Chapter 5 and 6

MAJOR CLASSIFICATION OF INSURANCE

 MAJOR CLASSIFICATION OF INSURANCE
A. Life and Health Insurance
B. Non life insurance: Property and Liability
A. Life Insurance
• As a social and economic device life insurance is a method by which
a group of people may cooperate to ameliorate the loss resulting
from the premature death of members of the group.
• Life insurance is basically different from non – life insurance in its
working. because, most non – life insurance policies that indemnify
the insured of the subject matter but life insurance does not
attempt to bring back the subject matter lost.
 Cont,,,
• The main purpose of life insurance policy is to protect the
dependents of the insured in the case of accidental death of the
insured by providing them with financial compensation amounting
to the sum insured (the policy’s face value or amount).
• Life insurance pays death benefits to the designated beneficiaries
when the insured dies. The death benefits are designed to pay for
funeral expenses, uninsured medical bills, estate taxes, and other
expenses are as a result of death.
 Life Insurance Underwriting

• Underwriting: is a process of assessing an individual’s anticipated

mortality - that is the relative incidence of death among a given
group of or morbidity – that is the relative incidence of sickness or
disease among a given group of people in order to determine:

(1) whether to approve that person for insurance coverage and if so,
(2) the risk classification to which the proposed insured should be
assigned”.
 Factors Considered in Life Insurance Underwriting
• in life insurance underwriting the factors that are considered or
examined are those that influence mortality. These factors include the
followings:-
• Age: The death or illness generally increases with an increase in age.
• Gender (Sex): empirical studies indicate that women are generally live
longer than men.
• Current Physical Condition: refers to the proposed insured’s current
physical and health conditions regarding pulse rate, heart condition,
blood pressure, lung cancer, nervous system etc.
• Personal Medical Condition: the insured’s past medical history is
examined to check for any previous illness that may possibly reoccur in
the future.
 Cont,,,
• Family Medical History: the medical history for the insured family is
examined to discover any possible hereditary diseases or deficiencies.
• Occupation: can affect the insured’s chance of suffering accidents of
premature death.
• Insurable Interest: The underwriter must make sure that there is an
insurable interest in applying for life insurance cover. This involves
identifying any relationship between the proposed insured and named
beneficiary.
• Moral Hazard: is that the proposed insured is making a deliberate attempt
to conceal or misrepresent information that might result in an unfavorable
underwriting decision.
 Cont,,,
• Financial Position: the proposed insured’s financial position or his
level of income has become an important factor to consider in life
insurance underwriting. Particularly, close examination is to be made
when the amount of cover is appreciable large.
• Habits: such as drug or alcohol consumption and smoking could lead
to accident by retarding a person’s judgment, reducing flexibility and
damaging his reflex system.
• Avocation: is any activity that the insured undertake outside his
regular occupation during his spare time. It includes certain hobbies
like sport activities, gardening etc.
 Sources of Information for Underwriting
• The assessment and evaluation of the risk is based on the
information collected by the underwriter.
• Pertinent information needed for underwriting purpose is obtained
from the following sources:
a. Proposal form (a formal application document that an
individual fills out when applying for an insurance policy)
b. Medical report
c. Attending physicians statement
d. Agents/salesman’s report
e. Questionnaires and interviews
 Underwriting Guidelines
• It is widely accepted that “one of the most important prerequisite to
good underwriting is consistency” this means that the underwriter
must evaluate each proposed insured in line with a given
framework of standard procedure of evaluations.
• Life insurance is assessing the risk bought by a proposed insured by
considering two guidelines:
1. Numerical rating system
2. Underwriting manuals
• Numerical Rating System: is a method of assigning numerical values
for individuals proposed insured’s based on the degree of risk they
brings in to the group.
• The underwriter does by giving positive or negative values to the
various characteristics of the proposed insured depending on their
impact on the person’s mortality risk.
• After due evaluation of each factor, assigns plus value to those
characteristics that have a negative effect on mortality (increase an
average risk) and identifies them as debits. On the other hand, those
characteristics that have favorable impact on mortality (reduce an
average risk) are given minus value called credits.
• Underwriting Manuals: is a manual that contains information
on various types of common medical impairments such as:
 blood pressure,
heart diseases,
diabetes,
respiratory diseases,
mental disorder,
infectious diseases and others.
• It is a manual used as a guideline in assessing and rating the
risk brought by a proposed insured. The manual first describes
the nature of each type of impairment and then provides the
recommended underwriting requirements.
 Underwriting Decisions
• On the basis of the information collected from the various sources
and the subsequent analysis made that the underwriter assesses and
evaluates the risk and accordingly makes a decisions.
• There are four options/decision:
1. To accept the risk and issue an insurance policy immediately
2. To accept the risk immediately but with adjustments for substandard
factors
3. To postpone the underwriting decision until information ordered is received
or until an extra risk of temporary nature (pregnancy, child birth) is
expected to lapse.
4. Either to decline or reject the risk
 Types of Life Insurance Policies

