Poli

PracticeofLife Insurance

Compiled By:

Manoj VermaAstt. Professor (Sr.Scale)Maharaja Agrasen Institute of Management StudiesE.mail: [email protected]

Notes by Manoj Verma Page 1

Syllabi

Unit I

Life Insurance: Conceptual framework, Importance of Life Insurance;

Insurance Products , A hedge against personal risk (s), Insurance Products,

alternative to Investment Products, Pension Plans, investment Plans,

Insurance Products, collateral security in the rising hire-purchase market

scenario. LIC Act 1956, Insurance Ombudsman Insurance Products

Unit II

Group Insurance and special purpose schemes. Group Insurance

Characteristic; Difference Between Individual and Group Insurance; GI

schemes in India.

Unit III

Actuarial considerations ( demographic, investment of funds and managerial

expenses) in costing Insurance products; Theory and Practice of

Underwriting: Selection, Loading, Exclusion clauses and declining of

proposals Policy Document.

Unit IV

Servicing (alterations and surrender), Claim Settlement, Retention Vs.

Reinsurance, Catastrophic Bonds, Sources of surplus and distribution of

Profits, Investments and Revenues.


Unit-1

Life Insurance – Conceptual Framework____________________________________________________________________

“Life insurance is the device of providing for life after death and retired, disabled or who live longer.”

Life has always been an uncertain thing. To be secure against

unpleasant possibilities, always requires the utmost resourcefulness

and foresight on the art of man. To pray or to pay for protection is

the spirit of the humanity. Man has been accustomed to pray God for

protection and security from time immemorial. In modern days

Insurance Companies want him to pay for protection and security.

The insurance man says “God helps those who help themselves”;

probably he is correct. Self-help and thrift are the basis of modern

civilization since all other features of modern life can be traced to these

basic principles. In the twentieth century Welfare State on the one hand

and Socialist State on the other tried to take care of the individual

from cradle to grave and look after him to enjoy a worthwhile life.

But unfortunately both have failed or at best only partially successful

since they proved either too costly has taken birth in those days when the

entrepreneurial spirit of middle class was at its highest and people

were inclined to take risks and accept challenges for a better future. The

advent of industrial revolution gave impetus to develop this branch of

insurance.


Life insurance concerns people's lives. Life insurance is founded basing

on different experiences and realities of human life. It provides men and

women with an institution through which they can systematically create

financial security for their families and businesses. It also serves the

economy as an important channel through which capital is made

available to business and industry. It is a business that affects everyone

directly or indirectly.

CONCEPT OF LIFE INSURANCE

Life insurance is a contract under which the insurer (Insurance

Company) in consideration of a premium paid undertakes to pay a fixed

sum of money on the death of the insured or on the expiry of a

specified period of time whichever is earlier.

In case of life insurance, the payment for life insurance policy is certain.

The event insured against is sure to happen only the time of its

happening is not known. So life insurance is known as 'Life Assurance'.

The subject matter of insurance is life of human being. Life insurance

provides risk coverage to the life of a person. On death of the person

insurance offers protection against loss of income and compensate the

titleholders of the policy.


Significance of Life Insurance

1. Life insurance makes the family financially secure after the

untimely death of the breadwinner.

2. Life insurance is also a savings instrument.

3. Life insurance helps in meeting responsibilities of people even

after death like higher education of children, their marriages, etc.

4. Helps in repaying the mortgage loans by acting as a collateral

security.

5. Life insurance also provides old age benefits, which can be had in

the form of annuities or a lump sum after retirement.

6. Creditors can also use it in case the debtor dies without repaying

the loan amount by getting the lives of the debtors insured, where

the policy money or the sum assured will belong to the creditor in

case of non-repayment.

7. Partners of a partnership firm can get the lives of the partners

insured in order to repay the share of the dead partner to the heirs.

8. A firm can get the life of its key man insured as the death of the

key man may cause the firm to suffer huge financial losses, and

this money so got can be used to recruit a new person in place of

the deceased employee and also meet the losses during the

transitional period (i.e. from the time of death of the key person

till the recruitment and training of a new employee).


9. Group insurance policies can also be taken as a welfare measure

on the lives of the employees as a whole, improving and boosting

the morale of the employees resulting in improved productivity.

Insurance a Hedge against Personal Risk

Before discussing in details lets first understand the concept of

Insurance; its basically a device that reduces the risk of an individual.

People which are exposed to the same kid of risk come together and join

hand to face the risk of a particular type. There are a variety of

definitions of insurance. In fact different researchers have defined it in

their own words. One of the very popular definitions is as follows:

“Insurance is a cooperative 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 .It’s a method of risk

transfer.”

Many times people get confused with Insurance and Hedging. They

consider it as one and the same thing but both are conceptually different.

Hedging is a technique for transferring the risk of unfavorable price

fluctuations to a speculator by purchasing and selling future contracts on


an organized exchange. It can be considered as another method of risk

transfer

Insurance Vs. Hedging

Although both the techniques are similar in that risk is transferred by a

contract; but there are some important differences between them such as:

Risk Insurability:

While insurance deals with only pure risk such as risk of physical

damage to a motor-vehicle, the hedging deals with a risk whichb is

highly speculative in nature. For example forward trading in foodgrains.

Insurance aims at transferring the risk which do not any possibility of

profits or gain and which are an essential part of our day to day life. But

in case of hedging the objective is to reduce the business risk. One aims

at the gain but do not want to retain the loss. So as a result hedging is

applied to transfer the risk to other party.

Reduction of risk by law of large number.

