Term Paper

INTRODUCTION TO
GENERAL
INSURANCE
Submitted by:
Sandeep Kumar Jha
Roll no. 87
Section - B
CONTENTS
TOPIC
PAGE NO.
Introduction/Definition
History
Principles involved
Types of General insurance
Objectives
Claims Management
Research Methodology
Financial Management
3
5
14
19
23
31
43
61
Advantages and Disadvantages

Recommendations
Conclusion
Biblography
70
71
72
73
INTRODUCTION
Introduction to General Insurance
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What is Insurance
An arrangement by which a company or the state undertakes to provide a guarantee
of compensation for specified loss, damage, illness, or death in return for payment
of a specified premium.
A thing providing protection against a possible eventuality.
Insurance is a means of protection from financial loss. It is a form of risk
management primarily used to hedge against the risk of a contingent, uncertain
loss.
An entity which provides insurance is known as an insurer, insurance company, or
insurance carrier. A person or entity who buys insurance is known as an insured or
policyholder. The insurance transaction involves the insured assuming a guaranteed
and known relatively small loss in the form of payment to the insurer in exchange
for the insurer's promise to compensate the insured in the event of a covered loss.
The loss may or may not be financial, but it must be reducible to financial terms,
and must involve something in which the insured has an insurable
interest established by ownership, possession, or preexisting relationship.
The insured receives a contract, called the insurance policy, which details the
conditions and circumstances under which the insured will be financially
compensated. The amount of money charged by the insurer to the insured for the
coverage set forth in the insurance policy is called the premium. If the insured
experiences a loss which is potentially covered by the insurance policy, the insured
submits a claim to the insurer for processing by a claims adjuster.
Generally there are only 2 types of insurance:1. Life insurance:- is a contract between an insurance policy holder and
an insurer or assurer, where the insurer promises to pay a
designated beneficiary a sum of money (the benefit) in exchange for a
premium, upon the death of an insured person (often the policy holder).
Depending on the contract, other events such as terminal illness or critical
illness can also trigger payment. The policy holder typically pays a premium,
either regularly or as one lump sum. Other expenses (such as funeral expenses)
can also be included in the benefits.
Life policies are legal contracts and the terms of the contract describe the
limitations of the insured events. Specific exclusions are often written into the
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contract to limit the liability of the insurer; common examples are claims relating
to suicide, fraud, war, riot, and civil commotion.
Life-based contracts tend to fall into two major categories:
Protection policies designed to provide a benefit, typically a lump sum

payment, in the event of specified event. A common form of a protection policy
design is term insurance.
Investment policies where the main objective is to facilitate the growth of
capital by regular or single premiums. Common forms (in the U.S.) are whole
life, universal life, and variable life policies.
2. General insurance: Insurance contracts that do not come under the ambit of life
insurance are called general insurance. The different forms of general insurance
are fire, marine, motor, accident and other miscellaneous non-life insurance. .
HISTORY
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Early methods
In some sense we can say that insurance appears simultaneously with the
appearance of human society. We know of two types of economies in human
societies: natural or non-monetary economies (using barter and trade with no
centralized nor standardized set of financial instruments) and more modern
monetary economies (with markets, currency, financial instruments and so on).
The former is more primitive and the insurance in such economies entails
agreements of mutual aid. If one family's house is destroyed the neighbors are
committed to help rebuild. Granaries housed another primitive form of insurance
to indemnify against famines. Often informal or formally intrinsic to local
religious customs, this type of insurance has survived to the present day in some
countries where a modern money economy with its financial instruments is not
widespread.
Turning to insurance in the modern sense (i.e., insurance in a modern money
economy, in which insurance is part of the financial sphere), early methods of
transferring or distributing risk were practiced by Chinese and Babylonian traders
as long ago as the 3rd and 2nd millennia BC, respectively. Chinese merchants
travelling treacherous river rapids would redistribute their wares across many
vessels to limit the loss due to any single vessel's capsizing. The Babylonians
developed a system which was recorded in the famous Code of Hammurabi, c.
1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant
received a loan to fund his shipment, he would pay the lender an additional sum in
exchange for the lender's guarantee to cancel the loan should the shipment be
stolen or lost at sea.
Achaemenian monarchs of Ancient Persia were the first to insure their people and
made it official by registering the insuring process in governmental notary offices.
The insurance tradition was performed each year in Norouz (beginning of the
Iranian New Year); the heads of different ethnic groups as well as others willing to
take part, presented gifts to the monarch. The most important gift was presented
during a special ceremony. When a gift was worth more than 10,000 Derik
(Achaemenian gold coin) the issue was registered in a special office. This was
advantageous to those who presented such special gifts. For others, the presents
were fairly assessed by the confidants of the court. Then the assessment was
registered in special offices.
The purpose of registering was that whenever the person who presented the gift
registered by the court was in trouble, the monarch and the court would help him.
Jahez, a historian and writer, writes in one of his books on ancient Iran: "Whenever
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the owner of the present is in trouble or wants to construct a building, set up a

feast, have his children married, etc. the one in charge of this in the court would
check the registration. If the registered amount exceeded 10,000 Derik, he or she
would receive an amount of twice as much.
A thousand years later, the inhabitants of Rhodes invented the concept of
the general average. Merchants whose goods were being shipped together would
pay a proportionally divided premium which would be used to reimburse any
merchant whose goods were deliberately jettisoned in order to lighten the ship and
save it from total loss.
The ancient Athenian "maritime loan" advanced money for voyages with
repayment being cancelled if the ship was lost. In the 4th century BC, rates for the
loans differed according to safe or dangerous times of year, implying an intuitive
pricing of risk with an effect similar to insurance. The Greeks and
Romans introduced the origins of health and life insurance c. 600 BCE when they
created guilds called "benevolent societies" which cared for the families of
deceased members, as well as paying funeral expenses of members. Guilds in
the Middle Ages served a similar purpose. The Talmud deals with several aspects
of insuring goods. Before insurance was established in the late 17th century,
"friendly societies" existed in England, in which people donated amounts of money
to a general sum that could be used for emergencies.
Separate insurance contracts (i.e., insurance policies not bundled with loans or
other kinds of contracts) were invented in Genoa in the 14th century, as were
insurance pools backed by pledges of landed estates. These new insurance
contracts allowed insurance to be separated from investment, a separation of roles
that first proved useful in marine insurance. Insurance became far more
sophisticated in post-Renaissance Europe, and specialized varieties developed.
Some forms of insurance had developed in London by the early decades of the
17th century. For example, the will of the English colonist Robert
Hayman mentions two "policies of insurance" taken out with the diocesan
Chancellor of London, Arthur Duck. Of the value of 100 each, one relates to the
safe arrival of Hayman's ship in Guyana and the other is in regard to "one hundred
pounds assured by the said Doctor Arthur Duck on my life". Hayman's will was
signed and sealed on 17 November 1628 but not proved until 1633. Toward the end
of the seventeenth century, London's growing importance as a centre for trade
increased demand for marine insurance. In the late 1680s, Edward Lloyd opened a
coffee house that became a popular haunt of ship owners, merchants, and ships'
captains, and thereby a reliable source of the latest shipping news. It became the
meeting place for parties wishing to insure cargoes and ships, and those willing to
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underwrite such ventures. Today, Lloyd's of London remains the leading market
(note that it is an insurance market rather than a company) for marine and other
specialist types of insurance, but it operates rather differently than the more
familiar kinds of insurance. Insurance as we know it today can be traced to
the Great Fire of London, which in 1666 devoured more than 13,000 houses. The
devastating effects of the fire converted the development of insurance "from a
matter of convenience into one of urgency, a change of opinion reflected in Sir
Christopher Wren's inclusion of a site for 'the Insurance Office' in his new plan for
London in 1667". A number of attempted fire insurance schemes came to nothing,
but in 1681 Nicholas Barbon, and eleven associates, established England's first fire
insurance company, the "Insurance Office for Houses", at the back of the Royal
Exchange. Initially, 5,000 homes were insured by Barbon's Insurance Office.
The first insurance company in the United States underwrote fire insurance and
was formed in Charles Town (modern-day Charleston), South Carolina, in
1732. Benjamin Franklin helped to popularize and make standard the practice of
insurance, particularly against fire in the form of perpetual insurance. In 1752, he
founded the Philadelphia Contributionship for the Insurance of Houses from Loss
by Fire. Franklin's company was the first to make contributions toward fire
prevention. Not only did his company warn against certain fire hazards, it refused
to insure certain buildings where the risk of fire was too great, such as all wooden
houses.
In the United States, regulation of the insurance industry primary resides with
individual state insurance departments. The current state insurance regulatory
framework has its roots in the 19th century, when New Hampshire appointed the
first insurance commissioner in 1851. Congress adopted the McCarran-Ferguson
Act in 1945, which declared that states should regulate the business of insurance
and to affirm that the continued regulation of the insurance industry by the states is
in the public's best interest. The Financial Modernization Act of 1999, commonly
referred to as "Gramm-Leach-Bliley", established a comprehensive framework to
authorize affiliations between banks, securities firms, and insurers, and once again
acknowledged that states should regulate insurance.
Whereas insurance markets have become centralized nationally and internationally,
state insurance commissioners operate individually, though at times in concert
through the National Association of Insurance Commissioners. In recent years,
some have called for a dual state and federal regulatory system (commonly
referred to as the Optional federal charter (OFC)) for insurance similar to the
banking industry.
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Insurance in india
In India, insurance has a deep-rooted history. It finds mention in the writings of
Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya
( Arthasastra ). The writings talk in terms of pooling of resources that could be redistributed in times of calamities such as fire, floods, epidemics and famine. This
was probably a pre-cursor to modern day insurance. Ancient Indian history has
preserved the earliest traces of insurance in the form of marine trade loans and
carriers contracts. Insurance in India has evolved over time heavily drawing from
other countries, England in particular.
1818 saw the advent of life insurance business in India with the establishment of
the Oriental Life Insurance Company in Calcutta. This Company however failed in
1834. In 1829, the Madras Equitable had begun transacting life insurance business
in the Madras Presidency. 1870 saw the enactment of the British Insurance Act and
in the last three decades of the nineteenth century, the Bombay Mutual (1871),
Oriental (1874) and Empire of India (1897) were started in the Bombay Residency.
This era, however, was dominated by foreign insurance offices which did good
business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and
London Globe Insurance and the Indian offices were up for hard competition from
the foreign companies.
In 1914, the Government of India started publishing returns of Insurance
Companies in India. The Indian Life Assurance Companies Act, 1912 was the first
statutory measure to regulate life business. In 1928, the Indian Insurance
Companies Act was enacted to enable the Government to collect statistical
information about both life and non-life business transacted in India by Indian and
foreign insurers including provident insurance societies. In 1938, with a view to
protecting the interest of the Insurance public, the earlier legislation was
consolidated and amended by the Insurance Act, 1938 with comprehensive
provisions for effective control over the activities of insurers.
The Insurance Amendment Act of 1950 abolished Principal Agencies. However,
there were a large number of insurance companies and the level of competition was
high. There were also allegations of unfair trade practices. The Government of
India, therefore, decided to nationalize insurance business.
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An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance
sector and Life Insurance Corporation came into existence in the same year. The
LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies
245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when
the Insurance sector was reopened to the private sector.
The history of general insurance dates back to the Industrial Revolution in the
west and the consequent growth of sea-faring trade and commerce in the
17th century. It came to India as a legacy of British occupation. General Insurance
in India has its roots in the establishment of Triton Insurance Company Ltd., in the
year 1850 in Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd,
was set up. This was the first company to transact all classes of general insurance
business.
1957 saw the formation of the General Insurance Council, a wing of the Insurance
Associaton of India. The General Insurance Council framed a code of conduct for
ensuring fair conduct and sound business practices.
In 1968, the Insurance Act was amended to regulate investments and set minimum
solvency margins. The Tariff Advisory Committee was also set up then.
In 1972 with the passing of the General Insurance Business (Nationalisation) Act,
general insurance business was nationalized with effect from 1st January, 1973. 107
insurers were amalgamated and grouped into four companies, namely National
Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental
Insurance Company Ltd and the United India Insurance Company Ltd. The
General Insurance Corporation of India was incorporated as a company in 1971
and it commence business on January 1sst 1973.
This millennium has seen insurance come a full circle in a journey extending to
nearly 200 years. The process of re-opening of the sector had begun in the early
1990s and the last decade and more has seen it been opened up substantially. In
1993, the Government set up a committee under the chairmanship of RN Malhotra,
former Governor of RBI, to propose recommendations for reforms in the insurance
sector.The objective was to complement the reforms initiated in the financial
sector. The committee submitted its report in 1994 wherein , among other things, it
recommended that the private sector be permitted to enter the insurance industry.
They stated that foreign companies be allowed to enter by floating Indian
companies, preferably a joint venture with Indian partners.
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Following the recommendations of the Malhotra Committee report, in 1999, the