• Life insurance policies can be classified:

a. Term Insurance
b. Whole (Cash Value ) Life Insurance.
 1. Term Insurance
• It provides temporary protection
• It is a contract that furnishes life insurance protections for a limited number of
years,
• the face value of the policy being payable only if death occurs during the
stipulated term
• nothing being paid in case of survival.
Types of Term Insurance
1. Yearly renewable term
2. 5 -, 10 -,15 -, or 20 – years term
3. Term to age 65
4. Decreasing term
5. Reentry term
 Cont,,,
• Yearly renewable term insurance
 issued for a one – year period and the policy owner can renew for successive one –
year periods to some stated age.
Premiums are increase with age at each renewal date.
Most yearly renewable term policies also allow the policy owner to convert to a cash
value policy (is the portion of a permanent life insurance policy that earns interest and
can be accessed during your lifetime to fund retirement, cover premiums, increase a death
benefit or for other purposes) without evidence of insurability.
• 5, 10, 15, or 20 years or for longer periods. The premiums paid during
the term period are level but they increase when the policy is renewed.
• A term to age 65 policy provides protection to age 65 at which time the
policy expires. The policy can be converted to a permanent plan of insurance
but the decision to convert must be exercised before age 65.
 Cont,,,
• Decreasing term insurance
face amount gradually declines each year.
But, the premium is level throughout the period.
In some policies, the premiums are structured so that the policy is
fully paid for a few years before the coverage expires.
For example, a 20 year decreasing term policy may require premium
payment for 15 years.
 Cont,,,
• Reentry term
 also called revertible term
 renewal premiums are based on select (lower) mortality rates if the insured can
periodically demonstrate acceptable evidence of insurability.
 Select mortality rates are based on the mortality experience of recently insured lives.
 However, to remain on the low rate schedule, the insured must periodically show that
he/she is in good health and is still insurable.
 The rates are substantially increased if the insured cannot provide satisfactory
evidence of insurability.
 Cont,,,
• Basic Characteristics of Term Insurance
1. The period of protection is temporary
2. Most term insurance policies are renewable
3. Term insurance policies have no cash value or saving elements.
4. Most term insurance policies are also convertible
 Cont,,,
• There are two methods for converting a term policy:
a. The Attained Age Method–the premium charged is based on the insured’s
attained age at the time of conversion.
b. The Original Age Method– the premium charged is based on the insured’s
original age when the term insurance was first purchased.
 2. Whole Life Insurance
• It is a cash value policy that provides life time protection or
• it provides for the payment of the face value up on the death of the insured,
regardless of when it may occur.
• It promise to pay the beneficiary whenever death occurs.
• It also promises to pay if the insured’s reaches age 100.
• it has also a saving element; builds cash values and life time protection
• The principal types of whole life insurance policies are:
a. Ordinary Life Insurance(OLI)
b. Limited Payment Life Insurance(LPLI)
 Ordinary Life Insurance
• It also called straight life and continuous premium whole life
insurance
• provides life time protection to age 100.
• If the insured is still alive at age 100, the face value (amount) of the
insurance is paid to the policy owner at that time.
• premiums do not increase from year to year but remains level
throughout the premium paying period.
• it has a saving element called a cash surrender value. The cash
values are due to the overpayment of insurance premiums during
the early years.
 Limited Payment Life Insurance

• the insured has life time protection.

• The premiums are level but they are paid only for certain
period.