In case of Insurance the risk can be highly reduced with introduction of

large numbers. In case a large number of persons are ready to purchase


the life insurance policy then it would be a much comfortable position

for the insurer.But in case of Hedging the law of large nimber cannot be

applied. It would hardly make any difference on the risk assumption of

the other party if more and more people opt for hedging contract.

Insurance - a hedge against personal risk

Though Insurance and hedging are fundamentally different concepts but

both are helping us in the similar way. Insurance proves to be much

better than the Hedging. The following could be valid explanations to the

above statement:

Insurance provides Security and Safety – insurance reduces the

risk of an individual. So the person can expect greater security as

well as safety for future.

Insurance affords Peace of Mind – al the financial burdens are

now reduced to the payment of premium which very much

nominal in comparison to amount of probable loss. So one can

have greater peace of mind after buying an insurance policy.

Insurance eliminates Dependency – the insurance eliminates the

dependency element from the family. The person who is sole


earner can get his dependents assured of for their future needs just

by purchasing a life insurance policy and paying the premium.

The family members are no longer dependent on the main earner

of the family.

Insurance encourages Savings – the insurance policy encourages

savings. By purchasing the policy, every person after getting the

policy, every person will have to pay the premium and the savings

would be channelized.

Insurance provides Profitable Investment – if we compare

insurance with other traditional investment tools then definitely it

proves to be a better option. It is highly cost effective with greater

certainty.

Insurance fulfills various needs of a person – Insurance can

fulfill all the future needs of an individual. The only thing that is

required is proper planning at right time. One can arrange funds

for all his future needs such as - the marriage of his daughter; for

education of children.

To Business


Uncertainty of business loss is reduced – by getting a policy

against a particular risk the uncertainty related with future

transactions can now be reduced. It definitely improves the

decision making of the management.

Business efficiency is increased with insurance – insurance

improves the efficiency of the business. The management can take

better decisions if all its efforts and ventures are backed by

insurance policy.

Key Man Indemnification – In case of business the existence of

the keyman is no longer a basic requirement, the business is

guaranteed by way of insurance policies at the time of availing

heavy loan facilities.

Enhancement of Credit – the insurance policy can act as a

collateral security in the debt market. So the credit facility is

definitely enhanced because of the existence of insurance

coverage.


Business Continuation – insurance policy can ensure the

continuation of business as the business is well covered against

major perils of loss. So the business may continue for a longer

period of time.

Welfare of Employees – insurance policy can act as a welfare

incentive offered to the employees. They are well covered against

major perils of the business.

To Society

Wealth of the society is protected – the society is also protected

against unforeseen future events. The investment can be made

with greater certainty and hence the entire wealth of the society

can be well protected.

Economic growth of the Country is encouraged – with the

procurement of the insurance coverage the society is benefited in

long run as insurance contributes towards the economic

development of the country. More funds are available for business

ventures as well as infrastructure development.


Reduction in Inflation – one major benefit of insurance is that it

assists in reduction of inflation. The money supply is increased

and the inflationary pressures are reduced by way of insurance.

Insurance an alternative to Investment Products

Investment

Investment means engagement of funds for the sake of future return. In

normal circumstances the purpose of investment is either to have

sufficient return or to have significant arrangement of funds so as to

meet the future obligations. In India, Insurance is mostly perceived as an

investment of funds; but the mechanism is entirely different.

Investment: Basic mechanism

1) Expected rate of Return

2) Involvement of Risk

3) More Risk More Profit

4) Conditional engagement of funds

5) Time element plays its role

6) Very much speculative

Insurance: Basic mechanism


Social device

Pure Risk coverage

Pooling of Funds

Law of Large numbers

Risk Coverage

Assurance of indemnification against a specific peril

Insurance an alternative to Investment Products:

Purpose – The purpose of making an investment is to earn a

specific return i.e. in order to have the availability of a particular

amount the funds are to be invested for a particular period. In case

of insurance the basic purpose is to cover a particular risk; it

provides a protection against a particular risk.

Risk Coverage/ Protection – in case of insurance the risk against

a specific peril is well protected but in case of investment there is

no element of protection or risk coverage.

Certainty/ Better assurance – Insurance proves to be a better

tool than normal investment as it generates better assurance. In

case of investment the specific amount can be generated only if

the funds are blocked for that specific period of time.


No speculation – in case of insurance there is no chances of

speculation element, but the insurance can be highly speculative.

If the things are up to the expectations than there could be a

profitable situation but in case your anticipations are not correct

than there could be a loss. But in case of Insurance the risk

covered is highly pure in nature.

No more Risk more profit – In case of normal investment there

is a fundamental principle of the market i.e. more risk more profit.

It says if you are ready to undertake more risk only than you can

have more profit. But insurance is free from this assumption.

Irrespective of individual risk, everyone gets the same risk

coverage in consideration of premium payment.

Comparatively better return – If we compare the two aspects of

insurance and investment than insurance gives a better rate of

return than normal investment as the entire loss is shared by the

group.

Sharing of Losses – insurance is based on a fundamental principle

of sharing of losses i.e. all the persons which are facing the same

kind of risk are grouped together and every body in the group

shares their respective share of loss of entire group.


Third party assurance – the insurance also covers the risk of

third party i.e. a person other than the insurer and the insured,

which is truly a wonderful advantage of insurance; but this kind of

advantage could not be achieved in case of normal investment.

Solution for all family needs – in case of investment, the targeted

amount of funds could be generated only if the funds are invested

for that much of time and in required quantity, but in case of

insurance one can plan for all his future requirements of funds

such as Child education or for their marriage. The only thing

required is to select the appropriate policy for this purpose.