Insurance Regulatory and Development Authority (IRDA) was constituted as an
autonomous body to regulate and develop the insurance industry. The IRDA was
incorporated as a statutory body in April, 2000. The key objectives of the IRDA
include promotion of competition so as to enhance customer satisfaction through
increased consumer choice and lower premiums, while ensuring the financial
security of the insurance market.
The IRDA opened up the market in August 2000 with the invitation for application
for registrations. Foreign companies were allowed ownership of up to 26%. The
Authority has the power to frame regulations under Section 114A of the Insurance
Act, 1938 and has from 2000 onwards framed various regulations ranging from
registration of companies for carrying on insurance business to protection of
policyholders interests.
In December, 2000, the subsidiaries of the General Insurance Corporation of India
were restructured as independent companies and at the same time GIC was
converted into a national re-insurer. Parliament passed a bill de-linking the four
subsidiaries from GIC in July, 2002.
Today there are 28 general insurance companies including the ECGC and
Agriculture Insurance Corporation of India and 24 life insurance companies
operating in the country.
EVOLUTION OF INSURANCE INDUSTRY IN INDIA IMPORTANT

MILESTONES
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Year
Event
1818
The advent of life insurance business in India with the

establishment of the Oriental Life Insurance Company in Calcutta.
1834
Oriental Life Insurance Failure
1850
The advent of General Insurance in India with the establishment of

Triton Insurance Company Ltd in Calcutta
1870
The enactment of the British Insurance Act
1907
The Indian Mercantile Insurance Ltd was set up
1912
The Indian Life Assurance Companies Act, 1912 was the first
statutory measure to regulate life business.
1928
The Indian Insurance Companies Act was enacted.
1956
Nationalization of Life Insurance Sector and Life Insurance

Corporation .The LIC absorbed 154 Indian, 16 non-Indian insurers
as also 75 provident societies.
1971
The General Insurance Corporation of India was incorporated as a

company
1973
General insurance business was nationalized with effect from
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1st January 1973.

107 insurers were amalgamated and grouped into four
companies namely:
1) National Insurance Company Ltd.,
2) The New India Assurance Company Ltd.,
3) The Oriental Insurance Company Ltd
4) The United India Insurance Company Ltd.
1993
The Government set up a committee under the chairmanship of

RN
Malhotra
former
Governor
of
RBI
to
propose
recommendations for reforms in the insurance sector

2000
The IRDA was incorporated as a statutory body in April 2000.

Foreign companies were allowed ownership of up to 26%.
2000-01 Insurance Industry had 16 new entrants, 10 in Life and 6 in

General Insurance
2001-03 Insurance Industry had 5 new entrants, 2 in Life and 3 in General
2003-04 Insurance Industry had 1new entrant, Sahara India Insurance

Company Ltd. In Life Insurance category
2004-05 Insurance Industry had 1new entrant, Shri Ram Insurance
company Ltd. In Life Insurance category
2005-06 Bharti Axa Life insurance company was granted Certification of
Registration in July
2006
Bharti Axa Life insurance company commenced its operations the
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newest player in the insurance sector.
PRINCIPLES OF INSURANCE
When a company insures an individual entity, there are basic legal requirements
and regulations. Several commonly cited legal principles of insurance include:
1. Indemnity the insurance company indemnifies, or compensates, the
insured in the case of certain losses only up to the insured's interest.
2. Insurable interest the insured typically must directly suffer from the loss.
Insurable interest must exist whether property insurance or insurance on a
person is involved. The concept requires that the insured have a "stake" in
the loss or damage to the life or property insured. What that "stake" is will
be determined by the kind of insurance involved and the nature of the
property ownership or relationship between the persons. The requirement of
an insurable interest is what distinguishes insurance from gambling.
3. Utmost good faith (Uberrima fides) the insured and the insurer are bound
by a good faith bond of honesty and fairness. Material facts must be
disclosed.
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4. Contribution insurers which have similar obligations to the insured

contribute in the indemnification, according to some method.
5. Subrogation the insurance company acquires legal rights to pursue
recoveries on behalf of the insured; for example, the insurer may sue those
liable for the insured's loss. The Insurers can waive their subrogation rights
by using the special clauses.
6. Causa proxima, or proximate cause the cause of loss (the peril) must be
covered under the insuring agreement of the policy, and the dominant cause
must not be excluded
Indemnification
To "indemnify" means to make whole again, or to be reinstated to the position that
one was in, to the extent possible, prior to the happening of a specified event or
peril. Accordingly, life insurance is generally not considered to be indemnity
insurance, but rather "contingent" insurance (i.e., a claim arises on the occurrence
of a specified event). There are generally three types of insurance contracts that
seek to indemnify an insured:
1. A "reimbursement" policy
2. A "pay on behalf" or "on behalf of policy
3. An "indemnification" policy
From an insured's standpoint, the result is usually the same: the insurer pays the
loss and claims expenses.
If the Insured has a "reimbursement" policy, the insured can be required to pay for
a loss and then be "reimbursed" by the insurance carrier for the loss and out of
pocket costs including, with the permission of the insurer, claim expenses.
Under a "pay on behalf" policy, the insurance carrier would defend and pay a claim
on behalf of the insured who would not be out of pocket for anything. Most
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modern liability insurance is written on the basis of "pay on behalf" language

which enables the insurance carrier to manage and control the claim.
Under an "indemnification" policy, the insurance carrier can generally either
"reimburse" or "pay on behalf of", whichever is more beneficial to it and the
insured in the claim handling process.
An entity seeking to transfer risk (an individual, corporation, or association of any
type, etc.) becomes the 'insured' party once risk is assumed by an 'insurer', the
insuring party, by means of a contract, called an insurance policy. Generally, an
insurance contract includes, at a minimum, the following elements: identification
of participating parties (the insurer, the insured, the beneficiaries), the premium,
the period of coverage, the particular loss event covered, the amount of coverage
(i.e., the amount to be paid to the insured or beneficiary in the event of a loss),
and exclusions (events not covered). An insured is thus said to be "indemnified"
against the loss covered in the policy.
When insured parties experience a loss for a specified peril, the coverage entitles
the policyholder to make a claim against the insurer for the covered amount of loss
as specified by the policy. The fee paid by the insured to the insurer for assuming
the risk is called the premium. Insurance premiums from many insureds are used to
fund accounts reserved for later payment of claims in theory for a relatively few
claimants and for overhead costs. So long as an insurer maintains adequate funds
set aside for anticipated losses (called reserves), the remaining margin is an
insurer's profit.
Insurance involves pooling funds from many insured entities (known as exposures)
to pay for the losses that some may incur. The insured entities are therefore
protected from risk for a fee, with the fee being dependent upon the frequency and
severity of the event occurring. In order to be an insurable risk, the risk insured
against must meet certain characteristics. Insurance as a financial intermediary is a
commercial enterprise and a major part of the financial services industry, but
individual entities can also self-insure through saving money for possible future
losses.
Risk which can be insured by companies typically shares seven common

characteristics:
1. Large number of similar exposure units: Since insurance operates through
pooling resources, the majority of insurance policies are provided for
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individual members of large classes, allowing insurers to benefit from

the law of large numbers in which predicted losses are similar to the actual
losses. Exceptions include Lloyd's of London, which is famous for insuring
the life or health of actors, sports figures, and other famous individuals.
However, all exposures will have particular differences, which may lead to
different premium rates.
2. Definite loss: The loss takes place at a known time, in a known place, and
from a known cause. The classic example is death of an insured person on a
life insurance policy. Fire, automobile accidents, and worker injuries may all
easily meet this criterion. Other types of losses may only be definite in
theory. Occupational disease, for instance, may involve prolonged exposure
to injurious conditions where no specific time, place, or cause is
identifiable. Ideally, the time, place, and cause of a loss should be clear
enough that a reasonable person, with sufficient information, could
objectively verify all three elements.
3. Accidental loss: The event that constitutes the trigger of a claim should be
fortuitous, or at least outside the control of the beneficiary of the insurance.
The loss should be pure, in the sense that it results from an event for which
there is only the opportunity for cost. Events that contain speculative
elements such as ordinary business risks or even purchasing a lottery ticket
are generally not considered insurable.
4. Large loss: The size of the loss must be meaningful from the perspective of
the insured. Insurance premiums need to cover both the expected cost of
losses, plus the cost of issuing and administering the policy, adjusting
losses, and supplying the capital needed to reasonably assure that the insurer
will be able to pay claims. For small losses, these latter costs may be several
times the size of the expected cost of losses. There is hardly any point in
paying such costs unless the protection offered has real value to a buyer.
5. Affordable premium: If the likelihood of an insured event is so high, or the

cost of the event so large, that the resulting premium is large relative to the
amount of protection offered, then it is not likely that the insurance will be
purchased, even if on offer. Furthermore, as the accounting profession
formally recognizes in financial accounting standards, the premium cannot
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be so large that there is not a reasonable chance of a significant loss to the

insurer. If there is no such chance of loss, then the transaction may have the
form of insurance, but not the substance.
6. Calculable loss: There are two elements that must be at least estimable, if
not formally calculable: the probability of loss, and the attendant cost.
Probability of loss is generally an empirical exercise, while cost has more to
do with the ability of a reasonable person in possession of a copy of the
insurance policy and a proof of loss associated with a claim presented under
that policy to make a reasonably definite and objective evaluation of the
amount of the loss recoverable as a result of the claim.
7. Limited risk of catastrophically large losses: Insurable losses are
ideally independent and non-catastrophic, meaning that the losses do not
happen all at once and individual losses are not severe enough to bankrupt
the insurer; insurers may prefer to limit their exposure to a loss from a
single event to some small portion of their capital base. Capital constrains
insurers' ability to sell earthquake insurance as well as wind insurance
in hurricane zones. In the United States, flood risk is insured by the federal
government. In commercial fire insurance, it is possible to find single
properties whose total exposed value is well in excess of any individual
insurer's capital constraint. Such properties are generally shared among
several insurers, or are insured by a single insurer who syndicates the risk
into the reinsurance market.
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TYPES OF INSURANCE
Some of the insurances are used by us in the daily life such as Motor Insurance,
Mediclaim but there are several other insurances which are used are by the
professional like Doctors, Chartered Accountants. Some are helpful in nation
building like Project insurance, Fire insurance, Engineering insurance. And for
export and imports of goods are covered by marine insurance. However insurance
is connected through our lifes directly or indirectly.
Following are the different types of insurance:
1. Motor Insurance
2. Marine Insurance
3. Fire Insurance
4. Project Insurance
5. Miscellaneous Insurance
6. Reinsurance
7. Aviation Insurance
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These can be further subdivided to various requirements of the people.

