECHNOLOGY
IN THE INSURANCE SECTOR
Life Insurance Applications
(a) Life Administration Module: ¾ Policy Servicing of existing policies: The

existing policyholders may require various services after taking the insurance
policy For eg: Change of Nominee, Change of address, of change in mode of
payment, assignment of the policy, Claims payment etc. These changes or
payment can be made very easily through computers.
New Business: As and when the new business is acquired the initial data of a
policyholder is quite large and as stated above the data is to be maintained for
longer period therefore storage of data in computer is useful ¾ Renewal
notice/Billing: Renewal notices to be sent for the payment of the premium and
with a no. of policyholders are very large and the renewal is on different dates.
The computer generates the renewal notice at very high speed and does it
automatically. The inter-mediatory bills are generated very fast and quickly ¾
Loans: The Policyholders do take loans and the insurer has to maintain the
records as the insurer has to recover the loan from the policyholder along with
the interest. The recovery of loan may be regular or recovery at the time of
payment of claim
(b) Statistics and MIS Claims: As the data in computer can be stored for longer
period the data may be useful for the insurer to prepare the type of policies are
266
sold in the market and type of claim arisen in the particular region. These Financial Management In Insurance
types of data will be useful for management to take any decision. Companies And Insurance Ombudsman
NOTES
(c) Archiving of historical data and imaging Systems: As the past data is
available with life insurer therefore they can design the new products and price
them accordingly.
General Insurance Applications
a) Front Office System
Policy Management and underwriting system
Co-insurance Reinsurance
Claims Management System
Financial‘ Accounts and Audit
Statistics and MIS
b) Reinsurance System .
Inward insurance
Outward Insurance
Reinsurance Account MIS.
c) Risk Management System
Other Applications
a) Investment
Term Loan . ..
Money market .
Investment Accounts .
Market Operations
(b) Personnel System.
Payroll system
Performance Appraisals
Attendance and leave system
267
Financial Management In Insurance PF .
Ombudsman (C) Office Services
NOTES
Purchases
Inventory
Tours and Travels etc
Corporate Accounting System
General Insurance Applications.

Let us discuss about Front Office System In the General Insurance Industry.
These applications can be written in any language and they may differ from
Office to Office of The different Insurance Companies. The software namely
GENESIS~ is being used by General Insurance Companies. On-line Front
Office System is the first step towards computerization of any insurance
Company and a welldesigned system at the front offices has following
advantages to the company.
To carry out business transactions efficiently.
Easy to handle growing volume of business and variety of business Efficient

customer services.
Reduction in office expenses z MIS for the Branch Managers . A good Front
Office System should allow Insurer, Underwriters, and agents to manage the
day to day operations of the office. The system should be capable of
administering all stages of policy development from questions to new
business, through adjustments by way of endorsements and renewals of
policies. Coinsurance, Claims re-insurance and all accounting functions. The
main components of the Front office System are given below: ¾ Policy
Management including Underwriting (Policy acceptance and printing and
customer services) ¾ co-insurance ¾ Re-insurance. ¾ Claims. ¾ Statistics &
MIS ¾ Accounts
14.9 ROLE OF INSURANCE COMPANIES IN INSURANCE
SECURITY
Insurance companies are a special type of financial institution that deals in the
business of managing risk. A corporation periodically gives them money and,
in return, they promise to pay for the losses the corporation incurs if some
unfortunate event occurs, causing damage to the well-being of the
organization.
Here are a few terms you need to know when considering insurance
companies:
268
Financial Management In Insurance
 Deductible: The amount that the insured must pay before the insurer Companies And Insurance Ombudsman
will pay anything NOTES
 Premium: The periodic payments the insured makes to ensure

coverage
 Co-pay: An expense that the insured pays when sharing the cost with
the insurer
 Indemnify: A promise to compensate one for losses experienced
 Claim: The act of reporting an insurable incident to request that the

insurer pay for coverage
 Benefits: The money the insured receives from the insurance company
when something goes wrong
14.10 CONTOURS OF THE FUTURE OF INSURANCE IN

RURAL AREAS
The rural market in India, constituting 742 million people, is by far the
largest potential market in the world. The annual rural household income of Rs
56,630 (as per NCAER, IMDR 2002) coupled with changing rural aspirations
in consumption patterns and lifestyles unfolds tremendous opportunities for
rural marketing. However, some of the issues that seem to be hindering large-
scale advent in the rural markets are lack of understanding of rural customer,
inadequate data on rural markets, poor infrastructure, low levels of literacy and
poor reach of mass media.
The insurance sector, per se, also did not make much headway in the rural
sector. The insurance market in India, liberalised in 2000 with the advent of
private insurance companies in November 2000 has not expanded in real terms
beyond the urban domain. The penetration of insurance in India is pitifully low
and if we aim for the modest target of insurance premium becoming 5% of
GDP, insurance companies need to look at newer market segments rather than
fight for a share in the same pie.
There exists a vast potential in the rural areas where more than 70% of our
population lives. But it is common perception and belief amongst the
insurance companies that it is expensive to do business in rural areas. Most
269
Financial Management In Insurance companies are focusing only on meeting regulatory requirements from rural
Ombudsman
areas and dont see them as commercially viable rural business opportunities,
NOTES
waiting to be exploited.
14.11 TERMINOLOGIES
1) Ombudsman 2) Financial management 3) Reinsurance
4) Infromation Technology 5) Secruity 6) Rural area
1. Explain the importance of financial management in insurance
companies?
2. Explain the role of managing expenses in the insurance companies?
3. State the insurance companies in channelizing their funds?
4. Bringout the areas of the application of reinsurance?
5. Explain the contours of the future of insurance in rural areas?