• For example, Mr. Chala, age 25, may purchase a 20 year limited
payment policy in the amount of birr 25,000. After 20 years, the
policy is completely paid up and no additional premiums are
required.
 Other Types of Life Insurance
• Some policies are designed to meet special needs or have unique features.
Others combine term insurance and cash value life insurance to meet these
needs.
1. Endowment Insurance: - pays the face amount of insurance if the insured
dies within a specified period; if the insured survives to the end of endowment
period, the face value is paid to policy owner at that time.
 For example, if Kebede, age 30, purchased a 20 years endowment policy and
died any time within 20 years period, the face value would be paid to his
beneficiary. If he survives to the end of the period, the face amount would be paid
to him.
 Endowment insurance has a cash value and the policy owner is paid the
contract’s face amount at the end of the protection period if the insured is still
alive.
 Cont,,,
2. Modified Life Insurance: - is a whole life insurance in which premiums
are lower than for the first three to five years and higher thereafter. The
initial premiums is slightly higher than for the term insurance, but
considerably lower than for an ordinary life policy issued at the same age.
3. Juvenile Life Insurance: -refers to life insurance purchased by a parent
or adult on the lives children younger than a certain age such as age 14 or 15.
Insurers generally require the child to be at least one month old before he/she
can be insured. Some insurers, however, will insure a child as young as one
day old.
 Cont,,,
4. Industrial Life Insurance
sometimes called debit insurance
 it is issued in small amounts and the premiums are payable weekly or
monthly.
 In the past, the premiums were collected at the insured’s home by an
agent of the company.
More than nine out of ten such policies were cash value.
In recent years, it has also been called home service life insurance,
reflecting the fact that individual policies are serviced by agents who
call at the policy owner’s home to collect the premiums.
 Cont,,,
5. Group Life Insurance
• is a type of insurance that provides life insurance on a group of people in a
single master contract.
• Physical examinations are not required and certificate of insurance are issued
as evidence of insurance.
• Most group life insurance contracts provide terms insurance coverage.
 Rate Making in Life Insurance (Premium
Determination)
• Insurance pricing for life insurance is performed through three methods:

a. Net Single Premium

b. Net Annual Premium
c. Gross Annual Premium
 1. Net Single Premium
• life insurance policies can be purchased with a single premium or with
annual, semi – annual, quarterly or monthly premiums.
• the net single premium forms the foundation for the calculation of all life
insurance premiums.
• NSP is the present value of the future death benefits. It is the amount, which
together with compound interest, will be sufficient to pay all death claims.
• In calculating the NSP, only mortality and investment income are considered.
• Insurance company expenses or the loading elements are considered later,
when the gross premium is calculated.
 Cont,,,
The NSP is based on the three basic assumptions:
1. Premiums are paid at the beginning of the policy year
2. Death claims are paid at the end of the policy year
3. The death rate is uniform throughout the year
• Additional Assumptions:
a. life insurers generally develop their own mortality data.
b. The amount needed to pay death benefits is discounted for compound
interest at given interest rate.
 Term Insurance
• Calculate the NSP, Assume according to Commissioners Standard Ordinary
(CSO) mortality table out of 10 million males alive at age zero, 9,210,289 are
still alive at the beginning of age 45. Africa Insurance Company has issued a
1,000 birr amount for five year term insurance policy. The death benefit is to
be paid at the end the year and discounted at 5%.

NSP at specific age = P. death x amount of insurance x PV of 1 birr at given Interest rate

Probability of Death =
 Cont,,,
Age Probability of death Amount of Present value Cost of insurance
insurance of Birr 1 of
5%
45 x 1,000 x 0.9524 = 4.33(Year 1)
46 x 1,000 x 0.9070 = 4.44 (Year 2)
47 x 1,000 x 0.8638 = 4.55 (Year 3)

48 x 1,000 x 0.8227 = 4.65( Year 4)

49 x 1,000 x 0.7835 = 4.77 (Year 5)

NSP = 22.74 Birr
 Ordinary Life Insurance
in calculating the NSP for an ordinary life policy is the same method desired
earlier for the five year term policy is used except that the calculation are
carried out to the end of the mortality table (age 99).
Thus, in our illustration, the NSP for a 1,000 Birr ordinary life insurance
policy issued at age 45 would be 270.84 Birr.
 2. Net Annual Level Premium (NALP)
• Most life insurance policies are not purchased with a single premium because
of the large amount of cash required.
• Consumers generally find it more convenient to pay for their insurance
installment payments.
• If premiums are paid annually, the net single premium must be converted in
to a Net Annual Level Premium (NALP)
• It is determined by dividing the NSP by the present value of a life annuity
due (PVLAD) of 1 Birr for the premium paying period.
 Cont,,,