1. Motor Insurance: - It is mandatory as per the laws of India that no vehicle
will be put to use on road if it doesnt have motor insurance. It also helps the
country in reducing the final burden on the customer by keeping it safeguard
against the loss that can be caused by accident.
a. Package Policy
b. Third Party Insurance.
2. Marine Insurance: Marine insurance are taken by the seller or buyer of
goods whose consignments/ goods travels on high seas/road/air which can
be taken on within the country or outside the country.
a. Indigenous/ Open Policy
b. Open Cover Policy
c. Custom Duty Policy
3. Fire Insurance: It helps in protecting the insured from the fire and other
perils covered under the policy.
a. IAR( Industrial All Risk)
b. SFSP (Standard fire and Special Perils) policy.
c. MEGA policies: These are special type of fire insurance which is given to
the industries where coverage is provide to the clients where sum insured
is more than 2500 crores.
4. Project insurance: It helps in the nation building as crores of rupees is
involved in building projects. Insurance of these projects helps to strength
our country.
a. CAR (Contract all Risk)
b. MCE(Machine cum Erection Policy)
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c. EAR(Erection all risk policy)

d. SCE(Storage cum erection policy)
5. Miscellaneous Policies: All health related policies and policies which
doesnt covered by any department comes under miscellaneous insurance.
a. Mediclaim
b. Overseas Mediclaim
c. Shopkeepers policy
d. Doctors Indemnity Policy
e. Personal Accident Policy
f.
Liability Insurance:- Nowadays special emphasis has been placed by

the industries and the corporate on this types of insurance.
6. Reinsurance: Reinsurance is insurance that is purchased by an insurance

company (the "ceding company" or "cedent" or "cedant" under the
arrangement) from one or more other insurance companies (the "reinsurer")
directly or through a broker as a means of risk management, sometimes in
practice including tax mitigation and other reasons described below. The
ceding company and the reinsurer enter into a reinsurance agreement which
details the conditions upon which the reinsurer would pay a share of the
claims incurred by the ceding company. The reinsurer is paid a "reinsurance
premium" by the ceding company, which issues insurance policies to its own
policyholders.
There are two basic methods of reinsurance:a. Proportional Reinsurance
b. Non Proportional Reinsurance
The ultimate goal of that program is to reduce their exposure to loss by
passing part of the risk of loss to a reinsurer or a group of reinsurers.
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7. Aviation Insurance: Aviation insurance is insurance coverage geared

specifically to the operation of aircraft and the risks involved in aviation.
Aviation insurance policies are distinctly different from those for other areas
of transportation and tend to incorporate aviation terminology, as well as
terminology, limits and clauses specific to aviation insurance.
Aviation insurance provides coverage for hull losses as well as liability for
passenger injuries, environmental and third-party damage caused by aircraft
accidents.
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OBJECTIVE
Why insurance plays important role in our life:
Social effects
Insurance can have various effects on society through the way that it changes who
bears the cost of losses and damage. On one hand it can increase fraud; on the
other it can help societies and individuals prepare for catastrophes and mitigate the
effects of catastrophes on both households and societies.
Insurance can influence the probability of losses through moral hazard, insurance
fraud, and preventive steps by the insurance company. Insurance scholars have
typically used moral hazard to refer to the increased loss due to unintentional
carelessness and insurance fraud to refer to increased risk due to intentional
carelessness or indifference. Insurers attempt to address carelessness through
inspections, policy provisions requiring certain types of maintenance, and possible
discounts for loss mitigation efforts. While in theory insurers could encourage
investment in loss reduction, some commentators have argued that in practice
insurers had historically not aggressively pursued loss control measures
particularly to prevent disaster losses such as hurricanesbecause of concerns
over rate reductions and legal battles. However, since about 1996 insurers have
begun to take a more active role in loss mitigation, such as through building codes.
The Indian insurance market is the 19th largest globally and ranks 5th in Asia, after
Japan, South Korea china and twain.
Insurance promotes economic development through various channels:
Insurance reduces the capital firms need to operate.
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Insurance fosters investment and innovation by creating an environment of greater

certainty.
Insurers are solid partners for the development of a workable supplementary
system of social protection, in particular in the field of retirement and health
provision.
As institutional investors, insurers contribute to the modernization of financial
markets and
facilitate firms access to capital.
Insurance promotes sensible risk-management measures through the price
mechanism and other methods and contributes to responsible and sustainable
economic development.
Insurance fosters stable consumption throughout the consumers life.
Moreover, in a global economy characterized by rapid social and demographic
change and by the emergence of new risks (e.g. by climate change or technological
developments) and new needs (health care, pensions), cooperation between private
insurance and public institutions is essential. This cooperation can bring benefits in
many fields, for example, health of the working population, accident prevention,
compensation for agricultural risks, international trade (export credit insurance),
etc.
How does it helps in nation building:

The insurance industry promotes economic growth and structural
development of the country through the following channels:
Providing broader insurance coverage directly to firms, improving their
financial soundness
Insurance allows firms to expand and take on economic risks without the
need to set aside capital in liquid contingency funds. The absence of
adequate business insurance cover tends to be particularly harmful for small
firms. Limited capital and difficulty in accessing financial markets make
them vulnerable to adverse events. Without insurance, large contingency
funds would be needed to protect firms against risk. For many small firms
this would represent more capital than they presently employ in total.
Therefore, without insurance, the population of firms would decrease rapidly
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To Learn and gain insight into new Insurance products:

In order to cater to the needs of new requirement, new products are being
developed such as in order to provide respite to the banks from the loss
occurred due to theft of vital information of credit card, credit card insurance
has come up. Special package policies are introduced to provide benefit of 2
or more policies under one single policy.
In the same way today insurance market are developing very fast so in order
to remain active and insurance firms are coming new and creative policies
and ideas so that it can be helpful for the customers.
How does the insurance company works:
Methods of insurance
There are the following types of insurance:
1. Co-insurance risks shared between insurers
2. Dual insurance risks having two or more policies with same coverage
3. Self-insurance situations where risk is not transferred to insurance
companies and solely retained by the entities or individuals themselves
4. Reinsurance situations when Insurer passes some part of or all risks to
another Insurer called Reinsurer
INSURERS BUSINESS MODEL

Underwriting and investing
The business model is to collect more in premium and investment income than is
paid out in losses, and to also offer a competitive price which consumers will
accept. Profit can be reduced to a simple equation:
Profit = earned premium + investment income - incurred loss - underwriting
expenses.
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Insurers make money in two ways:
Through underwriting, the process by which insurers select the risks to

insure and decide how much in premiums to charge for accepting those risks
By investing the premiums they collect from insured parties
The most complicated aspect of the insurance business is the actuarial science of
ratemaking (price-setting) of policies, which uses statistics and probability to
approximate the rate of future claims based on a given risk. After producing rates,
the insurer will use discretion to reject or accept risks through the underwriting
process.
At the most basic level, initial ratemaking involves looking at
the frequency and severity of insured perils and the expected average payout
resulting from these perils. Thereafter an insurance company will collect historical
loss data, bring the loss data to present value, and compare these prior losses to the
premium collected in order to assess rate adequacy.[8] Loss ratios and expense loads
are also used. Rating for different risk characteristics involves at the most basic
level comparing the losses with "loss relativities"a policy with twice as many
losses would therefore be charged twice as much. More complex multivariate
analyses are sometimes used when multiple characteristics are involved and a
univariate analysis could produce confounded results. Other statistical methods
may be used in assessing the probability of future losses.
Upon termination of a given policy, the amount of premium collected minus the
amount paid out in claims is the insurer's underwriting profit on that policy.
Underwriting performance is measured by something called the "combined
ratio"[9] which is the ratio of expenses/losses to premiums. A combined ratio of less
than 100 percent indicates an underwriting profit, while anything over 100
indicates an underwriting loss. A company with a combined ratio over 100% may
nevertheless remain profitable due to investment earnings.
Insurance companies earn investment profits on "float". Float, or available reserve,
is the amount of money on hand at any given moment that an insurer has collected
in insurance premiums but has not paid out in claims. Insurers start investing
insurance premiums as soon as they are collected and continue to earn interest or
other income on them until claims are paid out. The Association of British
Insurers (gathering 400 insurance companies and 94% of UK insurance services)
has almost 20% of the investments in the London Stock Exchange.
In the United States, the underwriting loss of property and casualty
insurance companies was $142.3 billion in the five years ending 2003. But overall
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profit for the same period was $68.4 billion, as the result of float. Some insurance
industry insiders, most notably Hank Greenberg, do not believe that it is forever
possible to sustain a profit from float without an underwriting profit as well, but
this opinion is not universally held.
Naturally, the float method is difficult to carry out in an economically
depressed period. Bear markets do cause insurers to shift away from investments
and to toughen up their underwriting standards, so a poor economy generally
means high insurance premiums. This tendency to swing between profitable and
unprofitable periods over time is commonly known as the underwriting, or
insurance, cycle.
Claims
Claims and loss handling is the materialized utility of insurance; it is the actual
"product" paid for. Claims may be filed by insureds directly with the insurer or
through brokers or agents. The insurer may require that the claim be filed on its
own proprietary forms, or may accept claims on a standard industry form, such as
those produced by ACORD.
Insurance company claims departments employ a large number of claims
adjusters supported by a staff of records management and data entry clerks.
Incoming claims are classified based on severity and are assigned to adjusters
whose settlement authority varies with their knowledge and experience. The
adjuster undertakes an investigation of each claim, usually in close cooperation
with the insured, determines if coverage is available under the terms of the
insurance contract, and if so, the reasonable monetary value of the claim, and
authorizes payment.
The policyholder may hire their own public adjuster to negotiate the settlement
with the insurance company on their behalf. For policies that are complicated,
where claims may be complex, the insured may take out a separate insurance
policy add on, called loss recovery insurance, which covers the cost of a public
adjuster in the case of a claim.
Adjusting liability insurance claims is particularly difficult because there is a third
party involved, the plaintiff, who is under no contractual obligation to cooperate
with the insurer and may in fact regard the insurer as a deep pocket. The adjuster
must obtain legal counsel for the insured (either inside "house" counsel or outside
"panel" counsel), monitor litigation that may take years to complete, and appear in
person or over the telephone with settlement authority at a mandatory settlement
conference when requested by the judge.
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If a claims adjuster suspects under-insurance, the condition of average may come

into play to limit the insurance company's exposure.
In managing the claims handling function, insurers seek to balance the elements of
customer satisfaction, administrative handling expenses, and claims overpayment
leakages. As part of this balancing act, fraudulent insurance practices are a major
business risk that must be managed and overcome. Disputes between insurers and
insureds over the validity of claims or claims handling practices occasionally
escalate into litigation (see insurance bad faith).
Marketing
Insurers will often use insurance agents to initially market or underwrite their
customers. Agents can be captive, meaning they write only for one company, or
independent, meaning that they can issue policies from several companies. The
existence and success of companies using insurance agents is likely due to
improved and personalized service.
Marketing of insurance products is an important tool in the insurance business. The
marketing of insurance is possible in both the life insurance and the non-life
insurance departments.
The type of advertisement and marketing suitable for insurance business must be
decided. The insurers must consider their budget, and plan their marketing strategy
according to their budget. They must also consider their target market. For
example, Vendors who want to develop their insurance market need to determine
the types and nature of insurance offered. They also need to research the market
segment they are targeting.
The marketing tools that help in advertising the companys insurance policies are:
Online advertisement It is one of the insurance marketing tools. Since,
internet plays a very important role nowadays, online advertisement help the
insurance marketers to get noticed. Through studies it is found that 75 percent of
households have access to computers and internet resources. Thus, online
advertisements plays very important role in advertising the companys insurance
policy.
Block line advertisement It is another marketing tool used in trade journals,
industry publications and periodicals. This insurance marketing tool is useful with
the perspective of industry professionals who read these publications.
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Television advertisements and print advertisements These are the other

