Chapter 03 principles and practice of lifeinsurance

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PRACTICEPRACTICE

OF OF

LIFE INSURANCELIFE INSURANCE

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FEW DIFFERENCES BETWEEN FEW DIFFERENCES BETWEEN LI AND GILI AND GI

•Insured event may or may not take place

•One-year renewable contract•Financial value of asset can be determined

•Contract of indemnity -exact value of loss is reimbursed (Exception Personal accident)•Premium calculated on past loss experience, probable risk factors and fixed Tariff plan

• Risk ‘death’ is certain, uncertainty is as to when

• A long-term contract

• Difficult to determine the economic or financial value of life

• Not a contract of indemnity

• Premium charged on mortality table

General Insurance Life Insurance

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ECONOMIC BASIS OF LIFE AND ECONOMIC BASIS OF LIFE AND HEALTH INSURANCEHEALTH INSURANCE

• Human Life Value concept propounded by S.S. Huebner is the economic foundation of LI

• Human Life Value - actual future earnings of an individual. It is capitalised value of a person’s net future earnings reduced by cost of man’s own maintenance expenses

• Functions of LI - protection to family, by ensuring continuity in income after death of the breadwinner

A savings instrument, collateral security, old age benefits, annuities or a lump sum after retirement, post death - higher education of children, their marriages, etc

Protection against - uncertainty of non-payment by debtors/partners, Keyman upon death

Welfare measure on the lives of employees as a whole

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HOW MUCH INSURANCE DOES A HOW MUCH INSURANCE DOES A MAN NEED?MAN NEED?

• Immediate funds requirements upon after death- medical expenses for terminal illness, expenses for performance of last rites and religious ceremonies etc

• Children's Education and Marriage expenses

• Recurring dependant spouse and children

• Funds for paying off debts.

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ORGANISATIONAL STRUCTURE ORGANISATIONAL STRUCTURE -LIC-LIC

CENTRAL OFFICEMUMBAI

ZONAL OFFICES (8)Bhopal, Chennai, Hyderabad,

Kanpur, Kolkata, Mumbai,New Delhi, Patna

FOREIGN OFFICESUK, Mauritius, Fiji

DIVISIONAL OFFICES (108)

BRANCH OFFICES (2048)

SATELLITE OFFICES

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ORGANIZATIONAL STRUCTURE- ORGANIZATIONAL STRUCTURE- CENTRAL OFFICECENTRAL OFFICE

CHAIRMANCHAIRMANMANAGING DIRECTORS (3)MANAGING DIRECTORS (3) C. V. OC. V. O

ACTUARIAL AUDIT BOARD SECRETARIATBANK ASSURANCE & ALTERNATE CHANNELCORPORATE COMMUNICATION CORP. PLANG.CRM ENGINEERING FINANCE & ACCOUNTS MARKETINGINVESTMENT INSPECTIONHRD/OD PERSONNELLEGAL & HOUSING PROPERTY FIN. SCHM. SBUMANAGEMENT DEVELOPMENT CENTRE IT/BPRHEALTH INSURANCE MICROINSURANCE REINSURANCE

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CLASSIFICATION OF LIFE AND CLASSIFICATION OF LIFE AND HEALTH INSURANCEHEALTH INSURANCE

• Group Insurance - A group of persons, who usually have a business or professional relationship to contract owner, are provided insurance coverage under a single contract. [Ex – Employees, Savings account depositors, poorer sections of society, landless agricultural workers]

• Ordinary – individually issued policies –majority of policies fall within the ordinary category

• Industrial Insurance –includes life and health insurance policies issued to individuals in small amounts, premiums payable on a weekly or monthly basis. Not popular in India.

• Credit insurance –This is issued through lending institutions to cover debtors’ obligations if they die or become disabled

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LIFE INSURANCE PLANSLIFE INSURANCE PLANS

• Historically, Life Insurance benefit patterns fit into one or a combination of :

• Term life insurance (popular in the United States)

• Whole life insurance

• Endowment insurance (popular in India,

Asian many African, European and Latin

American Countries)

• Annuity contracts - promise to pay insured

a periodic payment.

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1) TERM INSURANCE• Protection - limited number of years or age

such as 65 or 70 years• Terminates with - no maturity value.• Upon survival - nothing paid• More comparable to property and liability

insurance contracts than to other LI contract• Initial premium rates low compared to other

LI products - period of protection is limited• Useful for - persons with low income and high

insurance needs• Supplementary to - an existing life insurance

program during the child rearing period

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2) WHOLE LIFE INSURANCE

• Protection - over one’s entire lifetime.

• Upon death of insured - payment of the face amount regardless of when death occurs.

• Face amounts payable remain at same level throughout policy duration, although dividends are often used to increase total amount paid on death.

• Gross premium also remains at the same level through out premium payment period with some exceptions.

