Insurance Certification Examination Notes

Chapter - 1
What is insurance?
Insurance is a contract between the insurance company (insurer) and the policyholder (insured), in return for
a consideration (the Premium), the insurance company promises to pay a specified amount to the insured on
the happening of a specific event.

How does Insurance work?

 Risk Retention – Not very wise way of handling Risk.
 Risk Transfer – Transfer the risk from one person who does not have the capacity to bear them to someone
who does have the capacity for them, is known as Insurance.
Thus, Insurance is nothing but a risk transfer mechanism, it protect the economic value of assets.

Role of Financial services and insurance

 Social – If a family that loses its income provider they will depend on the income of their relatives for their
living expenses and other financial goals. Insurance provides a security against these dependencies.
 Economically –
1. Its provides Employment (Direct and Indirect both)
2. Provide Loan to Government (through Bonds, especially in traditional plans)
3. Invest in the various infrastructure project (through debenture of private companies)
Insurance benefits society as a whole, not just those who hold insurance.

Some of the benefits for a policyholder are:

1. Investment option (Equity & Debt both)
2. Protection of financial security
3. Tax benefits
4. Planning for life stage needs
5. Loan against insurance policy (though Insurance company and Banks)

Benefits of a professional insurance market

 Need based selling
 Stop Mis-selling
 Disclosure (Complete disclosure about the product, breakup of premium, commission etc.)

Benefits of professional Insurance Markets

1. Higher confidence among the policyholders
2. Increase in insurance penetration
3. Social Benefits
4. Employment generation
5. Increase in profits for the insurance company.

History of Insurance
1. Phase I – Pre-Liberalization (1818-1993)
2. Phase II – Liberalization (1993-1999)
3. Phase III – Post- Liberalization (1999 onwards)

Pre-Liberalization:
Key Point:
 First Insurance company-1818, The Oriental Life Insurance Company at Kolkata
 First Regulation – The Indian Life Assurance Companies Act 1912
 Insurance Act 1938
 1956 – Government nationalized 254 private, foreign companies and provident society and passed LIC Act
1956 and give LIC the only power to do Life Insurance business in India.

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 1972 – Formation of General Insurance Council

 1972 – The General Insurance Business (Nationalisation) Act 1972 (GIBNA) was passed. The General
Insurance Corporation of India (GIC) was formed under the company Act 1956 as a private company limited
by shares.
Liberalization: Under this phase the Government was started reforms:
Key Point:
 Malhotra Committee (1993) – In 1999 the government has formed Malhotra committee under the
chairmanship of Mr. R. N. Malhotra to make recommendation for the reform of the Insurance sector. On the
basis of his report given in 1994, the government open the life insurance sectors for the private and foreign
insurance companies.
 1999 – Formation of IRDA as an autonomous body to regulate the development of Insurance industry. The
IRDA was incorporated as a statutory body in April 2000.
Post- Liberalization (1999 onwards):
Key Point:
 The government permitted the foreign companies to do life insurance business in India but only through a
joint venture with an Indian company.
 FDI LIMIT – 26%
 W.e.f. 21st March 2003 GIC ceased the power of as a holding company of his four subisidiaries. The
ownership vested with the government of India. GIC was notified as a reinsurance company for Non Life
Insurance.
Recent Development in the Insurance Industry.
 Growing importance of IT
 Bancassurance
 Online Sales
 Micro-Insurance
 Grievance Redressal – The customer can either call a toll-free number 155255 or email
complaints@irda.gov.in to register their complaint.
Types of Insurance Organisations
 Life Insurance Company
 Non Life Insurance Company
 Reinsurance
Role in the Insurance Industry / Constituents of the insurance markets:
1. Agents (Individual Agents) 6. Third Party Administrators (TPAs)
2. Corporate Agent 7. Loss Adjusters/Surveyors
3. Intermediaries (Brokers) 8. The Regulator (IRDA)
4. Underwriters 9. Training Institutes
5. Actuaries 10. NGOs

Actuaries: They calculate the standard price of the product (designed the products) and also do the annual valuation
of the company to know the solvency of the company and declare bonuses.
Training Institutes: Insurance Institute of India, National Insurance Academy (NIA), and Insurance Institute of Risk
Management (IIRM)

NGOs: Promoting the customers rights. Linking buyer and seller, spreading awareness about insurance products.

Insurance Distribution:
 Direct Marketing Channels
 E-Sales (Online Sales)
 Indirect Marketing Channels
 Bancassurance

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 Comparison websites (like policybazar.com etc.)

Role and Functions of an agent:

Becoming an agent: The Insurance Act 1938 requires that an agent must have a license.
Role of an Agent:
 Act as the main link between the insurance company and the insured.
 To recommend the right products that addresses the client’s needs.
 Act in the interest of the Insurance Company.
 Facilitate the smooth sale of insurance products.
 Service the client properly unity maturity or in the event of a claim.

Code of conduct for an agent:

 Specified by the IRDA in the IRDA (Licensing of Insurance Agents) Regulation 2000
 Should disclose all information about the Company and the Products
 Act in the interest of the client and Company both.

Chapter - 2
Risk and Insurance:
Concept of Risk:
Definition: The Risk can be defined in three different ways:
1. Risk is the chance of damage or loss.
2. Risk is doubt concerning the outcome of a situation
3. Risk is something or someone considered to be a potential hazard.

In Life Insurance ‘risk’ is used to describe the possibility of an unfavourable event occurring, e.g. untimely death,
or an unforeseen disability.