Publishing Company.
270
MODEL QUESTIONS PAPER Financial Management In Insurance
33544 - BANKING AND INSURANCE NOTES
M.COM Degree Examination

Fourth Semester
PART –A (10x2=20)
Answer All the Questions
1. Define Banking.
2. What is Recurring deposit?
3. Define Conversion.
4.What is Executor?
5. Define Insurance.
6. What is Non-Life Insurance?
7. What is Product Design?
8. Define Underwriter.
9. What is Claims Management?
10. Define Reinsurance
PART – B ( 5x5=25)
Answer All the Questions
11. a. Explain the Relationship between Banker and Customer?
(or)
b. State the Entries Favorable to the Customer.
12. a. Bring out the Payment in due course?
(or)
b. Explain the Basis of negligence?
13. a. Explain the Subsidiary Services?
(or)
b. What is Significance of insurance and risk.
14. a. Explain the importance of the Privatization of Insurance industry
(or)
b. Bring out the Framework for IRDA.
15. a. Explain the role of riders in insurance policies?
(or)
b. Explain the need for insurance underwriting.
PART – (3x10=30)
Answer any THREE Questions
16. Explain the Circumstances under which a cheque can be dishonored?
17. Discuss the role of financial reporting in managing insurance operations.
18. Explain the critical aspects of aviation industry in the country.
19. Explain the product development in the life and Non- life insurance sectors in
India.
20. What is Ombudsman? Explain the importance of financial management in
Insurance Companies.
271

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ALAGAPPA UNIVERSITY

[ACCREDITED WITH ‘A+’ Grade by NAAC (CGPA:3.64) in the Third Cycle

KARAIKUDI – 630 003

DIRECTORATE OF DISTANCE EDUCATION

33544 - BANKING AND INSURANCE

Copy Right Reserved For Private use only

“The Copyright shall be vested with Alagappa University”

1.2 ORIGIN OF BANKING

1.4 BANKING AND OTHER BUSINESS

necessary to say that the keeping of an ordinary banking account is NOTES

essential to constitute a person customer of bank.‖ It is not prudent to call

Modern view- Single Transaction

To sum up, the following are the prerequisites to constitute a person

(a) He must have some sort of an account.

1.7 GENERAL RELATIONSHIP

When a banker receives deposits from the customers, he is not

A banker as an agent: The agent - principal relationship is said to

lation of a banker and a customer is primarily that of a debtor and a NOTES

creditor, the respective position being determined by the existing state of

The banker as a privileged debtor: A banker, as a debtor is not the

A banker as a creditor: The debtor-creditor relationship holds good

1.8 SPECIAL RELATIONSHIP

―The drawee of a cheque having sufficient funds of the drawer in his

(a) The availability of money in the account of the Customer: A

Overriding the Obligation

When a banker overrides his statutory obligation and dishonours a

may fail to honour a cheque by over-sight. It amounts to saying that the

Lord Teterden rightly observed ―It is discredit to a person and there-

When a cheque is wrongfully dishonoured, a banker is liable only to

Ordinary Damage Vs. Special Damage

A banker is always liable to pay damages for wrongful dishonour of

(ii) an action brought forth by a businessman having sufficient funds for

A banker is primarily concerned with the second case and he has

Case Law Illustration

dishonoured a cheque for a small sum of £ 2-15sh by mistake. Taking into

In Canara Bank Vs. I. V. Rajagopal, the banker had dishonoured by

Thus, generally a non-trader customer is not entitled to recover sub-

Is there any obligation to pay bills? Eventhough there is no statutory

1.9 BANKER’S LIEN

is more extensive than that of a particular lien.

A Banker‘s lien is always a general lien. A banker has a right to

Circumstances for Exercising Lien

c) The possession should be lawfully obtained in his capacity as a

d) The property should not be entrusted to the banker for a specific

Lien can not go beyond the agreement

In C. R. Narasimha Setty Vs. Conor a Bank (1990) the plaintiff Mr.

Self- Instructional Material

Agiun. in K Jagdishwar Reddy Vs. Andhra Bank,(1988) it was

Again, In Syndicate Bank Vs. Vijayakumar (1992), it was held that

A Banker’s Lien as an Implied Pledge

It must be noted that a banker‘s lien is generally described as an

Lien on Negotiable and Quasi Negotiable Securities

A banker has a lien on all securities entrusted to him in the capacity

No Lien on Documents Entrusted for a Specific Purpose

Lien on Bonds and Coupons

Negative Lien: It is otherwise called non-possessory lien. In the case

1.10 BANKER’S DUTY TO MAINTAIN SECRECY OF

account to third persons.

The disclosure of the financial position of a customer may affect his