Lesser knowledge of investment process may work – If you

want to get better return from your investment than you have to be

well versed with all the aspects of investment process. In fact you

have to scientifically plan you investment process. But in case of

Insurance you do not need to be so scientific. The insurance

company has in fact plan the investment of funds, you have to

purchase the policy and have to pay the premium.


Insurance Products - collateral security in rising hire purchase

market

Concept of Hire Purchase

Hire purchase is the legal term for a contract, in this persons usually

agree to pay for goods in parts or a percentage at a time. In cases

where a buyer cannot afford to pay the asked price for an item of

property as a lump sum but can afford to pay a percentage as a

deposit, a hire-purchase contract allows the buyer to hire the goods

for a monthly rent. When a sum equal to the original full price plus

interest has been paid in equal installments, the buyer may then

exercise an option to buy the goods at a predetermined price (usually

a nominal sum) or return the goods to the owner

Hire purchase differs from a mortgage and similar forms of lien-

secured credit in that the so-called buyer who has the use of the goods

is not the legal owner during the term of the hire-purchase contract. If

the buyer defaults in paying the installments, the owner may

repossess the goods, a vendor protection not available with

unsecured-consumer-credit systems. HP is frequently advantageous

to consumers because it spreads the cost of expensive items over an

extended time period.


Concept of Collateral

In lending agreements, collateral is a borrower’s pledge of

specific property to a lender, to secure repayment of a loan. The

collateral serves as protection for a lender against a

borrower's default - that is, any borrower failing to pay

the principal and interest under the terms of a loan obligation.

1) If a borrower does default on a loan (due to insolvency or other

event), that borrower forfeits (gives up) the property pledged as

collateral - and the lender then becomes the owner of the

collateral. In a typical mortgage loan transaction.

2) Collateral, especially within banking, may traditionally refer

to secured lending (also known as asset – based lending)

3) More recently, complex collateralization arrangements are used to

secure trade transactions (also known as capital market

collateralization).

Insurance Products - Collateral Security in rising hire purchase

market


Easy availability of loan – Insurance policy can be well utilized

as a collateral security in the hire purchase market. The lender can

get an assurance from the borrower’s side that in case the

borrower is not able to pay the amount than the lender can use the

insurance policy to recover the amount.

Greater assurance to lender - the lender get a significant

assurance from the lender as the amount of policy is a guarantee of

paying back the borrowed money.

Interest can be better negotiated – if the borrower has an

insurance policy than the borrower is also in a position to

negotiate the interest rate as the borrower can also have more

options to avail the loan facility.

Risk coverage + credit enhancement – through the insurance

policy the borrower can avail the dual benefit as the future risk can

be well covered as well as the credit can also be enhanced

Reduction of Uncertainty – the existence of a significant amount

of insurance policy can reduce the uncertainty. The payment of the

interest as well as the principal amount can be well protected

through insurance policy.


Elimination of Dependency – the insurance policy can eliminate

the dependency element from hire purchase agreement as the

lender can get this risk, well covered through insurance policy. For

example – majority of banks gets their loan amount through the

insurance policy of the borrower.

Encourages savings – the existence of insurance policy promotes

the loan facility. The borrower can negotiate the rate of interest

and the terms and conditions of the contract in a better way. So the

borrower get a saving in terms of the cost of the loan. As well as

many other people also go for better savings, so as to earn a return

by lending the money to those people who actually need it and

which have a lesser degree of risk in lending them the money

Better Decision Making – the insurance policy improves the

decision making process. Both the parties i.e. the borrower as well

as the lender can take their respective decisions in a better way.

LIC Act 1956

An Act to provide for the nationalization of life insurance business in

India by transferring all such business to a Corporation established for

the purpose and to provide for the regulation and control of the business


of the Corporation and for matters connected there with or incidental

thereto.

Some of the important provisions are as follows: —

1. Short title and commencement. —

This Act maybe called the Life Insurance Corporation Act, 1956

It shall come into force on such date as the Central Government

may, by Notifications in the Official Gazette, appoint.

Definitions: In this Act, unless the context otherwise requires,

(1) "Appointed day,” means the date on which the Corporation is

established under Section 3;

(2) "Composite insurer "means an insurer carrying on in addition to

controlled business any other kind of insurance business;

(3) "Controlled business" means— (i) In the case of any insurer

specified in sub-clause (a) or sub-clause (b) of clause (9) of section 2 of

the Insurance Act and carrying on life insurance business—

(a) all his business, if he carries on no other class of insurance

business;

(b) all the business appertaining to his life insurance business, if he

carries on any other class of insurance business also;

(c) all his business if his certificate of registration under the Insurance

Act in respect of general insurance business stands wholly cancelled for

a period of more than six months on the 19th day of January, 1956.


(ii) in the case of any other insurer specified in clause (9) ofsection2

of the Insurance Act and carrying on life insurance business—

(a) all his business in India, if he carries on no other class of insurance

business in India;

(b) all the business appertaining to his life insurance business in India, if

he carries on any other class of insurance business also in India;

(c) all his business in India if he certificate of registration under the

Insurance Act in respect of general insurance business in India stands

wholly cancelled for a period of more than six months on the 19th day of

January, 1956.

Explanation.— An insurer is said to carry on no class of insurance

business other than life insurance business ,if in addition to life insurance

business, he carries on only capital redemption business or annuity

certain business or both ;and the expression" business appertaining to his

life insurance business" in sub-clause

(i) and (ii) shall be construed accordingly;

(iii) in the case of a provident society, as defined in section 65 of the

Insurance; Act, all its business;

(iv) in the case of the Central Government or a State Government, all life

insurance business carried on by it, subject to the exceptions specified in

section44;

(4) "Corporation" means the Life Insurance Corporation of India

established under section 3;


(5) "Insurance Act” means the Insurance Act, 1938(4of1938);

(6) "Insurer" means an insurer as defined in the Insurance Act who

carries on life insurance business in India and includes the Government

and a provident society as defined in section65 of the Insurance Act;

(7) "Member" means a member of the Corporation;

(8) "Prescribed" means prescribed by rules made under this Act;

(9) "Tribunal" means a Tribunal constituted under section17 and having

jurisdiction in respect of any matter under the rules made under this Act;

(10) All other words and expressions used herein but not defined and

defined in the Insurance Act shall have the meanings respectively

assigned to them in that Act.