types of insurance marketing tools. These advertisements are the excellent forms of
insurance marketing as they have a greater impact and reach. However, the only
drawback is that both are very expensive. These may affect the insurance
companys advertising budget.
6.6.1 Issues in insurance marketing
Just like the other business marketing, there are some issues in insurance
marketing also.
Marketing issues for young growth-oriented insurance companies as well as other
insurance companies are as follows:
Initial marketing focus issues A potential initiator of an insurance marketing
business is needed, because, without support, the insurance company cannot
succeed. Thus, if the insurer or the insurance company does not have potential to
do marketing may have to face lot of difficulties in insurance marketing.
Marketing the company vs. sponsoring products issues A new or young
unknown insurance company has to be accepted within the market place before
marketing effectively to the end-users (consumers). These companies must be what
they are. Every prospect will not value innovation and dexterity; instead the correct
ones will value it. Thus, young insurance companies might face issues while
finding out the correct prospect of policies.
Marketing programs issues Once after a young insurance company is
positioned in the market, if its marketing program is not designed specifically to
accomplish their current insurance programs objectives, then the whole effort is
almost worthless. Thus, it should re-evaluate its marketing program to acquire
good marketing.
Exit strategy issues It is also one of the marketing issues. Right at the
beginning, an insurer or a founder must understand, and be able to explain how
they can exit. Even though they had given their expectation about companys
growth and prosperity, if they fail to describe which
type of customers would ultimately want to purchase into it, they are said to be
facing a marketing issue. Thus, they must plan for organising the company,
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provisioning of funds, and positioning of company in the market for the ultimate
exit opportunity.
Pricing issues The desired price or premium at which an insurer seeks to sell
their policy can impact on the distribution of the same. Since all the insurers wants
to make profit for their contributions, their distribution schemes may affect the
insurance products pricing. If too many competitors are involved, then ultimate
selling price may become barrier to meet sales targets, in such cases an insurer may
go for alternative distribution options.
Target market issues An insurance marketing is said to be effective, only if
customers obtain the policies. The insurers must determine the level of distribution
coverage needed that effectively meet customers requirements to reach their target
market.
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CLAIMS MANAGEMENT
BASIS OF CLAIMS MANAGEMENT

Claims management comprises of all the managerial decisions, and the processes
involved regarding the settlement and payment of claim with regard to the terms in
the insurance contract. The main emphasis here is on monitoring and lowering the
costs related in carrying out the claim process. The elements or the basis of claims
management are claims preparation, claims philosophy, claims processing and
claims settlement.
Claims preparation - Claims preparation includes reporting the damages
occurred to property, or injuries to people along with documentary proof of the
assessment of loss and details of the loss.
Claims philosophy - Claims philosophy deals with the claims handling
methods and procedures. It also contains the guidelines required to prepare the
receipt of claims from the insurers, analysis of the claim, the decision to be taken
on the issue or dispute, evaluation of the claim cost and expenses, supervise the
claim payment, and enhance the efficiency of claims settlement.
Claims processing - The claim process deals with the claims procedures and
handling of claims. Handling of claims is keeping track of the events which causes
the loss to the insured and gives a cause to the insured to file a claim. The claims
process has two procedures for the insurer and insured to be pursued. Considering
from the view of the insured, it includes the loss or damage by understanding the
cause for the loss, giving notice of the loss to the insurer, make available the
required proof of the loss to the insurer or the loss assessor and surveyors. From
the point of the insurer on receiving the receipt of the claim from the insured, the
immediate steps such as verification of the claim, reviewing the claim application,
responding to the insured and carrying out claims investigation, claims negotiation
and claim settlement.
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Claims settlement - Settling a claim is a process of negotiation between the

insured person and insurance provider. Insurance companies receive claims
relating to accidents and medical procedures. If there is evidence to support claims,
the claims settlement claims is very easy. The insurer may try to compare the claim
with similar ones in the past and try to lower the settlement. Thus good negotiation
skills are essential for an insured to get a good claims settlement.
3.2 CLAIMS SETTLEMENT
.
An insurance company to the insured to settle an insurance claim according the
guidelines stipulated in the insurance policy defines claims settlement as the
payment of proceeds.
The information furnished in the proposal form of an insurance contract is proved
correct only at the time of claim. If after inspection of the property, the claim
appears to be misinterpreting or false, then the insurance company can decline the
claim or avoid the policy or in certain instances the reduced amount of the claim is
paid. The points to be covered in case of a claim settlement procedure are:
The loss or damage is to be intimated to the insurance company immediately or
as soon as possible. On intimation, the insurance company is to forward a claim
form.
The completed claim form must have an estimation of all the items suffered
loss.
A licensed surveyor is arranged, if the loss incurred is major.
The insured needs to provide the required documents to support the loss.
To establish the cause of loss, the insured should prove that the loss has
occurred because of an insured peril.
3.2.1 General guidelines for claims settlement
There are some guidelines that must be followed while settling the claims. These
guidelines are general in nature, and are not compiled to be the same always.
Therefore, the claim settling authority uses discretion and records reasons.
Appointment of surveyor
The Insurance Act states that surveyor should survey claims above Rs. 20,000. The
surveyors appointment should be based on the following points:
The surveyor should have a valid license.
The surveyor selected should consider the type of loss and nature of the claims.
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Depending on the situation, if technical expertise is required, a consultant

having technical expertise assists the surveyor.
One surveyor can be used for various jobs, if the surveyors competence is good
for both.
Appointment of investigator
Depending on circumstances, it is necessary to appoint an investigator for
verifying the claim version of loss. The appointing letter of the investigator o
mentions all the reference terms to perform.
3.3 GUIDELINES FOR SETTLEMENT OF CLAIMS BY IRDA
3.3.1 Proposal for insurance
The proposals for insurance are:
In all cases to claim insurance, a proposal for grant of cover should be
submitted with proof (a written document). But a written proposal form is not
required for marine insurance markets.
Depending on the circumstances of the claim, forms and documents in the grant
of cover can be made available in the languages recognised by the constitution of
India.
The prospect is to fill the form of proposal, under the guidance of the provisions
of section 45 of the Insurance Act.
If a proposal form is not used, the insurer has to record the information
obtained, orally or in writing, and confirmation is to be done by the insurer within
15 days. If any information is not recorded, the burden of the missing information
lies on the insurer, in case he claims that the insured is suppressing information or
is providing misleading information.
The insurer is to educate the proposer, concerning the facilities available, like
appointing nominee or any facility based on the terms of act or conditions of
policy.
The insurer has to process the proposal quickly and efficiently. All the decisions
and confirmations should not exceed 15 days from the receipt of proposal by the
insurer.
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TYPES OF CLAIMS
Marine insurance claims
Marine insurance claims are made due to many causes which depend on weather
conditions, collisions, loss of cargo and so on. But Marine insurance policy does
not cover loss or damage due to willful misconduct, ordinary leakage, improper
packing, delay, war, strike, riot and civil commotion.
Marine insurance claim procedure:
In case of loss/damage in transit, a monetary claim must be lodged with the
carrier within the time limit to protect recovery rights.
Appointment of surveyor or claim representative in agreement with the insurer
to determine the nature, cause and extent of loss/damage is must.
The surveyor should inform the insurer about the value of loss incurred.
The claim procedure takes nearly about 1-3 weeks.
Depending on the nature of operations, deployment and the hazards that can occur,
the marine hulls are divided into vessels under tariff advisory committee, vessels
insured under policies. The types of claims which are covered under marine
insurance claims are total loss, particular or partial charges, salvage and salvage
charges, general expenses, collision liability and accident claims.
The procedure to claim with respect to hulls is:
A licensed surveyor is appointed in all cases of partial losses/ expenses. In case
of total loss, if the vessel is available for inspection a licensed surveyor is
appointed.
Abandonment of the vessel or wreck in writing is essential for constructing total
loss claims as a notice. The insurer refuses the acceptance of the abandonment of
the wreck till the probable liabilities attached to the wreck are estimated.
Total loss claims are settled on the basis of statements, documents and
surveyors report.
In case of partial loss, the surveyor must assess the amount of salvage.
A survey report consisting the following is required for processing and
documentation for the settlement of hull claims:
Name of the registered owner of the vessel.
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Identities regarding the vessels including registration details, license particulars,

including validity.
The details of the losses incurred.
The surveyors observation on the circumstance of the loss.
Quantifications of repairs, replacements, salvage and labour as applicable.
Cause of the loss as per the perils/hazards.
Fire insurance claims
Fire insurance covers damages due to fire for buildings, equipments and stocks.
Hence, it is essential that the insurance company officials visit the site of losses to
assess the damage caused by fire. If the loss incurred is within Rs. 20,000, and loss
of profits claim is not involved, then the officer has the discretion to do an
independent survey and settle the claim on the basis of the documents.
The documents generally required for processing fire insurance claims are:
Policy documents with terms conditions and warranties.
Claim form filled by the insured.
Survey report that consists of the indication of the cause of loss, assessment of
loss, confirmation of policy terms.
Salvage from fire and allied peril losses deteriorate. Hence disposal of the salvage
is undertaken on priority basis without waiting for the liability to be established. In
circumstances where the records required are destroyed in fire or through perils
like flood, then settlement is negotiated by the surveyor who asses such losses on a
realistic and reasonable basis.
Motor insurance claims
Motor insurance claim, facilitates the repair of the vehicles in any of the cashless
garage network. Nevertheless, if the vehicle is serviced in a garage outside the
network, then an insured person can reimburse the claim.
The documents that are required for settling motor claims are:
Filled claimed forms.
Registration certificate usually verified, for purchase details.
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Driving license as per policy, to verify validity and class of vehicle. This is not
relevant for the loss incurred to the parked vehicles.
Load challan, to verify the load carried was within the permissible limits.
Fitness certificate of the vehicle, to check its road worthiness.
Report by police is required in case of an accident involved.
Survey report which assesses and quantifies the payable claim, the detailed
explanation of the happening and the list of the replacement of parts.
The insurance company appoints a surveyor on intimation of loss. In case of major
accidents, the insured arranges the photographs of the vehicle at the spot of the
accident, depicting the external damages and the number plate of the vehicle. If for
any reason the driving license cannot be produced, the claim is considered on nonstandard basis.
Mediclaim insurance
Medical insurance is also known as Mediclaim policy or Mediclaim insurance in
India. It is a tool to deal with health related crisis. It offers financial assurance
during medical emergencies. Mediclaim insurance covers medical and
hospitalization expenses.
Mediclaim insurance plays a significant role in individuals financial planning. It
offers many benefits by lessening the burden on financial aspects and assisting in
solving medical problems. Mediclaim insurance is a non-life insurance. The
documents to be submitted, to avail mediclaim are hospitalization claim form
consisting duly completed claim form, bills receipts, discharge card, cash memos,
bills from chemists with the prescription, test reports and surgeons bill and receipt
consisting of the nature of operation.
The cases which are to be given special care in Mediclaim are:
If previous medical history is not shown, discharge card and admission papers
of the hospital are asked for verification.
The claims cannot be made for routine visits to the hospital.
There is indication of malpractice in the cash memos and bills.
Miscellaneous insurance claims

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Miscellaneous insurance claims cover claims based on the nature of package

policies. These policies are made user friendly, and they require a high degree of
skill and tact as they deal with emotions and sentiments of individuals. The
different types of miscellaneous insurance claims are:
Workmens compensation insurance claims - Worker's compensation claims are
raise by an employee who has been hurt on the job to obtain reimbursement for
medical treatment and salary lost. To receive this compensation, the injured
employee or the nominee must file a claim within a specified time period. In some
cases, the employee may need to undergo a check-up by a physician who is
authorized by the Worker's Compensation Board. For permanent disablement
claims, the agreement letter is to be submitted to the workmens compensation
commissioner while demanding compensation as per the Workmen Compensation
Act.
In addition to the claims form, the following documents must also be submitted:
o Medical certificate.
o Wages statement.
o Age proof as given in the company.
Personal accident insurance claims - Personal accident insurance claims can be
raised when some accidents occur that results in either death or disablement of the
policy holder. Following documents are to be submitted to process this personal
accident insurance claim:
o Filled in claim form.
o Doctors report.
o Investigation reports, like lab tests, x-rays and reports to confirm the injury.
o Age proof, in case the claim is for a dependent child.
o Medical bills, if there is provision to claim for medical expenses.
In case of fatal claims, the claim payment is made to the assignee. If there is no
assignee, then the legal representative receives the payment. In case of group
policy, the payment is made to the individual beneficiary, but payment to the
employer is also made with respect to the employee.
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FACTORS AFFECTING THE CLAIM MANAGEMENT