NALP =

• PVLAD of 1 Birr for the premium paying period = P. Survival x 1 birr pay’t
due immediately x PV of 1 birr

• P. Survival =
 Term Insurance
• E.g. Calculate the NALP for a five year term insurance policy with
the amount of 1,000 Birr issued at age 45 and a 1 Birr payment is
due immediately.
• By referring to the 1980 CSO mortality table, out of 10 million males alive at
age zero, 9,210,289 are still alive at the beginning of age 45 and the market
interest rate is discounted at 5%.
 Cont,,,
• Age 45 1 Birr due immediately = 1 Birr

PVLAD of 1 Birr = 4.503 Birr

 Therefore, The PV of a five year temporary life annuity due of 1 Birr at age
45 is 4.50 Birr
Cont,,,
 Ordinary Life Insurance
• The NALP for a 1,000 Birr ordinary life insurance policy issued at age
45 is calculated in a similar manner.
• The same procedure is used except that the calculations are extended to
the end of the mortality table.
• The PV of a whole life annuity due of 1 Birr for age 45 through 99 must
be calculated.
• The PV of a whole life annuity due of 1 Birr at age 45 is 15.312 Birr.
• The NSP (270.84 Birr) is then divided by the present value of whole life
annuity due of 1 Birr at age 45 (15.312 Birr) and the NALP is 17.69 Birr.
 Gross Premium
• It is determined by adding a loading allowance to the net annual level
premium.
• The loading must cover all operating expenses, provides a margin for
contingencies and in the case of stock life insurance, provides for a
contribution to profits.
• Three major types of expenses are reflected in the loading allowance:
a. Production expenses
b. Distribution expenses
c. Maintenance expenses
 Cont,,,
a. Production expenses:- are the expense insured before the agent deliver the
policy, such as policy printing cost, underwriting expenses and the cost of
medical examination.
b. Distribution expenses: - are largely selling expenses, such as the first year
commission, advertising and agency allowance.
c. Maintenance expenses: -are the expenses insured after the policy is issued,
such as renewal commissions, cost of collecting renewal premiums and state
premium taxes.
• Exhibit
• Commissioners 1980 Standard Ordinary Mortality Table, Male Lives
 Age at Number Living Number Ate at Number Living Number
Beginning of Beginning of Dying During Beginning at Beginning of Dying during
of Year Designated Designated of Year Designated year Designated
year Year year
0 10,000,000 41,800 25 9,663,007 17,104
1 9,958,200 10,655 26 9,645,903 16,687
2 9,947,545 9,848 27 9,629,216 16,466
3 9,937,697 9,739 28 9,612,750 16,342
4 9,927,958 9,432 29 9,596,408 16,410
5 9,918,526 8,927 30 9,579,998 16,573
6 9,909,599 8,522 31 9,563,425 17,023
7 9,901,077 7,921 32 9,546,402 17,470
8 9,893,156 7,519 33 9,528,932 18,200
9 9,885,637 7,315 34 9,510,732 19,021
10 9,878,322 7,211 35 9,491,711 20,028
11 9,871,111 7,601 36 9,471,683 21,217
12 9,863,510 8,384 37 9,450,466 22,681
13 9,855,126 9,757 38 9,427,785 24,324
14 9,845,369 11,322 39 9,403,461 26,236
15 9,834,047 13,079 40 9,377,225 28,319
16 9,820,968 14,830 41 9,348,906 30,758
17 9,806,138 16,376 42 9,318,148 33,173
18 9,789,762 17,426 43 9,284,975 35,933
19 9,772,336 18,177 44 9,249,042 38,753
20 9,754,159 18,533 45 0,210,289 41,907
21 9,735,626 18,595 46 9,168,382 45,108
22 9,717,031 18,365 47 9,123,274 48,536
23 9,698,666 18,040 48 9,074,738 52,089
24 9,680,626 17,619 49 9,022,649 56,031
 Health Insurance
• Health insurance is the type of insurance that provides identification for
expenditure and loss of income resulting from loss of health.
• Health insurance is an insurance against loss by sickness or bodily injury.
• Health insurance sells a wide variety of individual health insurance coverage.
• The most important individual coverage includes the following:
A. Medical expenses insurance
a. Hospital insurance
b. Surgical insurance
c. Physician’s expenses insurance
d. Major medical insurance
B. Disability income insurance: provides periodic income payments to the
insured while he/she is unable to work as a result of sickness or injury. Coverage
 B. NON-LIFE INSURANCE POLICES