Establishment and incorporation of Life Insurance Corporation of

India.—

(1) With effect from such date as the Central Government may, by

notification in the Official Gazette, appoint, there shall be established a

Corporation called the Life Insurance Corporation of India.

(2) The Corporation shall be a body corporate having perpetual

succession and a common seal with power subject to the provisions of

this Act, to acquire, hold and dispose of property, and may by its name

sue and be sued.


Constitution of the Corporation.—

(1) The Corporation shall consist of such number of persons not

exceeding 2 as the Central Government may think fit to appoint thereto

and one of them shall be appointed by the Central Government to be the

Chairman there of.

(2) Before appointing a person to be a member, the Central Government

shall satisfy itself that person will have no such financial or other interest

as is likely to affect prejudicially the exercise or performance by him of

his functions as a member, and the Central Government shall also satisfy

itself from time to time with respect to every member that he has no such

interest; and any person who is, or whom the Central Government

proposes to appoint and who has consented to be, a member shall,

whenever required by the Central Government so to do, furnish to it such

information as the Central Government considers necessary for the

performance of its duties under this sub-section.

(3) A member who is in anyway directly or indirectly interested in a

contract made or proposed to be made by the Corporation shall as soon

as possible after the relevant circumstances have come to his knowledge,

disclose the nature of his interest to the Corporation and the member

shall not take part in any deliberation or discussion of the Corporation

with respect to that contact.

Capital of the Corporation.—


(1) The original capital of the Corporation shall be five crores of rupees

provided by the Central Government after due appropriation made by

Parliament bylaw for the purpose, and the terms and conditions relating

to the provision of such capital shall be such as maybe determined by the

Central Government.

(2) The Central Government may, on the recommendation of the

Corporation, reduce the capital of the Corporation to such extent and in

such manner as the Central Government may determine.

Functions of the Corporation.—

1) Subject, to the rules, if any, made by the Central Government in this

behalf, it shall be the general duty of the Corporation to carry on life

insurance business, whether in or outside India, and the Corporation

shall so exercise its powers under this Act as to secure that life insurance

business is developed to the best advantage of the community.

2) Without prejudice to the generality of the provisions contained in sub-

section (1) but subject to the other provisions contained in this Act, the

Corporation shall have power —

(a) To carryon capital redemption business, annuity certain

business or reinsurance business in so far as such re insurance business

appertains to life insurance business;

(b) Subject to the rules, if any, made by the Central Government in

this behalf, to invest the funds of the Corporation in such manner as the


Corporation may think fit and to take all such steps as may be necessary

or expedient for the protection or realization of any investment;

including the taking over of and administering any property offered as

security for the investment until a suitable opportunity arises for its

disposal;

(c) To acquire, hold and dispose of any property for the purpose of

its business;

(d) To transfer the whole or any part of the life insurance business

carried on outside India to any other person or persons, if in the interest

of the Corporation it is expedient so to do;

(e) To advance or lend money upon the security of any movable

property or otherwise;

(f) To borrow or raise any money in such manner and upon such

security as the Corporation may think fit;

(g) To carry on either by itself or through any subsidiary any other

business in any case where such other business was being carried on by a

subsidiary of an insurer whose controlled business has been transferred

to and invested in the Corporation under this Act;

(h) to carry on any other business which may seen to the

Corporation to be capable of being conveniently carried on in connection

with its business and calculated directly or indirectly to render profitable

the business of the corporation;


(i) to do all such things as maybe incidental or conducive to the

proper exercise of any of the powers of the Corporation.

In the discharge of any of its functions the Corporation shall act so far as

maybe on business principles.

Power to impose conditions, etc.—

(1) In entering into any arrangement, under section 6, with any

concern, the Corporation may impose such conditions as it may think

necessary or expedient for protecting the interest of the Corporation and

for securing that the accommodation granted by it is put to the best use

by the concern.

(2) Where any arrangement entered into by the Corporation under

section 6 with any concern provides for the appointment by the

Corporation of one or more directors of such concern, such provision

and any appointment of directors made in pursuance there of shall be

valid and effective notwithstanding anything to the contrary contained in

the Companies Act, 1956 (1 of1956),or in any other law for the time

being in force or in the memorandum, articles of association or any other

instrument relating to the concern, and any provision regarding share,

qualification, age limit, number of directorships, removal from office of

Directors and such like conditions contained in any such law or

instrument aforesaid, shall not apply to any director appointed by the

Corporation in pursuance of the arrangement as aforesaid.


(3) Any director appointed as aforesaid shall-

(a) Hold office during the pleasure o f the Corporation any maybe

removed or substituted by any person by order in writing by the

Corporation;

(b) Not incur any obligation or liability by reason only of his being a

director or for anything done or omitted to be done in good faith in the

discharge of his duties as a director or anything in relation thereto;

(c) Not be liable to retirement by rotation and shall not be taken into

account for computing the number of directors liable to such retirement.

Offices, branches and agencies.--

(1) The central office of the Corporation shall be at such place as the

Central Government may, by notification in he Official Gazette, specify.