General factors affecting claims
The factors that affect claim settlement are:
The risk and cause of event covered in the policy.
The cause of event is directly related to the loss, a remote cause cannot be
placed in the settlement.
The policy should be valid on the date of event.
If conditions and warranties are not fulfilled according to the cover of the
policy, the cover of insurance does not come into effect even though premium is
paid.
The loss occurred should not be intentional in order to make profit.
Without the presence of the insurable interest for the property insured at the
time of loss, the benefit or compensation cannot be availed.
The assured has to make gains out of the insurance contract, as the contract is
indemnity in nature as it makes good the loss suffered.
Documentary evidence must support the claim.
The insured has the following alternatives for settling the claims:
Pay the claims as reported by the surveyor or the insurer, whichever is less.
Take help of agent or some persons who are well-versed in insurance, and come
to an agreement, if it is a disputed claim
In case of litigation caused by rejection of claim, the cost might be more if the
insurer loses the litigation.
Arrangements to replace asset, by repairing or by purchasing a similar asset can
be made. Repaired assets should continue to provide service as before.
Time element in the claims payment
The time value is very important in the settlement of a claim. Insurer should submit
the claim details within the specific period mentioned in the policy document. In
few cases, either the policyholder or the claimant or the claimant representative,
has to intimate the death of a person or the accident of vehicle, either orally or in
person, immediately.
The reasons for the importance of time element in the claims payment are as:
The delay in the claim settlement causes an unfavorable opinion about the
insurer.
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The extension of time increases the cost of claims.

The delay may result in the insurer having to pay interest on the due insurance
amount, or insurers may have to pay the case costs to the assured, as per the
direction of the court, which increases the costs.
The delay in payment, may lead to legal action, which is costly.
The delay may cause extra burden to the insurer due to the unproductive use of
manpower to defend, expenses incurred and waste of time on legal actions.
Legal actions will affect on the productive areas of the business mainly in the
marketing of the insurance business.
The delay may increase the number of cases with consumer protection councils.
Thus, the delay in the claims payment influences the present and future insurance
business along with the cost burden. Therefore, it is necessary to settle the claim
payments faster.
The reasons for the delay in claims settlement may include:
Late submission of claim form: The reasons for the late submission of claim
form may be:
o The ignorance or lack of knowledge of the existence of the insurance policies
against the lives of the persons, who face the event.
o Non-availability of the information to the beneficiary.
o The policy may not have any nominee details.
Innocence and illiteracy of the claimant: The claimant or assured may not
have the knowledge, and may fail to:
o File the claim papers.
o File the insurance claims within a specified period.
o Follow the claims procedure.
Incompletely filled claims forms: If the insured do not properly fill the claim
forms, then the insurers will:
o Fail to provide the necessary information to settle the claims.
o Delay the claim settlement asking for the desired information.
Insufficient proof: If the assured fails to submit the sufficient proof or the
supporting documents along with the claim form, which assists the claim evaluator
to know the event date or cause, then it may lead the claim evaluator to delay the
settlement of claims. The reasons include:
Reasons from insureds or claimants side:
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Non co-operation with the insurer to settle the claim or attain some
compromise.
Destroyed the evidences, with or without intention, which would otherwise
assist the estimation of the loss payable under the claim.
Not providing the information about the changes in the constitution of the
organisation or the changed address or any other information necessary to settle the
claim.
Reasons from insurers side:
Due to the pressure of work or may be intentional.
Lack of motivation.
Lack of awareness of importance of the claims settlement.
Lack of awareness among the staff of the organizations or imperfect supervision
or organizational structure.
Insurers can avoid the delay in submitting the claims or settlements, by providing
the awareness of the facts and importance of the insurance and the claims
procedure, to the claimant or the assured. They can take the help of agent or the
local staff to attain certain compromises with the claimants in the complex cases.
They must design the organisation in such a way, that it avoids holding of papers.
They should have well-trained and motivated staff. They can also use the latest
technologies, to assess the losses and recruit suitable staff for using the same.
TERMS IN CLAIMS
.
The general terms used in claims, on the basis of variety of claims, are maturity
and death claims. These claims are life insurance claims based on the type of life
policies.
Maturity claims
Maturity claims are availed in general endowment policies, which include money
back policies. The insurance company makes the payment on the maturity date or
post-dated cheques should be sent to policy holders in advance. The policyholder
or the nominee to of the policy makes the claims on maturity. If the life assured
dies before the maturity date, the claim is considered as death claim.
Those who can claim these policies are:
The assured.
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The payee, whose name appears in the benefit schedule of the policy as a party
interested.
The creditor who is assigned and nominated, to receive the payment under the
policy.
Amount payable
The amount paid on the maturity of the policy is the sum assured, plus profits and
bonus that increases with the policy. The profits are paid on pro-rata basis, i.e., in
the proportion of the premium paid and declared bonuses. The payment of profits
is a clause in the policy. Hence it is compulsory for the insurer to pay the bonus.
Dispute in payment of maturity claims
The general dispute that arises in payment of maturity claims, is regarding the
proof of age. If the age is not correctly checked at the time of issuing the policy
document, then malpractice can take place. Another dispute is regarding the good
title of the claimant on the policy. In case the insurer delays the payment of bonus
to the insured upon maturity, and if the payment of bonus is not as per the contract,
the policy holder can move to the court to claim such payment.
Death claims
Death claim policy is a request made by the beneficiary of a life insurance policy
on the death of the insured to the insurance company to make the payment
according to the terms of the policy.
Death claim is claimed, if the insured dies before the expiry term of the policy. The
occurrence of death must be intimated to the insurance company in writing. The
intimation must be from a concerned person, and must beyond doubt establish the
identity of the deceased person. The claimants paid on the happening of the event
are:
The legal heirs of the policyholder.
The nominees, assignees and transferees.
The wife and children of the assured according to the Married Womens
property Act.
The creditor in whose name the policy has been endorsed
The claim amount which is paid in a life insurance policy includes:
The amount insured or the face value of the policy.
Bonus declared by the company, which is recoverable as an insurance amount.
The share of profits in case of participation policy.
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Surrender value, if the policy has lapsed due to non-payment of the premium or
if the assured surrenders the policy, the insurance company may pay a percentage
of the premium paid, according to the ordinances of the company.
RESEARCH METHODOLOGY
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Insurance companies must determine what premium to charge that

will cover losses, and be competitive with other insurance companies.
To do this, insurance companies hire actuaries, who use statistics and
the law of large numbers to determine expected losses and the
probability of how much actual losses can deviate from expected
losses.
Probability and Statistics
Sometimes, the probability of an event can be determined a priori.
Such is the case with the flip of a fair coin, or the roll of a fair die,
because the possibilities are both limited and known. However, the
probability of most insurable events cannot be known a priori,
because there are too many factors that can influence the outcome,
resulting in highly variable outcomes. Thus, actuaries apply statistical
analysis to past events in an attempt to determine the frequency of
losses and the extent of those losses within a population, and how
much they vary from year to year.
A probability distribution summarizes this data by plotting possible
events against their probabilities. If there are only a limited number of
possibilities, then the distribution is said to be discrete; otherwise, it
is continuous. Plotting the roll of a die creates a discrete probability
distribution, because there are only 6 possibilities. However, most
insurable events have a continuous distribution because the outcomes
have a continuous range of possibilities.
A probability distribution can be characterized by its central tendency
and its dispersion. Central tendency is the expected value,
or mean (common symbol: ) of the distribution, and is equal to the
sum of each possible event (X) times the probability (P) of that event.
In the case for insurable losses, the mean is equal to the sum of the
amount of each possible loss times the probability of that loss.
Equation for Mean: = Xi Pi
Page 42
Example Calculating the Mean of 2 Samples of 3 Events

Amount
of
Loss (Xi)
Probability
of
Loss (Pi)
XiPi
$0
.10
= $0
$500
.20
= $100
$1,000
.05
= $50
Xi P i
= $150
=
Amount
of
Loss (Xi)
Probability
of
Loss (Pi)
XiPi
$100
.15
= $15
$500
.20
= $100
.035
= $35
Xi P i
= $150
$1,000
=
However, the mean does not measure dispersion, which is a measure

of how widely the individual events vary. A measure of dispersion is
important because, in determining risk for insurance purposes, the
greater the dispersion, the greater the variation in losses, and, thus, the
greater the objective risk. Wide variations in dispersion can average to
the same mean, as can be seen in the 2 tables above. Both have the
same mean of $150, but the losses in the 1s t table has a greater
dispersion that varies from $0 to $100, and in the 2n d table, the losses
vary from $15 to $100. Because the range is more limited in the 2nd
example, it poses less objective risk, and is, therefore, more
predictable.
The statistical measure of dispersion is the variance (common
symbol: 2 ), which is equal to the square of the difference between the
possible values and the mean.
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Equation for Variance: 2 = Pi(Xi - )2
To make the units of central tendency and variance the same, the square root of the
variance, called the standard deviation (common symbol: ), is used to represent
dispersion.
Example Calculating the Variance and Standard Deviation of the Above 2
Samples
For the 1s t distribution, the variance and standard deviation are:
2 = .1(0-150)2 + .2(500 - 150)2 + .05(1,000 - 150)2 = 2,250 + 24,500 +

36,125 = 62,875
= 62,875 = 250.75 (rounded).
For the 2n d distribution:
2 = .15(100-150)2 + .2(500 - 150)2 + .035(1,000 - 150)2 = 375 + 24,500 +

25,287.5 = 50,162.5
= 50,162.5 = 223.97 (rounded).
The greater the standard deviation for a loss event, such as fires, the
greater the uncertainty of the event within a given time frame, and,
therefore, the greater the potential for losses. However, the standard
deviation can only be calculated from an observed population or a
representative sample of the population. The law of large numbers is a
useful tool because the standard deviation declines as the size of the
population or sample increases, for the same reason that the number of
heads in 1 million flips of a coin will probably be closer to the mean
than in 10 flips of a coin.
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Central Limit Theorem

The central limit theorem states that as the sample size (n) grows, the distribution
becomes more like the normal distribution of the entire population, with the mean
of the sample more nearly equal to the mean of the population, and the standard
error (s), which is the standard deviation of the sample, approaches the standard
deviation of the population (p).
Equation for Standard Error: s = p/n
Thus, the difference between the standard error and the
standard deviation of the population diminishes as the
sample size, n, increases.
The normal distribution is represented by the bell-shaped
curve, with 68% of the distribution lying within 1
standard deviation, 95% lying within 2 standard
deviations, and 99.7% of the distribution lying within 3
standard deviations.
As the size of the sample increases, dispersion decreases. The normal distribution
curve for the sample size of 100,000 is narrower than the curve for 10,000, while
they both have the same mean. Thus, losses are more predictable for the larger
sample size.
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Underwriting Risk and Insurance Premiums