PROPERTY AND LIABILITY INSURANCE

1. MOTOR INSURANCE
• It is a major class of insurance providing the highest insurance premiums to
insurance companies.
• It is also relatively a complicated class of insurance due to the various types
of motor vehicles involved. Generally, two types of policies are issued:
a. private Vehicle Policy and
b. Commercial Vehicles Policy.
 Cont,,,
• Furthermore, the policy provides two types of insurance cover:
Comprehensive Cover which indemnifies the insured for losses/ damage
caused by a wide range of perils; and
Third Party Liability which gives cover against third party liability death
or bodily injury to third parties or/and damages caused to the property of
such persons in the event of an accident caused with the use of the insured
motor vehicle.
 2. MARINE INSURANCE

• It covers all types of goods transported by sea or inland waterways

including land transit by road or rail incidental.
• It can also cover items sent by ordinary or registered mail, airmail and
parcel post.
• The goods can be protected by ocean marine and inland marine contracts.
• Marine insurance indemnifies the insured for loss of or damages to the
property insured arising out of sea perils such as storm, shipwreck,
stranding, collision, fire, explosion, and the like.
• The policy contains such information as: named and address of the
insured, name of the vessel, period of insurance, the subject-matter
insured, the agreed insurable value and the amount of premium.
 Cont…
A. Ocean marine insurance: - provides protection for goods transported over
water.
 Major types of coverage:
1. The Vessel (hull insurance):- covers physical damages to the ship or vessel.
2. Cargo insurance: - covers the shipper of the goods if the goods are damaged
or lost. The policy can be written to cover a single shipment.
3. Freight insurance: - indemnifies the ship-owner for loss of earning if the
goods are damaged or lost and are not delivered.
4. Protection and indemnify (P and I) insurance: - usually written as a separate
contract that provides comprehensive liability insurance for property
damaged or bodily injury to a third party.
 Cont…

B. Inland marine insurance: - is a marine insurance that

provides protection for goods shipped on land including imports,
exports, domestic shipment and means of transportation,
personal property, floater risks and commercial property floater
risks.
The policy duration generally extends from the time the goods
leave the warehouse or origin and terminates on delivery to the
final warehouses at the destinations.
 3. FIRE AND LIGHTNING POLICY

• This policy provides indemnification to the insured for loss or damages to

property by fire or lightning at any time during the tenure of the policy.
• Indemnification is equal to the value of the property at the time of the
happening of its destruction without exceeding the policy amount.
• Insurable property include premises, stocks and materials in the business
and belonging to the insured, goods held by the insured in trust or on
commission for which the insured if responsible, fixtures, fittings,
machinery, etc. .
• The conditions of this policy state that the insurer will not be liable for
any misrepresentations, omissions or mis - description of the insured
property.
 Cont…
• The insured is required to make monthly declaration to the
Insurer concerning.
The average value at risk on each day of the month.
The average of the highest value at risk in each week of the month.
the highest value at risk during the month, and
The value at risk on a specified day of the month.
• The policy does not cover:
Losses by theft during or after the occurrence of a fire.
Loss/damage to property arising out of climatic conditions, inherent
chemical reaction, etc…
Burning of property by order of any public authority.
 4. PUBLIC LIABILITY POLICY
• It is to indemnify the insured against all payments the insured becomes
legally liable to pay for compensation in respect of bodily injuries to or
illness of any person; loss of or damage caused to the property of others
the policy also covers the insured from all costs and expenses of litigation
recovered by any claimant against the insured.
• The Policy is issued for a maximum period of one year.
• The limits of indemnity are specified thereupon both for Any One
Accident and for Any One Period of Insurance.
• If the insured dies while the policy is in force, the insurer will indemnify
the personal representative of the insured.
 Cont…
• Exceptions to this policy include:
Liabilities assumed by the insured through agreements with other parties.

Liabilities in respect of injuries or illness under a contract of employment,

i.e., occupational injuries or illness.