(2) The Corporation shall establish a zonal office at each of the

following places, namely, Bombay, Calcutta, Delhi, Kanpur and Madras,

and, subject to the previous approval of the Central Government, may

establish such other zonal offices as it thinks fit.

(3)The territorial limits of each zone shall be such as may be specified by

the Corporation.

(4) There may be established as many divisional offices and branches in

each zone as the Zonal Manager thinks fit. Committees of the

Corporation.--


(1) The Corporation may entrust the general superintendence and

direction of its affairs and business to an Executive Committee

consisting of not more than five of its members and the Executive

Committee may exercise all powers and do all such acts and things as

may be delegated to it by the Corporation.

(2) The Corporation may also constitute an Investment Committee for

the purpose of advising it in matters relating to the investment of its

funds, and the Investment Committee shall consist of not more than eight

members of whom not less than four shall be members of the

Corporation and the remaining members shall be persons (whether

members of the Corporation or not) who have special knowledge and

experience in financial matters, particularly, matters relating to

investment of funds.

(3) The Corporation may constitute such other Committees as it may thin

fit for the purpose of discharging such of its functions as maybe

delegated to them.

Funds of the Corporation.--

The Corporation shall have its own fund and all receipts of the

Corporation shall be credited thereto and all payments of the Corporation

shall be made there from.

Audit.—


(1) The accounts of the Corporation shall be audited by auditors duly

qualified to act as auditors of companies under the law for the time being

in force relating to companies, and the auditors shall be appointed by the

Corporation with the previous approval of the Central Government and

shall receive such remuneration from the Corporation as the Central

Government may fix.

(2) Every auditor in the performance of his duties shall have at all

reasonable times access to the books, accounts and other documents of

the Corporation.

(3) The auditors shall submit their report to the Corporation and shall

also forward a copy of their report to the Central Government.

Annual report of activities of Corporation.—

The Corporation shall, as soon as may be, after the end of each financial

year, prepare and submit to the Central Government in such form as

maybe prescribed a report giving an account of its activities during the

previous financial year, and the report shall also give an account of the

activities, if any, which are likely to be undertaken by the Corporation in

the next financial year.

Insurance Ombudsman

The institution of Insurance Ombudsman was created by a Government


of India Notification dated 11th November, 1998 with the purpose of

quick disposal of the grievances of the insured customers and to

mitigate their problems involved in redressal of those grievances. This

institution is of great importance and relevance for the protection of

interests of policy holders and also in building their confidence in the

system. The institution has helped to generate and sustain the faith and

confidence amongst the consumers and insurers.

Appointment of Insurance Ombudsman

The governing body of insurance council issues orders of appointment

of the insurance Ombudsman on the recommendations of the

committee comprising of Chairman, IRDA, Chairman, LIC, Chairman,

GIC and a representative of the Central Government. Insurance council

comprises of members of the Life Insurance council and general

insurance council formed under Section 40 C of the Insurance Act,

1938. The governing body of insurance council consists of

representatives of insurance companies.

Eligibility

Ombudsman are drawn from Insurance Industry, Civil Services and

Judicial Services.

Terms of office


An insurance Ombudsman is appointed for a term of three years or till

the incumbent attains the age of sixty five years, whichever is earlier.

Re-appointment is not permitted.

Territorial jurisdiction of Ombudsman

The governing body has appointed twelve Ombudsman across the

country allotting them different geographical areas as their areas of

jurisdiction. The Ombudsman may hold sitting at various places within

their area of jurisdiction in order to expedite disposal of complaints.

The offices of the twelve insurance Ombudsmans are located at (1)

Bhopal, (2) Bhubaneswar, (3) Cochin, (4) Guwahati, (5) Chandigarh,

(6) New Delhi, (7) Chennai, (8) Kolkata, (9) Ahmedabad, (10)

Lucknow, (11) Mumbai, (12) Hyderabad. The areas of jurisdiction of

each Ombudsman has been mentioned in the list of Ombudsman.

Office Management

The Ombudsman has a secretarial staff provided to him by the

insurance council to assist him in discharging his duties. The total

expenses on Ombudsman and his staff are incurred by the insurance

companies who are members of the insurance council in such

proportion as may be decided by the governing body.


Removal from office

An Ombudsman may be removed from service for gross misconduct

committed by him during his term of office. The governing body may

appoint such person as it thinks fit to conduct enquiry in relation to

misconduct of the Ombudsman. All enquiries on misconduct will be

sent to Insurance Regulatory and Development Authority which may

take a decision as to the proposed action to be taken against the

Ombudsman. On recommendations of the IRDA, the Governing Body

may terminate his services, in case he is found guilty.

Power of Ombudsman

Insurance Ombudsman has two types of functions to perform (1)

conciliation, (2) Award making. The insurance Ombudsman is

empowered to receive and consider complaints in respect of personal

lines of insurance from any person who has any grievance against an

insurer. The complaint may relate to any grievance against the insurer

i.e. (a) any partial or total repudiation of claims by the insurance

companies, (b) dispute with regard to premium paid or payable in terms

of the policy, (c) dispute on the legal construction of the policy

wordings in case such dispute relates to claims; (d) delay in settlement


of claims and (e) non-issuance of any insurance document to customers

after receipt of premium.

Ombudsman's powers are restricted to insurance contracts of value not

exceeding Rs. 20 lakhs. The insurance companies are required to

honour the awards passed by an Insurance Ombudsman within three

months.