When an insurance company increases the size of its customer base, it
increases its underwriting risk because the sample size is greater, and,
therefore, there is a greater chance of loss. But the company also
collects more premiums to finance those losses. In fact, premiums
grow faster than the underwriting risk, because the underwriting
risk is equal to the square root of n times the standard deviation for
the population, and, thus, increases by the square root of the sample
size, n, but the premiums grow by n.
Underwriting Risk = n s = n p/n = n p
Premiums Collected = n Amount of Premium
Insurance companies expect lossesthat's their business, but, by
increasing the customer base, actual losses more closely equal
expected losses, thus, reducing objective risk, which allows insurance
companies to charge a premium that covers losses and operating
expenses, and that provides a profit, but no more.
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Note, also, that because dispersion increases with smaller sample sizes
or populations, to set an accurate premium, the probabilities
calculated from samples or populations must be applied to insured
groups that are at least as large as the samples used to estimate
probabilities. If the insured group is smaller than the samples, then
dispersion will be greater, which may cause greater losses for the
insurance company and cause greater variability of losses from year to
year.
Some insurance premiums cannot be calculated using the law of large
numbers. Because catastrophes are infrequent and highly variable,
catastrophe insurance cannot use the law of large numbers.
Instead, catastrophe insurance relies on statistical models to forecast
disasters and transfers much of its risk to investors by selling
catastrophe bonds, contingent surplus notes, and even exchangetraded options. Most catastrophe insurance is provided by reinsurance
companies, because they generally cover a much larger geographic
area.
The Law of Large Numbers Helps to Avoid Credit Risks and to Maintain
Stable Premiums
The law of large numbers is useful to insurance companies because
they charge a premium to cover losses before they occur. If the
insurance company could charge the premium after the covered
period, then the premium charged could reflect actual losses.
Likewise, if a group decided to pool its losses among the group, then
the law of large numbers would not be needed, since the cost of the
group's losses could be distributed to each member of the group. The
disadvantage of this approach is that there is significant credit risk, in
that many members of the group may decide not to pay. The other
disadvantage is that premiums would be much more volatile,
especially for smaller groups.
Hence, the main benefits of using the law of large numbers to insure a
group is to avoid credit risk by charging a premium that reflects
probable losses before the losses occur and to charge a more stable
premium.
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INSURANCE CYCLE
The tendency to swing between profitable and unprofitable periods over time is
commonly known as the underwriting or insurance cycle.
The
underwriting
cycle
is
the
tendency
of property and casualty
insurance premiums, profits, and availability of coverage to rise and fall with some
regularity
over
time.
A cycle
begins
when
insurers
tighten
their underwriting standards and sharply raise premiums after a period of severe
underwriting losses or negative stocks to capital (e.g., investment losses). Stricter
standards and higher premium rates lead to an increase in profits and accumulation
of capital. The increase in underwriting capacity increases competition, which in
turn drives premium rates down and relaxes underwriting standards, thereby
causing underwriting losses and setting the stage for the cycle to begin again. For
example, Lloyd's Franchise Performance Director Rolf Tolle stated in 2007 that
mitigating the insurance cycle was the biggest challenge facing managing
agents in the next few years. The Insurance Cycle affects all areas of insurance
except life insurance, where there is enough data and a large base of similar risks
(i.e. people) to accurately predict claims, and therefore minimize the risk that the
cycle poses to business.
For the sake of argument let's start from a 'soft' period in the cycle, that is a period
in which premiums are low, capital base is high and competition is high. Premiums
continue to fall as naive insurers offer cover at unrealistic rates, and established
businesses are forced to compete or risk losing business in the long term.
The next stage is precipitated by a catastrophe or similar significant loss, for
example Hurricane Andrew or the attacks on the World Trade Center. The graph
below shows the effect that these two events had on insurance premiums.
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After a major claims burst, less stable companies are driven out of the market
which decreases competition. In addition to this, large claims have left even larger
companies with less capital. Therefore, premiums rise rapidly. The market hardens,
and underwriters are less likely to take on risks.
In turn, this lack of competition and high rates looks suddenly very profitable, and
more companies join the market whilst existing business begin to lower rates to
compete. This causes a market saturation and Insurance Cycle begins again.
Dealing with insurance cycle
While many underwriters believe that the cycle is out of their hands, Lloyds is
trying to push for more proactive management of the ups and downs of the
industry. In 2006 they published their Seven Steps to managing the insurance
cycle:
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1. Dont follow the herd. Insurers need to be prepared to walk away from markets
when prices fall below a prudent, risk-based premium.
2. Invest in the latest risk management tools. Insurers must push for continuous
improvement of these tools based on the latest science around issues such
as climate change, and make full use of them to communicate their pricing and
coverage decisions.
3. Dont let surplus capital dictate your underwriting. An excess of capital
available for underwriting can easily push an insurer to deploy the capital in
unsustainable ways, rather than having that capital migrate to other uses such
as hedge funds and equities, or returning it to shareholders.
4. Dont be dazzled by higher investment returns. Dont let higher investment
returns replace disciplined underwriting as base rates creep up on both sides of the
Atlantic. Notionally, splitting the business into insurance and asset
management operations, and monitoring each separately, is one way to achieve
this.
5. Dont rely on the big one to push prices upwards. The spectacular insured
loss should not be used as an excuse to raise prices in unrelated lines of business.
Regulators, rating agencies, and analysts not to mention insurance buyers are
increasingly resisting such behavior.
6. Redeploy capital from lines where margins are unsustainable. There is little
that individual insurers can do to alter overall supply-and-demand conditions. But
insurers can set up internal monitoring systems to ensure that they scale back in
lines in which margins have become unsustainable and migrate to other lines.
7. Get smarter with underwriter and manager incentives. Incentives for key
staff should be structured to reward efficient deployment of capital, linking such
rewards to target shareholder returns rather than volume growth. The Lloyds
Managing Cycle report has several problems. It focuses on the industry as a whole
being able to work together to reduce the effect of market fluctuations. However,
this is somewhat unrealistic, as if underwriters do not write business in a soft
market (i.e. at cheap prices for the customer), it will be hard to win this business
back in a hard market due to loyalty issues.
Rolf Tolle asserts that There is nothing complex about the cycle. It is about
having the courage of your convictions to act with strength.. Swiss Re argue that
instead of beating the cycle, insurers should learn to anticipate its fluctuations.
Cycle management is essentially proper timing. Monitoring the market,
predicting market trends and accurately assessing prices play an important role.
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Swiss Re give several examples of potential business strategies. One is to write

risks at a roughly fixed rate. This is clearly not practicable as it does not allow for
the cyclical nature of the market. Another is to fail to react fast enough to changes
in the market, which leaves a company even more exposed. The recommended
strategy is one that relies on prediction of the business cycle and setting premiums
based on models and experience.
PRICING PROCEDURE
The previous section dealt with the concept of insurance pricing. This section will
deal with the pricing procedure, and its determination.
Basically,
determine
procedure
Division),
(DPP).
pricing procedure is a methodical and sequential use of technique to

the right price of the product. The insurer can determine the pricing
based on Sales area (Sales Organisation, Distribution Channel, and
Customer Pricing Procedure (CPP), and Document Pricing Procedure
The following elements are considered while pricing insurance products:

Claims cost It includes claims paid in conjunction with settlement expense,
estimate far outstanding claim, and so on.
Business acquirement cost It includes commission, brokerage and business
development
cost, and so on.
Management expenses These include salaries, rent and other expenses
necessary for managing an organisation.
Profit It include return on the capital cost.
Pure premium method
The pure premium is the average loss per coverage unit, or in particular, the
product of the average severity and the average frequency of loss.
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The average frequency of loss (F) is obtained by dividing the number of losses
invited (NL) from the number of coverage units (NE) in the appropriate class. This
concept is used to calculate the average number of losses for all insured.
The average severity loss (S) is obtained by dividing the monetary amount of all
losses (SL) from the number of losses invited (NL). It represents the severance of
the loss.
Thus, the pure premium is determined by multiplying the average frequency of loss
and the average severity of loss, but it reflects the average loss of insured
expectations. In order to meet all the losses, each insured who are involved in the
particular class of business must pay the amount before commissions and
administrative expenses.
Pure Premium (PP) = (average frequency of loss) * (average severity of loss)
PP = (NL/NE) * (SL/NL) = (SL/NE)
These concepts can be used to determine the losses, but they do not consider the
distribution of losses. Thus, the pure premium distribution is defined as the
probability distribution of total losses for an appropriate class of business.
A measure of the intrinsic variation in the population is the variance represented
by:
PP2 = (PP - ) / (n-1)
Where, = theoretical pure premium distribution mean.
However, the marketing manager refers only a sample but not the entire pure
premium population. Thus, while estimating they are expected to refer to the true
value.
Assume that the insurance marketing manager refers to a sample randomly from
the basic pure premium distribution. Then, it shows that the average losses for a
sample of n coverage units follow a normal distribution. In other words, if they
refer random samples continually then it represents the average or mean of the
sample pure premium follows a normal distribution. Thus, the standard variation or
error of the mean of a sample pure premium distribution (m) is defined as the
standard deviation of the pure premium population distribution adjusted by the
number of coverage units and is given by,
m = PP / n
The calculation of standard error of the pure premium distribution is necessary
because the average pure premium is incremented by a risk factor that compensates
the error to the expected variations in the productivity.
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In addition, the accuracy of the estimation increases with the increase in the
number of coverage because the standard error of the average of the pure premium
decreases with the increase in the sample size.
Two other factors also come into picture during the estimation of pure premium,
which are credibility factor and loading factor.
Credibility factor refers to the extent to which an experience of an appropriate
insured considered in the pricing process. It refers to the amount of confidence of
the price-maker (marketing manager) to show that the available data represents the
losses to be expected in the future accurately. Thus, the equation for the acceptable
pure premium is given by,
PPacceptable = (C*PPi) + ((1 C)*PP)
Where, PPi = pure premium derived from the experience of the insured.
PP = pure premium derived from the experience of the actual population.
C = credibility factor, 0 C 1
Loading factors refers to the transaction expenses and the profit margin expressed
in terms of percentage. Taking into account the traditional issues in concern with
the economic objectives of regulation and the fair price discrimination, the gross
premium value is determined by using the equation,
Gross premium = Pure premium / (1 loading factor)
The pure premium can also be determined as follows,
Let,
The costs of set of events to be covered for an individual on yearly basis,
{c} = {c1,c2,,cn}
Probabilities that occur for each events in a year, {p}={p1,p2,,pn}
The risk function of this insurance policy be X. Then, X(ci) =pi
Group of persons insured, {H} = {1,2,,h}
Thus, without security charges the pure premium is calculated as follows:
PRICING OBJECTIVE
The marketing manager has to decide the objectives of pricing. Pricing objectives
guides the decision makers to make price policies, to plan pricing strategies and to
set actual prices.
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Pricing objectives are the overall goals that describe the role of price in the longrange plans of organizations. The pricing objectives guide the marketing manager
in developing marketing plans.
The insurance pricing has the following general objectives:
1) The rating system must create adequate premium income for the insurance
corporation to be able to settle its claims and expenses; to provide a realistic return
rate to the sponsors of funds and to finance continuing growth and expansion.
2) The rate must not be excessively high and allow unusual gains for the insurer.
The rate must be justifiable.
3) The rates must not be discriminatory, in the sense that it must not be the same
for heterogeneous buyers and must not be different for homogeneous buyers.
4) The rating system must be easily understandable.
5) The pricing system should not be expensive to use.
6) The rates should not be frequently changed as the public cannot face wide
variation in costs every year.
7) The methods should encourage the reduction of losses by providing inducement
to the insured to avoid losses.
BASIC PRICING METHODS
Basically, the pricing method gives us an idea on how to set the product price. The
price value that is set for the product in the insurance company will change over
time for many reasons. The company can decide to change the pricing method only
when it finds out the customers needs and competition in the market.
The pricing methods allow companies to think about their business, industry and
customer. The vendors must understand the variety of options available along with
the merits and demerits of the pricing methods, before any one of them. They may
also merge a number of pricing methods to suit their business and the type of
products they sell.
There are three basic pricing methods, which are:
Cost-based pricing In this method, the price includes the cost of ingredients
and cost of operating the business. This method is based on product cost subtotal,
which includes the costs of operating the business such as costs of reserves,
transportation, advertisement, rent and other costs involved in manufacturing the
products. The cost-based pricing comprise of three methods, which are:
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o Mark-up pricing Mark-up pricing includes a profit percentage with product