Liabilities in respect of loss of or damage to any property, land, building

caused by vibration or weakening of support, and any liability in respect of
injuries to persons caused by such factors.
 5. MONEY POLICY
• It gives cover for any loss of money belonging to the insured or for
which the insured is responsible in the circumstances occurring during
any period of insurance.
• The policy protects the insured from two types or risks related to
money:
1. Transit Risks: refer to loss of money while it is in transit either to
the premises or from premises or carrying the money to other places
for making disbursement. In this case, insurance cover is applicable
for a period of time until the transit activity is accomplished.
 Cont…

2. Premise Risks: refer to the possibility of loss of money kept in

locked safes in the premise risks also include loss/damage caused to
safe boxes’ in the insured’s premises caused by burglars,
housebreakers or thieves.
• The insurer, however, will not be liable for losses caused by the
following factors:
War and war like operations.
dishonesty of any messenger or employee of the insured
Loss from an unattended vehicle, etc…
 6. FIDELITY GUARANTEE POLICY

• This policy protects employers from all direct losses arising from any act or
acts of fraud or dishonesty committed by any of the employees listed in the
Schedule during uninterrupted service in the capacity and employee,
position of the employee, date of commencement of the risk and the amount
guaranteed in connection with each employee.

• The period of insurance cover shall not exceed one year.

 7. ALL RISKS POLICY

• the insured protects his property from misfortune not specifically

excluded in the policy.

• All items to be insured are listed in the Schedule including the

specification and the sum insured for each item.

• The property manly insured include gold & silver, funs, pictures,
wearing apparels and other jewelers items.
 8. PERSONAL ACCIDENT POLICY
• It provides compensation for death or bodily injuries caused by violent,
accidental, external and visible means.
• The injuries shall be the direct cause of death, loss or disablement.
• Death or disablement should occur within 12 calendar months from the
date of the accident.
• In the Schedule the insured specifies his occupation or profession; and
the policy remains valid for exposure to risk associated with the stated
occupation or profession.
 Cont…
• If the insured engages himself in any occupation which greater risk
may prevail without informing the insurer, the policy becomes void and
no compensation would be paid.
• Moreover, the accident is bound to take place within the geographical
limit specified in the Schedule.
• It is issued to individuals or a group of individuals on named basis.
• Under this scheme, premiums are calculated based on the estimated
annual wage payment, which at expiry, is adjusted to reflect the actual
wages paid.
• And, the benefits will be based on 5 years salaries/ wages without
exceeding Birr 100,000 for any one person and medical expenses
limited to Birr 1,000 per person.
 9. WORKMEN’S COMPENSATION POLICY
• It indemnifies the insured against all sums for which he is to be liable to pay
compensation for any worker who sustains death or bodily injury by an accident or
occupational diseases arising from his work and during the time of his work.
• The worker should be employed by the insured, and the category of work assigned to
him and the place of work should be specified in the Schedule.
• The policy does not provide compensation for death or disablement resulting from
suicide attempted suicide or intentional self injury.
• Other exceptions for which no compensation is paid by the insurer include: accidents
occurred while the insured is in a state of insanity, or is under the influence of
intoxicants or drugs.
• In the case of women, the policy does not cover accidents originating from pregnancy
on childbirth.
• The premium is based in the estimated amount of wages, salaries and other earnings.
 10. PLATE GLASS POLCIY
• It protects the insured against the destruction or breakage of the glass fixed
in the insured’s premises by any accident of misfortune of a fortuitous
character.
• The glass to be insured is to be specified in the Schedule.
• The policy does not provide for compensation in respect of:
Damages directly or indirectly traceable to fire explosion, earthquake,
volcanic eruption, hostilities, riots, sticks and he like.
Cracked or imperfect glass
Damage to window frames and other fittings.
Consequential losses and any legal liability, etc…
 11. BURGLARY and HOUSEBREAKING INSURANCE

• This is to protect property from loss by theft, but only if accompanied by

actual forcible and violent breaking into or out of a building.
• It cover for two categories of risk: Private Residence and Business
Premises.
• It is also possible for the insured to take insurance against both risks in
one policy.
• A careful examination of the risk is needed since the risk involves moral
hazard.
• It is important to first identify the insured’s character and habits.
• The policy may be issued for a maximum period of one year.