Manner of lodging complaint

The complaint by an aggrieved person has to be in writing, and

addressed to the insurance Ombudsman of the jurisdiction under which

the office of the insurer falls. The complaint can also be lodged through

the legal heirs of the insured. Before lodging a complaint:

i) the complainant should have made a representation to the insurer

named in the complaint and the insurer either should have rejected the

complaint or the complainant have not received any reply within a

period of one month after the concerned insurer has received his

complaint or he is not satisfied with the reply of the insurer.

ii) The complaint is not made later than one year after the insurer had

replied.

iii) The same complaint on the subject should not be pending with


before any court, consumer forum or arbitrator.

Recommendations of the Ombudsman

When a complaint is settled through the mediation of the Ombudsman,

he shall make the recommendations which he thinks fair in the

circumstances of the case. Such a recommendation shall be made not

later than one month and copies of the same sent to complainant and

the insurance company concerned. If the complainant accepts

recommendations, he will send a communication in writing within 15

days of the date of receipt accepting the settlement.

Award

The ombudsman shall pass an award within a period of three months

from the receipt of the complaint. The awards are binding upon the

insurance companies.

If the policy holder is not satisfied with the award of the Ombudsman

he can approach other venues like Consumer Forums and Courts of law

for redressal of his grievances.

As per the policy-holder's protection regulations, every insurer shall

inform the policy holder along with the policy document in respect of

the insurance Ombudsman in whose jurisdiction his office falls for the


purpose of grievances redressal arising if any subsequently.

Steady increase in number of complaints received by various

Ombudsman shows that the policy-holders are reposing their

confidence in the institution of Insurance Ombudsman.

-------------

Group insurance

Meaning of group insurance

Many employees were aware of the economic security provided by

insurance-oriented service benefits. The employers on the other hand

also appreciated group insurance as an easy method of providing life

insurance to the employees. Group insurance developed in India in the

early 1960s. It is the coverage of many persons under one policy. Under

group insurance, the insurer drafts a single policy known as a master

policy for the insured group.

Under employee group insurance, the contract of insurance is between

the insurer and employer. So it is the employer who pays the premium.

Further it is the employer who can decide upon the members and the


extent to which they shall be insured. The employer nominates

employees for the pension scheme based on different criteria

like their earnings potential, their seniority, age and post. Employees

have no say in choosing the extent of their cover. However, the employer

while introducing the group insurance scheme for the first time may give

an employee the option to join or not to join the scheme. This is

necessary, especially when the employees have to contribute for the plan

or forego another benefit in order to be covered under a group insurance

plan. Certain features of group insurance differentiate it from individual

insurance. Let us now discuss the distinguishing features of group

insurance.

Features of group insurance

Group policy: Under group insurance a single policy known as a master

policy is issued to the group policyholder who may be the employer or

the authorised person representing the group Certificates and summary

evidence of insurance is given to the members of the group insured. The

master policy is a detailed document that states the contractual

relationship between the insurer and the group policyholder. A list of

persons eligible for coverage with relevant information such as age,

occupation etc is sent by the employer or nodal agency to the insurer.

The insurer examines the list, quotes the premium payable and confirms

coverage for the listed persons when the premium is paid.


Underwriting group: This is the most important distinguishing feature

of group insurance. In group insurance, the insurer underwrites the group

as a whole. Therefore group characteristics are important rather than the

individual characteristics of group members. This means the underwriter

considers the size, age composition, occupation and stability of the group

as a whole rather than health and other insurability aspects of the

individuals. For the reasons stated above, insurers prefer to underwrite

larger groups rather than smaller ones to avoid the possibility of adverse

selection. Underwriters favour a regular flow of new employees, as the

old ones will be replaced with the younger ones, so that the average age

group remains more or less constant. Further, actively and efficiently

working employees can be assumed to be in average health.

Cost effective: Group insurance generally costs less than individual

insurance. This is because the group insured generally needs no medical

examination. Secondly, the acquisition cost for the insurer is also low.

The insurer pays less commission to agents of group insurance than to

the agents of individual insurance. Moreover, the employer offers

administrative services such as collection of premiums, where the

employees share the premiums. The cost of administrating the scheme

for the employer is minimal. So the group coverage is provided to

customers at prices lower than that of individual insurance.


Experience rated premiums: The insurer charges experience rated

premiums when the group is too large. In group insurance, the premium

reflects the loss. In simple words, the group is charged higher premiums

if the loss experienced in the previous year is higher than expected

losses. Where the loss experience is considerably less than expected loss

experience over a period of time the saving is passed on by the insurer to

the master policyholder by way of reduction in premium.

Advantages of group insurance

Some of the advantages of group insurance are as follows:

1. With group insurance, persons with less or no life insurance are

also able to get some measure of insurance protection.

2. Coverage is also available to those employees who are otherwise

uninsurable. Life insurance companies can reach a vast number of

clients at less cost within a short span of time.

3. It is a tax effective tool. The employer gets tax relief for the

premium paid by him on behalf of the employees. Employers are

also entitled to tax relief for premiums paid by them if the scheme

is partly contributory.

Limitations of group insurance

There are also some limitations to the group insurance schemes, which

are discussed below:


1. The nature of group insurance is temporary. It means once the

member is out of the group, the coverage ceases. The employee

also loses insurance coverage in the event of termination of the

group plan.

2. The master policy issued by the insurer is not very flexible. It does

not meet the individual needs for insurance. The insurer under

group insurance cannot focus on the financial needs of the

individual, which is possible in individual insurance. A few

members who could have been charged fewer premiums if

individual insurance had been taken, have to pay higher premiums

because the premium is fixed for the group as a whole.

Group eligibility

A group to be insured under the group life insurance scheme has to fulfill

the following conditions

1. The group, which should be homogenous, should have been

formed for purposes other than to seek insurance.

2. The group should allow new comers to enter into the group for the

continuity of the group.

3. The method of determining the amount to be insured should

preclude individual selection.