cost. All businesses with many products use this type of pricing because it is
simple to calculate. The profit level must be specified in terms of percentage. This
is added to the production cost to set product price. This type of pricing is common
in retail business as they have many types of products and purchases from many
vendors.
o Cost-plus pricing In a cost-plus pricing, a percentage is added to an unknown
product cost. This type of pricing works properly when production costs are not
known. The only difference between mark-up and cost-plus pricing is that, in costplus pricing both consumer and vendor settle on the profit percentage and believe
that product cost is unknown whereas in mark-up pricing product cost is known.
The cost-plus pricing reduces your risk if you produce custom order products for
other firms or individuals.
o Planned-profit pricing Planned profit pricing method enables you to earn a
total profit for the business. It is different from the first two types of cost-based
pricing. The first two pricing methods focus on per unit price. In planned-profit
pricing, the product price is calculated by combining per unit costs with output
projections. Planned-profit pricing uses break-even analysis to calculate product
price. This method is suitable for manufacturing businesses since the manufacturer
has the ability to increase or decrease the production depending upon the available
demand or profit.
Advantage of cost-based pricing
The main advantage of this type of pricing is that it enables the manufacturer to
determine how different levels of output can affect the product price as well as to
examine how different prices affect the amount of output needed.
Disadvantages of cost-based pricing
The following two disadvantages of cost-based pricing result in it not working for
some businesses:
The cost-based pricing does not consider how customer demand affects price.
The cost-based pricing method does not include competition in the market.
Competition-based pricing In this method, the product price includes costs
of raw materials and the cost of operating the business and is similar to the
competitors price. In competition-based pricing, vendors must ensure the
following three factors:
o The product price needs to be similar to the competitors price.
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o Set price to increase the customer base.

o Larger market share through price.
Advantage of competition-based pricing:
The main advantage of this pricing method is that it focuses on industry as well as
competition. The companies that follow competition-based pricing examine the
types of existing and upcoming competition. It helps you to manage the business
according to the competition. Products that have a unique or innovative quality can
be priced more than their net-worth.
Disadvantages of competition-based pricing:
Though the competition-based pricing has advantages, there are few
disadvantages:
The production costs of the company may be ignored due to the focus on the
prices set by competitors.
This method requires more time to carry out and update market research.
Competitors can easily copy the price chosen.
Customer-based pricing Customer-based pricing is also known as valuebased pricing. In this method, the product price is based on the customer demand
or need for the product. Product that are unique or innovative, create greater
demand. The different factors to be considered in customer-based pricing are:
o Setting a price that supports the value of the product.
o Setting a price to increase product sales.
o Designing a range of prices that attracts many customer groups.
o Setting a price to increase sales volume.
o Pricing a bundle of products that reduces the catalogues or excite the customers.
Disadvantages of customer-based pricing
The disadvantages of customer-based pricing method are:
Production costs can get ignored.
Competition may be neglected.
It is necessary to set both wholesale and retail prices products.
Volume discounts and rebates need to be considered.
Tips for Successful Pricing
Below are some tips for the insurer to be successful in pricing insurance.
Page 56
Be creative Apply new techniques to sell more to existing customers as well

as to attract new customer groups.
Listen to your customer Review the consumer comments periodically to
gather new ideas.
Do your homework Record notes on how you arrived at a price so that you
can make related assumptions in the future.
Cover the basics Merge pricing methods to ensure the three basics of pricing
which include product price, competition and customers.
Be flexible Regularly review both internal and external issues and calculate
how a price change would affect the new situation
PRICING OF INSURANCE PRODUCTS
Basically, there is a difference between insurance products pricing and physical
products pricing. It is difficult to determine the investment costs in insurance
products pricing than that of physical products pricing. Thus, pricing of insurance
products means the determination of the investment costs on insurance products. It
is still complicated when compared with the other services, where we can estimate
the cost of providing the service with sound accuracy. Furthermore, in insurance
transactions, the premium is collected before providing predetermined services,
that is, the payment of claims. Insurance can be considered as the business of
buying risk. Insurers have to face difficult situation while selling a policy, as they
have to decide the appreciable cost of the policy because it depends upon whether
or not the losses occur and if they do, how many and how large they will be. Thus,
they charge different prices (premiums) for different people for the policies that
provide same kinds and amounts of insurance.
The methods used to determine the pricing of insurance products are:
Insurance rating methods
Insurance rating methods are used to determine the pricing of the insurance
products. That is, an insurance price is the price per unit of insurance and is a
function of the price of insurance. The three basic insurance pricing (rating)
methods are:
Judgment rating This method is applicable where we find very less or no
quantitative data of the risk similar to that of proposed risk. The rate is mostly
based on the sponsors own judgment after evaluation of all
Page 57
coverages. This method is commonly used in ocean marine insurance and in some
lines of inland marine insurance.
Class rating Generally, this method is practically applied rating method in
insurance business. In this method, the risks are classified based on some important
characteristics. Insurer will charge the same price per unit of coverage for the
insured risks that belong to the same class. In this method, the classifications and
the respective rates are in the form of printed manuals. Thus, this rating method is
also known as manual rating. In this method, prices are based on age, gender,
physical fitness, lifestyle, and so on. This method is used in life insurance,
proprietary insurance, automobile insurance, workers compensation and health
insurance and so on.
Merit rating The modification of class rating is referred to as merit rating. It
alters the class rate of a particular class insured based on individual loss
experience. In this method, insurer assumes that the loss experience of a particular
insured will differ considerably from the loss experience of the other insured.
There are three different types of merit-rating plans. These plans are:
o Schedule rating In this plan, all insurance coverage is rated separately. For
calculating the schedule rates, firstly, the risk (the person or object insured) must
be examined, to make out the features that are about to cause losses or to prevent
them. Then, the risk is compared with the average or standard risk of its type.
Finally, the risks desirable features are deducted from the standard rate and its
undesirable features are added, thus, the resultant rate is the modified rate that
reflects the characteristics of risk for which it is used.
o Experience rating This plan modifies the class rate based on the claim
experience of a particular coverage where the actual losses for a time (normally
two or three years) are compared with the average risks in the same class. If the
risk has a better value than the average, you have to reduce the rate; else if the risk
has a worst value than average, you have to increase the rate. This plan is used only
for larger risks that are having many losses each year that reflect on trend. Thus,
this plan is generally restricted to larger firms that generate a sufficiently high
volume of premiums and more probable experience.
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o Retrospective rating This plan modifies the insurance price on the basis of
current experience. This is usually done by determining the final prices
retrospectively in the policy contract. Normally, in this plan, insurers specify the
maximum and minimum range and determine the final premium after the policy
expires and depends on the Life Insurance and/or Non-life insurance Pricing.
FINANCIAL MANAGEMENT IN INSURANCE

COMPANIES
Page 59
MANAGEMENT AND INVESTMENT OF FUNDS

An insurance company should manage and invest its funds wisely in order to
maximise the profits of its investments, and reimburse the money for an insured
person in case of a loss. Financial management is the responsibility of the financial
managers. The basic functions of financial managers are:
Preparation of the companys financial plan.
Managing capital and excess income.
Managing cash flows and investments.
Creation of financial reports and measurement of financial performance.
Auditing and internal cost control.
Financial objectives of an insurance company
Insurance is a vital element of any sound financial plan. Insurance companies are
financial institutions with financial goals. Insurance prevents the risk of a financial
loss. The major financial objectives of an insurance company are:
Profitability This is a financial objective that increases the returns of the
stakeholders of the company. It determines the insurers ability to manage the
business. The insurer must perform the following tasks in order to ensure longterm profits :
o Attain high quality ratings from insurance rating agencies.
o Offer funds for savings/investment.
o Ensure payment of dividends to stake holders.
o Provide funds to broaden products and supply channels.
o Provide funds for growth and achievement.
Solvency This is defined as the capability to meet the financial requirements
arising out of obligations. Insurance companies should frame their policies
according to the obligations to be paid to certain benefits in future. They must
preserve the minimum standard of capital and surplus as per the law. The risks
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related to the insurers investments, and the definite businesses the insurer sells,
determines the legal minimum standard of capital.
The risks that an insurance company faces while performing and managing the
business that affects its solvency are:
Pricing risk - Pricing risk is a risk that arises when regulations affect the
premium rates of the insurance companies or the possibility of the insurers
claims and expenses being different from what was anticipated.
Asset risk - Asset risk is the risk of loss of an investment because of various
reasons, other than a change in market interest rates.
General business risk - This is the risk, in which the losses arise as a result of
ineffective business practices or because of the environmental factors that are
purely beyond the control of the insurer.
Interest rate risk - This type of risk occurs due to variations in the market
interest rates. For example, loss on sale of a bond when market rates increase, is an
interest rate risk.
Planning financial goals and strategy
The financial goals of insurers are to maximise profits and maintain solvency. The
insurer is forced to maintain the tradeoff between the two since profit involves risk
taking and maintaining solvency involves risk avoidance. Therefore the correct
balance between the two is vital for the financial success of an insurance company.
Financial strategy is related to the investment strategy as well, since the investment
strategy helps in taking decisions concerning the investments to be made. To
identify investment strategies the following factors must be considered:
The money needed after a certain amount of time.
The time period after which the money is required.
The financial risk involved.
The return expected after the time period.
If the financial goals are established and the risk relationship is known, then the
strategy is formed in the following two ways:
1) Aggressive strategy emphasizes profitability and can threaten the companys
solvency.
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2) Conservative strategy is a way wherein strategies which affect solvency are

avoided and the rate of return is enhanced.
Types of investments
To achieve profitability, an insurer has to continue to invest funds in different areas
efficiently. The insurer invests most of the funds in accordance to the policy chosen
by the applicant. While investing, the insurer has to check if there are liquid funds
for settling claims, and then invest the rest in a long term investment plan to get
higher returns. The investor (insurer) should consider the quality, security and
marketability of the investments to attain the highest rate of interest.
Different types of claims have different types of investments. As a policy can be
life or non-life, long term or short term; similarly, the investments are classified
into the following:
Government bonds - Government bonds are debt securities given by the
Government of India and are issued in Indian rupees. Government bonds have a
period of maturity from one year to 30 years. The investor can buy these bonds at
face value with discount or at the premium. The investor avails a fixed rate interest
for the bond period. When the bond reaches the maturity date, the investor receives
the full amount (face value). The investor can also sell these bonds in a secondary
market, even if the bond maturity date is not reached.
Some benefits of government bonds are:

o Regulation of nationwide cash circulation.
o Safer than stock market investments.
o Insignificant credit risk, as the government has the highest credit ratings.
The risks associated with government bonds are:
o The political issues in the country affect them.
o If the government bond is purchased from any foreign country, then the return
depends on fluctuations in foreign currency market.
o Inflation may affect the return of these bonds.
o Government bonds have lower returns than corporate bonds.
Other types of bonds The other types of bonds include the following:
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o Public sector undertaking bonds - These bonds are meant for long term or
medium term investments. Public sector undertaking bonds are also government
bonds, but these are sold in a private basis. Here, the government finds out and
offers the bonds to investors at fixed rates.
o Corporate bonds - Corporate bonds are private sector bonds offered by different
private sector corporations of India. These can be long term bonds, which may
have term up to 15 years. These bonds can be purchased by any investor, but with a
higher degree of risk than the government bonds. The risk depends upon the
marketing conditions and investment rates. When the investor expects a higher
return, then the degree of risk is also more.
o Financial institutions and banks - In India, more than 80 percent of the total
bonds in the market are sold by financial institutions and banks. These bonds are
well regulated, and offer higher returns to the investors. Such bonds are suitable for
investors aiming at large scale investment.
o Emerging markets bonds - The Government of India issues bonds abroad, to
raise capital for economic development in India. Unlike other bonds in India, these
bonds are issued in U.S dollars or in Euro. The insurer itself pays the higher
interest rates charges on these bonds. The risk involved in this bond is that, it is
subjected to the economic conditions of the country.
o Tax-saving bonds- the Government of India, to help the citizens to save taxes
fully or partially, issues Tax-saving bonds. These five-year bonds are usually issued
by the Reserve Bank of India. These bonds have an interest rate of 6.5 percent, and
are paid in every six months. The investor does not have to pay the tax for the
interest income until the bond maturity.
REGULATION RELATING TO INVESTMENT
As per the insurance act, every insurer has to keep investing a certain amount of
capital in India. The income from the policyholders premium cannot be invested
outside India.
In life insurance business, an insurer has to constantly invest funds. The value of
the funds invested should not be less than the total amount to be paid to the life
insurance policyholders, in case of a loss or maturity of the policy. The insurers in
life insurance business can keep on investing their controlled funds (i.e. funds
other than pension, unit liked life insurance and general annuity business) in a
manner, as given in the table:
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Regulations on Investments in Life Insurance Business