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3) ENDOWMENT INSURANCE• PROMISE TO PAY - Policy amount on death

of insured during a fixed term of years (+) Full-face amount at the end of the term if insured survives term

• ENDOWMENT INSURANCE =

Term life insurance

(+) Pure endowment [to pay face amount if insured dies during the

period + to pay maturity amount only if insured is living at the end of a specific period, with nothing paid in case of prior death]

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COMBINATION PLANS

• Sometimes traditional policies like Whole Life

and Endowment needs to be combined,

including the annuity to meet requirements of

certain policyholders, to be covered for

maximum risk

• LIC TRIPLE COVER JEEVAN MITRA POLICY

On maturity - basic sum becomes payable

On death - 3 times the basic sum assured.

Accidental death - four times of the basic

sum assured becomes payable

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SOME OTHER POPULAR LIFE INSURANCE CONTRACTS

• HEALTH INSURANCE - contingent claim

contract on insured incurring additional

expenses or losing income because of

incapacity or loss of good health. • DISABILITY INCOME INSURANCE – Payment

upon loss of earning loss of earning capacity• LONG TERM CARE INSURANCE – loss of

earning capacity for a substantial period–

reimbursement of hospital, physician, or other

health care expenses

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Some other popular life insurance contracts (Contd.)

• CONVERTIBLE PLANS – provides that terms and conditions of policy to another policy within certain period

• WITHOUT PROFIT POLICIES – not entitled to bonuses, declared after actuarial valuations

• WITH PROFIT POLICIES – pay a slightly higher premium for bonuses

• JOINT LIFE POLICES- two or more lives covered • CHILDREN PLANS- made by parent or guardian;

risk on the life of child begins after specified period (deferment period)

• RIDERS – a clause or conditions added on basic policy providing additional benefit at choice of proposer

• ANNUTIES – practically same as pensions; reverse of life insurance

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PRINCIPLES AND PRACTICE OF REINSURANCE

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REINSURANCE• PRACTICE WHEREBY a reinsurer,

o in return of a premium paid to it o indemnifies another person/company

for a portion or all of liabilitytaken up by the latter (reinsured) due to a

policy of insurance that it has issued• SPECIFIC REASON — either nature of risk

insured or business strategies of IC• REINSURANCE PRIMARILY DEALS WITH

CATASTROPHE RISKS - predictable and cause greatest exposure for the insurance company (9/11 attacks)

• Business hinges on successful PRUDENT PARTNERSHIPS by use of technology

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Reinsurance (Contd.)• RISK MANAGEMENT - involving transfer of

risk from IC to Reinsurer• CONTRACT OF INDEMNITY – basis for

providing insurance to IC • REINSURANCE AGREEMENT – entered into

between IC and Reinsurer• GLOBAL SPREAD OF RISKS – local market

bad losses do not impact local businesses; there are tie-ups with global reinsurers

• HOW IT WORKSIC insurer gives reinsurer a portion of the

premium it collects from the insured and in return IC is covered for losses above a

particular limit.

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PRINCIPLES AND ADVANTAGES OF REINSURANCE

• PRINCIPLE OF UTMOST GOOD FAITH• PRINCIPLE OF INDEMNITY• NO REINSURANCE WITHOUT

RETENTION: IC must retain a part of Risk before

reinsuring. No reinsurance of complete riskThose risks that are within retention

capacity of IC must be retained completely• ADVANTAGES Safeguards capital and reinforces stabilityHelps IC to upgrade itselfAlso helps a company to withdraw from

business

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TYPES OF REINSURANCE• TREATY REINSURANCE – covers entire

category of risk or line of business in advance.

• Capacity + Coverage of all prerils with adequate limits + confidence on security of reinsurers + continuity of reinsurance after a loss

• FACULTATIVE REINSURANCE - reinsurance of

current single risk and options are open for both reinsured and reinsurers

reinsurer retains the faculty or power to either accept or reject each individual risk offered to it by IC

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IRDA REGULATIONS• OBJECTIVE - to expand retention within

India, ensure best protection for reinsurance costs incurred and simplify administration.

• RETENTION OF RISK - proportionate to financial strength and business volumes.

• REINSURANCE WITH NATIONAL REINSURER - 10% of sum assured on each policy by IC (only in non-life sector)

• REINSURANCE PROGRAMME - beginning F/Y and submitted to IRDA, 45 days` before

• EXCESS OF REINSURANCE BUSINESS- to be placed outside India with reinsurers having at least BBB (S&P) rating for the preceding 5 years. (India's own sovereign rating)

• LIC can continue to reinsure its policies with GIC ( private IC cannot)

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UNDERWRITING• Selection of a policyholder after recognising

and evaluating hazard, fixing a premium and deciding all other terms and conditions

• Safeguards - against any moral, morale or general hazard

• Limiting factors – capacity, skilled human resources, compliance of regulatory provisions, availability of reinsurance

• Line underwriting – Where daily underwriting carried out; underwriters usually located in offices of insurer

• Staff underwriting – Where underwriter helps management in formulating and implementing underwriting policy. They are usually located at H.O.