4. Safeguards should be established to produce a normal distribution

of risk and to avoid the inclusion of undue proportion of the total


insurance of the group upon unhealthy lives or on a few lives or

on the lives of advanced ages.

5. A universal administrative organisation referred to as nodal

agency in our country, must be in existence that is able and willing

to act on behalf of the insured. Besides the insured members there

should be some party who can pay a proportion of the total cost.

Eligible groups

Earlier, group insurance was taken only for the employees of an

organisation. Later on, other groups were also included like groups of

professionals, co-operative societies, debtors of one creditor, etc. Let us

now discuss some of the groups that are eligible for group insurance.

1. Individual employer groups: Employees may be working with a

single large company, a sole trader or in a partnership firm. The

employees of any of the above are referred to as individual

employer groups. So far, individual employer groups have been

the most common groups insured. This was due to the favourable

characteristics of such groups, which are mentioned below:

a. The employer can represent the employees as a single person

dealing with the insurance company.

b. Authentic employee data is readily available.

c. Payment of premiums is easy and regular.


d. The employer has the required machinery to collect the claim

money from the insurance company and pay it to the beneficiaries.

e. The employer would have already screened the employees at the

time of employment through a pre-recruitment medical

examination. Besides, such employees also enjoy medical

facilities offered by employers and therefore enjoy better health.

So, it is convenient for the insurer to grant a cover without

medical evidence.

2. Multiple employer groups: Employers may be financially or in

any other way, connected to each other as associated companies.

Such employers can form a group and take a group policy

covering the employees of each employer of the group. There is a

principal company who is a policyholder and deals with the

insurance company. It collects the required data and premium

from other employers as per the agreement.

3. Labour union groups: Under labour union groups, the insurer

covers the members of a labour union by issuing a contract

directly to the union. It is the union that pays the premium. The

union may be meeting the premiums wholly out of the union funds

or jointly with the members. It should be ensured in such cases

that the coverage benefits individual members rather than the

union or its office bearers.


4. Creditor-debtor groups: In creditor debtor group insurance, lives

of the debtors are covered through a group policy issued to the

creditor. The creditor, such as a bank or a finance company,

insures its debtors as collateral security against the credit given to

the debtors. In the event of the death of the borrower, the insurer

pays the benefit to the creditor. The creditor sets off the

outstanding loan and any balance of the policy proceeds is paid to

the legal heirs of the debtor.

5. Miscellaneous groups: Different other groups can also be insured

under a group insurance scheme. Such groups include associations

of public and private employees, associations of professionals

such as lawyers, doctors, accountants, teachers, unit

holders,veteran associations, religious groups, retail chains etc.

Group Insurance Schemes

The two main types of group insurance are group life insurance and

group accident and sickness insurance. The group life insurance allows

the members to name the beneficiaries of their choice. The

employee/member has a special privilege to convert the policy on

termination from the group. This can be highly beneficial, especially for

an uninsurable person. Group accident and sickness policy have different


components. And the technicalities differ from company to company.

Let us now discuss the various schemes available to an employer.

Group life insurance

Three types of group life insurance are common in India – the group

term insurance scheme, group gratuity scheme and group superannuation

scheme. Group life insurance is the most common group insurance

provided to employees. Group life insurance is a simple and economic

way of providing life insurance to employees. Under this policy,

generally a fixed sum is paid to the dependants of a covered employee on

his death. It is also possible to offer what is known as graded cover that

offers different covers to different categories of employees within the

same group.

This scheme is renewable every year. As the premium rates are very low

when compared to individual insurance, the employees and the weaker

sections find it convenient and helpful. It helps their dependents in

reducing debt burdens.

Definition: Group life insurance is that form of life insurance covering

not less than

25 employees with or without medical examination, underwritten under

a policy

issued to the employer, the premium on which is to be paid by the

employer or by the employer and employees jointly and insuring all of


his employees or all of any class or classes thereof determined by

conditions pertaining to the employment for amounts

of insurance based on some plan which will preclude individual

selection. Where the

group is small, say less than 100, the insurer may insist on 100%

participation of

employees in the scheme, if the scheme involves contribution from

employees also.

For very large groups however, the insurer generally accepts the scheme

if 75% of

the employees participate.

Group gratuity scheme

The group gratuity scheme is an insurance scheme covering the

employer’s liability to

pay gratuity under the Payment of Gratuity Act, 1972. The amount of

gratuity to be paid

is at the rate of 15 days wages based on the wages last drawn, for each

completed

year of service. However this is subject to a maximum limit. The Act

requires that the

gratuity be paid to those employees who have served the employer

continuously for


at least five years.

Group superannuation scheme

After retirement, employees need financial security. The provident fund

and the gratuity

provided by the employer may not be sufficient in an inflationary

economy. Secondly

such lump sum payments are often utilised by the employees to meet

their current

contingent liabilities. The employers observed that the employees

actually also need

a periodical payment over and above the normal terminal benefits. Such

payment is

made in the form of pensions by creating a superannuation fund.

Superannuation

scheme aims at providing old age pensions to employees after

retirement.

Group insurance scheme in lieu of EDLI

Group insurance scheme in lieu of ELDI is also a type of group

insurance scheme

offered by life insurance. All employers who come under the

Employee’s Provident


Fund and Miscellaneous Provision Act 1952, have a statutory liability to

subscribe to

the Employee’s Deposit Linked Insurance Scheme, 1976, to provide for

the benefit of

life insurance to all their employees. Under the scheme in effect from

24th June, 2000,

the insurance benefit is equal to the average balance to the credit of the

deceased

employee in the provident fund during the last 12 months, provided that

where such

balance exceeds Rs. 35,000, insurance cover would be equal to

Rs.35,000 plus 25%

of the amount in excess of Rs.35,000, subject to a maximum of

Rs.60,000. Hence if

the length of service is inadequate and /or the salary is low, the benefit to

the family

of the employee in the event of his death would be meagre.