Areas of investment
Percentage of funds invested
Government securities
Government
securities
or
other
approved securities:
Approved investments:
(a) Infrastructure and social sector:
(b)Other
to
be
governed
by
exposure/prudential norms :
25%
Not less than 50 %
Not less than 15%
Not exceeding 35%
Other than in Approved Investments to Not exceeding 15%

be governed by Exposure/Prudential
Norms :
While calculating investments, the amount of funds the insurer gives the RBI with
respect to the life insurance business will be taken as an investment to the
government securities. If the insurer makes any investment other than in Indian
rupee or purchases any immovable property outside India, then it will be
considered as a personal investment. Any investor should not invest funds out of
the given budget in shares of private companies.
Insurance companies (inside or outside of India) that have one-third of their share
capital outside India or that have one-third of their governing members residing
outside India need to maintain the required assets in India in the form of a trust in
order to discharge their liabilities.
Every insurer shall keep on investing the funds of unit linked life insurance
business with respect to the model of investment approved by policy holders. The
insurer can invest unit linked policies only in categories, where the assets are easily
marketed. The total investment in other approved investment categories should not
exceed twenty five percent of the total funds. In general insurance business, the
insurer shall keep on investing the assets all the time in a manner, as given in the
table
Regulations on Investment In General Insurance Business
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Areas of investment
Central government securities:

Not less than 20%
State government securities and other Not less than 30%

guaranteed securities including the
aforesaid:
Housing and Loans to State Government Not less than 5%
for Housing and Fire Fighting
Equipment
Investments in Approved Investments
(a) Infrastructure and Social Sector:
(b) Others to be governed
exposure/prudential Norms:
Not less than 10%

by Not exceeding 30%
Other than in Approved Investments to Not exceeding 25%

be governed by Exposure/Prudential
Norms:
In pension and annuity business, an insurer needs to invest the funds as per given
the table :
Regulations on Investments in Pension and Annuity Insurance Business
Areas of investment
Government Securities:
Not less than 20%
Government
securities
or
other Not less than 40%
approved securities, including the
above:
Balance to be invested in Approved Not less than 60%
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Investments and to be governed by

Exposure/Prudential Norms:
In Indian reinsurance business, every re-insurer has to constantly invest funds as

per the rules of general insurance business.
Investment criteria and prudential norms
IRDA has laid down the following criteria to govern all insurers:
Depending on the total policies written in a particular year, for general insurance
companies the criteria for investment in the rural sector is the following
percentage:
For non-life insurer
o 2% in the 1st financial year.
o 3% in the 2nd financial year.
o 5% in the 3rd financial year.
For life insurer
o 5% in the 1st financial year.
o 7% in the 2nd financial year.
o 10% in the 3rd financial year.
o 12% in the 4th financial year.
o 15% in the 5th financial year.
The positive side of these IRDA norms is that it prevents risky and false
investments, and fuels the priority sectors. But, investing in high returns funds is
also prevented since the returns on gifts and government securities is lower.
Prudential norms
The prudential norms include:
Investment in equity shares and debentures must not to exceed more than 15%
of the total capital by both life and non life insurers.
Loans must not to exceed 10% of the estimated annual accretion of funds.
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Separate statements are required for activities yielding 10% more revenue
according to accounting norms.
There are two auditors appointed, one with 4 years tenure and another with 5
years tenure, to ensure that there is no lack of audit in the insurance company.
Asset Liability Management (ALM)
ALM is a cash flow management program in which the financial effects of the
insurers product liability are co-ordinate with the financial effects of the business
investment. The financial managers of the insurance company are responsible for
asset liability management as it is important for the cash flows arising out of assets
and liabilities to match and support the insurers strategic objective of solvency and
profitability. They identify the patterns of companys cash out flows and construct
a portfolio of assets that increase cash inflows which are sufficient to meet the
companys obligations on time.
The risk arising due to growth in a company is because the growth is not matched
with the sufficient resources or wrong selection/pricing of products is done. To
maintain good asset liability ratio, insurers follow the following asset-liability
management methods:
Cash flow testing In this method, the cash flow of the insurance company is
tested under various interest rate conditions.
Cash flow matching In this method, a block of liabilities with certain cash
flows is matched with a block of assets with identical cash flow.
Immunization Here the liability portfolio duration is calculated and matched
with asset portfolio of identical duration.
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ADVANTAGES & DISADVANTAGES
Insurance is bought to hedge the risks of the future, which may or may not take
place. It is used to hedge against the risk of an uncertain loss. An insurance
company, which sells the insurance to insured or policyholder, is called as insurer.
The amount charged by insurance company for a certain amount of insurance
coverage is called as premium.
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Advantages of insurance:
Risk Cover: life is full of uncertainties, so insurance helps your family members to
continue to enjoy a good quality of life from unforeseen events and to cover the
risk of loss.
Protection from rising health expenses: The cost of health insurance is increasing
day by day so at this time, insurance protects the people from diseases and hospital
expenses.
Planning for future needs: It also helps as long-term investments. It helps people
to meet their future goals like childrens education, marriage, and building home
planning and plan for relaxed retired life.
Assured income through annuities: Insurance is one of the instruments for
retirement planning. Money saved at the time of earning life and that money will
be utilized after retirement.
Disadvantages of insurance:
Disadvantages of insurance may be due to agents, when you work with an agent
you have to pay commission to him, this may lead extra cost. If you cut the
middlemen then you can save money then it can be paid as premium for insurance.
RECOMMENDATIONS
In the modernized well advanced hi-tech approach to the customer every possible
facilities and effort to build up the confidence of the rising policy holders towards .
Page 69
Insurance companies, to complete one another nothing is left to recommend. But

some recommendations that are intensely felt and highly required for insures to
sustain in the market. These are as follows:
a)More and more transparency should be ascertained between
i n s u r e r s a n d policy holders.
b)Particularly, in the emerging boom in the insurance company, every
insurance company should be customer centered, and well versed in the handling
of problem and grievances of the policy holders.
c ) E a c h a n d E v er y pr o d u c t l a u n c h e d by t h e I n s u r a n c e c o mp a n y
s h o u l d b e i n favor of increasing need of policy holders. IRDA should be more
and more responsible to the insurance sector by determining some standard.
It should be mandatory to every insurers to make more and more responsible and
responsive to the policy holders so that comprehensive understanding may be
developed among policy holders. It may be beneficial on both sides.
CONCLUSION
The insurance sector is a colossal one and is growing at a speedy rate of 15-20%.
Together with banking services, insurance services add about 7% to the countrys
GDP. A well-developed and evolved insurance sector is a boon for economic
development as it provides longterm funds for infrastructure development at the
same time strengthening the risk taking ability of the country.
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The insurance sector plays a fundamental role in the economy. A world without
insurance would be much less developed economically and much less
stable.The risk transfer function of the insurance sector contributes, on the one han
d, to the creation of a more stable operating environment for companies and, on the
other hand, deduction in the level of capital required by undertakings to protect
themselves against risk. This allows companies to concentrate their attention and
resources on their core business. Insurance provides an efficient way to support the
State in the provision of pensions, healthcare and social security. Through products
designed to complement State provision, the insurance sector contributes
significantly to guaranteeing a stable and lifelong level of revenue (pension,
education leave, maternity leave) and to limiting the impact of demographic
change on states budgets. Insurers have also demonstrated their ability to manage
other fields of social security such as compensation and rehabilitation accidents at
work. These products have a double economic impact, protecting workers from the
economic consequences of accidents, and encouraging a healthy working
population. Insurance not only provides a stable operating environment, but it also
improves companies awareness of risk management, and influences their
investment decisions. Differences in price and policy conditions are key factors
that influence undertakings and households decisions, and contribute to
sustainable and responsible use of available resources. For instance, insurance
contributes to the reduction of risks linked to climate change by supporting
Government policies designed to limit climate change and to reduce its impact.
BIBLOGRAPHY
1. Insurance Institute of India General Insurance Books

2. Actuarial World
3. Claims Management in Insurance
Page 71
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INTRODUCTION TO

Advantages and Disadvantages

Protection policies designed to provide a benefit, typically a lump sum

the owner of the present is in trouble or wants to construct a building, set up a

Introduction to General Insurance

Following the recommendations of the Malhotra Committee report, in 1999, the

EVOLUTION OF INSURANCE INDUSTRY IN INDIA IMPORTANT

Introduction to General Insurance

The advent of life insurance business in India with the

Oriental Life Insurance Failure

The advent of General Insurance in India with the establishment of

The enactment of the British Insurance Act

The Indian Mercantile Insurance Ltd was set up

The Indian Insurance Companies Act was enacted.

Nationalization of Life Insurance Sector and Life Insurance

The General Insurance Corporation of India was incorporated as a

General insurance business was nationalized with effect from

Introduction to General Insurance

1st January 1973.

The Government set up a committee under the chairmanship of

recommendations for reforms in the insurance sector

The IRDA was incorporated as a statutory body in April 2000.

2000-01 Insurance Industry had 16 new entrants, 10 in Life and 6 in

2003-04 Insurance Industry had 1new entrant, Sahara India Insurance

Bharti Axa Life insurance company commenced its operations the

Introduction to General Insurance

newest player in the insurance sector.

4. Contribution insurers which have similar obligations to the insured

modern liability insurance is written on the basis of "pay on behalf" language

Risk which can be insured by companies typically shares seven common

individual members of large classes, allowing insurers to benefit from

5. Affordable premium: If the likelihood of an insured event is so high, or the

be so large that there is not a reasonable chance of a significant loss to the

Introduction to General Insurance

These can be further subdivided to various requirements of the people.

c. EAR(Erection all risk policy)

Liability Insurance:- Nowadays special emphasis has been placed by

6. Reinsurance: Reinsurance is insurance that is purchased by an insurance

Introduction to General Insurance

7. Aviation Insurance: Aviation insurance is insurance coverage geared

Introduction to General Insurance

Why insurance plays important role in our life:

Insurance fosters investment and innovation by creating an environment of greater

How does it helps in nation building:

Introduction to General Insurance

To Learn and gain insight into new Insurance products:

INSURERS BUSINESS MODEL

Insurers make money in two ways:

Through underwriting, the process by which insurers select the risks to

If a claims adjuster suspects under-insurance, the condition of average may come

Television advertisements and print advertisements These are the other

Introduction to General Insurance

BASIS OF CLAIMS MANAGEMENT

Claims settlement - Settling a claim is a process of negotiation between the

Depending on the situation, if technical expertise is required, a consultant

Introduction to General Insurance

Identities regarding the vessels including registration details, license particulars,

Miscellaneous insurance claims

Miscellaneous insurance claims cover claims based on the nature of package

Introduction to General Insurance

FACTORS AFFECTING THE CLAIM MANAGEMENT

The extension of time increases the cost of claims.

Introduction to General Insurance

Insurance companies must determine what premium to charge that