Where the employer provides for a better insurance benefit through an

alternative

insurance plan, he may be exempted from participating in this scheme.

LIC’s group

insurance scheme in lieu of EDLI has been recognised as one such

scheme.


Benefits to the employer

1. The premium payable by the employer in general is lesser than the

total

contribution, which has to be made under the EDLI scheme, especially

when

the salary level of the employees is high and the average age of the

employee

group is low.

2. Settlement of claim for this scheme is quicker; the insurer just asks for

the death

certificate and the claim form from the employer.

3. The premium paid by the employer is admissible as normal business

expenses

for income tax purposes.

Benefits to the employee

1. The coverage offered by LIC scheme is higher than that offered under

EDLI

scheme by the Provident Fund authorities.

Group savings linked insurance scheme

Group savings linked insurance scheme is a group insurance scheme,

which is very


popular since it offers a survival benefit in addition to the death benefit

available under

a group term assurance policy.

Where life insurance benefits are not linked to any statutory requirement,

there is

often a demand to link it with a survival benefit, particularly when the

employees come

forward to make contributions. The central government employee’s

group insurance

scheme is an example of such a combination.

This scheme was introduced with the objective of providing, low cost

insurance on a

wholly contributory and self-financing basis, with a survival benefit to

help the families

of the government employees in the event of death of the employees

while in service,

and a lump sum payment to the employees on cessation of employment.

Insurance companies now offer a similar scheme, which was originally

formulated

to suit the requirements of large public sector organisations like BHEL,

HHAL, HMT,

LIC, GIC, etc. The scheme has since been extended to reputed private

companies


and educational institutions.

The group savings linked insurance scheme can be a contributory or non-

contributory

scheme. Part of the premium collected is the savings premium that is

accumulated at the

rate declared from time to time; a part is utilised to provide life cover in

case of death.

Main features:

The employer acts as a facilitator and coordinator in maintaining the

scheme and

in making monthly deductions from salary.

Contribution consists of risk premium and the savings portion. The

savings portion

earns interest at the declared rate, compounding yearly.

As per regulations, the life cover premium and contribution for savings

should be

in the ratio 1:2 respectively.

Employees are grouped into several agreed categories based on their

salary and

therefore the contribution and coverage depend on the category to which

the

employee belongs.

Benefits


1. In the event of death of the employee, the nominee gets an assured

sum with

accumulated savings and interest on the same.

2. On retirement/resignation/termination, only the accumulated savings

portion

with interest is payable. Monthly contribution of employees is exempted

under

Section 88, of IT Act, 1961.

Requirements

The number of members joining the scheme has to be atleast 75% of the

total number

of employees. The scheme has to be made compulsory for all the new

employees.

The premium payable is based on weighted mean of the ages of the

members.

Contribution is uniform for each category.

Group Annuity Scheme

Employers who have a privately administered Superannuation Fund,

where moneys are

invested by Trustees as per Income Tax Rules can purchase pensions for

employees

as and when due under ‘Group Annuity policies from LIC.’


Group Leave Encashment Scheme

According to Accounting Standard (AS-15) of January, 1995 and

amended Section 209

(3) of the Companies Act, 1956, it has become necessary for employers

to provide for

the liability of leave encashment facility available to employees in the

annual books of

accounts. The Group Leave Encashment Scheme (GLES) is designed to

fund such

liabilities of employers.

Group Mortgage Redemption Assurance Scheme

This scheme covers the borrowers of Housing/Vehicle Loans from

financial institutions

where loans are recovered in EMI. Insurance cover allowed to borrower

upto the

outstanding loan excluding the EMI interest, subject to conditions

applicable to the

scheme.

Group Social security schemes

In many developed countries, insurance coverage either under individual

plans or

under group insurance is not available to persons belonging to the

weaker sections


of the community who are engaged in various occupations in the

unorganized sector.

For such people, social insurance is the only answer for providing a

certain minimum

of insurance cover. Therefore social security insurance is the growing

concern of many

nations. In most of the developed countries, insurers actively participate

in social

welfare measures. In our country also, insurance companies provide

protection to

weaker sections under group term insurance policy. The poorer section

groups include

handloom workers, rickshaw pullers, rural artisans, landless agricultural

labourers,

barbers, tailors co-operative milk producers etc. In the event of death of

the member,

a fixed sum is paid to the dependents. In case of an accident, the

dependents can

get double the sum.

Group Disability Income Insurance


Workers compensation provided to employees in the event of work-

related disability is

often inadequate. These benefits also fail to cover disability due to

accidents that are not

work- related.

The group disability income insurance available in most of the foreign

countries

(but not in India) provides economic security to the employees in the

event of

disability. Group disability income insurance is of two types - short term

plans and

long-term plans.

Case study

‘Annapoorna oils’ was a fast growing company started three years ago,

engaged in

the manufacture of edible oils. Although a relatively new company, it

already had a

market share of 10% in its home state, Andhra Pradesh. The wage

agreement with the

employee’s union, which was for three years had ended, and the union

had submitted


a charter of demands. The union, taking note of the high profits the

company had been

generating in the last two years, wanted a 25% wage increase across the

board for

all employees. The management was more or less inclined to agree.

However there

were no demands for any employee welfare insurance schemes from the

union.

At this point of time the group insurance manager, LIC, was making a

routine business

call for introducing group schemes in the company.

Question: If you were the group insurance manager what suggestions

would you

give to the company management at this point of time?