Risk to human life:

 Illness
 Premature Death
 Accidents
 Unemployment
 Living to long beyond retirement

Components of Risk:
 Uncertainty
 Level ( Probability or Frequency, Extent or severity)
 Peril and hazard
Life Insurance companies determine the level of risk based on past data (claim experience). The past data indicates
that individuals within a certain age group (say 60-70) are more prone to heart attacks then the level of risk will be
considered to be higher for that age group.

Peril and Hazard

Peril: Peril refers to a specific event which might cause a loss. Peril is the risk being insured against.
Hazard: Hazard is a condition that either increases the chance that a peril will happen or might cause that it effect to
be worsen if it does.

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(e.g. Lung cancer is a peril and smoking can be a Hazard.)

Type of Hazards:
 Physical Hazards
 Moral Hazards
Physical hazard:- Physical hazard refer to the physical characteristics of the risk associated with the life insured. E.g.
 Age, Occupation, Gender, Residence, Habits, Height and weight
 Hobbies, Physical characteristics, Medical condition
 Physical handicap, Medical history of the family, Personal history
Moral hazard:- More difficult to define because it relates to the conduct and/or intention of the proposer. Such as:
 Reckless or careless attitude to health and personal safety
 Previous history of dishonesty
 Previous claim history if it reveals a history of fraudulent/frequent claim, bankruptcy or financial difficulties.

Fraud and Moral Hazard: The following are some example:-

 Requesting large amount of insurance at the later stage of their lifecycle
 Insurance taken by an individual with no dependants
 Insuring a non-earning member of the family
 When the nominee of the policy is not among the dependants of the insured
 Past premium payments of the individual are much higher than they are capable of paying.
 When the medical check-up is carried out at a different place from the place of insurance.
 If the relationship of the agent and the proposer causes the underwriter concern.

Some of the hazards that would cause an individual to be categorised as high risk are:
 Risky job profile
 Existing medical conditions
 Lifestyle of an Individual
 Age group of the individual
High risk proposals can be accepted on other than standard terms such as charging a higher premium imposing
restrictions on the sum insured, term or a lien etc.

Insurable Risks:
 Financial Risks : Loss of Life, Disease or disability, Retirement, Savings accumulation
 Pure Risks: Those risk where there is no possibility of making a profit. There can be a loss and the best
possible outcome is one of breaking even.
 Particular Risks: Those risk that are personal or local in their effect.

Pooling of Risk: Insurance company pools the premium collected from several individuals to insure them against
similar risks. The insurance company maintains different sets of pools for different risks e.g. Life Insurance, Care
Insurance, Home Insurance, Travel Insurance etc.

The premium that is charged should be sufficient to meet:

 The administrative expense
 Other expenses for maintaining the pool
 A certain percentage of the profit.

Law of large numbers.

Insurance companies apply the law of large numbers to determine the cost of total annual claims. An insurance
company will set the rates of its premiums according to the number of claims it will expect to pay over the term of
the policies.

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Chapter – 3
Part 1. Insurance Principles:
Essentials of Valid Contract of Insurance:
An Insurance contract is an agreement enforceable by law, between the Insurance company and the Insured person.
Features of a valid contract:
 Offer and acceptance
 Consideration
 Capacity to contract: (a. Age of majority, B. Sound Mind, C. Not disqualified by law, from entering into
contacts.)
 Consensus ad idem (This means both the parties must understand and agree upon the same thing, in the
same sense. )
 Legality of object or purpose
 Capacity of Performance: The contract must be capable of being performed by both the parties. e.g. A
person requesting life insurance for a very high amount should be capable of paying the premium required.
The Policy Document:
The policy document is not the contract of insurance in itself; rather, it is evidence of the contract.

Utmost Good Faith:

A positive duty voluntarily to disclose, accurately and fully, all facts material to the risk being proposed, whether
requested or not.
Breach of the duty of utmost good faith:
1. Non-disclosure: or the omission to disclose a material fact, either inadvertently or because the proposer
thought it was immaterial.
2. Concealment
3. Fraudulent Misrepresentation (e.g. a person declares his age to be five year less than he actually is)
4. Innocent misinterpretation ( inaccurate statements which are believed to be true)
Duty of disclosure: Applies on both Insurer and Insured
Insured’s duty of disclosure:
It is important that the proposer makes full and complete disclosure of all the material facts relating to the contract
(e.g. facts, relating to their health, lifestyle (alcohol, tobacco), Denial of Insurance in past by any company or
acceptance of proposal in the past at a higher premium than normal)
The duty of disclosure is revived at each renewal stage.
Insurer’s duty of disclosure:
The insurer also has a duty of disclosure to the insured:
 Insurer should make sure that it discloses all information related to the insurance product in all its literatures.
 In health Insurance at the time of renewal some companies offer a discount on the premium or increase the
cover by a certain percentage keeping the premium the same, if there is no claim made by the insured in the
same year.
 They charge lower premium from a non-smoker compare to those are smokers.
Material Facts: Material facts help the underwriter to decide two things:
 Whether to accept the risk proposal or to reject it
 If the proposal is to be accepted, then at what price (premium) it should be accepted.
Consequences of non-disclosure
 The insurer may avoid the contract entirely, ab initio (from beginning), no claim are payble.
 If the non disclosure is fraudulent (concealment) the insurer may keep the premium also.
Life Insurance (Duty of disclosure – when operates)
 At the time of proposal up until the time the risk is accepted by the insurance company and FPR is being
issued.
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 In the event that a lapsed policy is revived.

Insurable Interest:
 When an individual stands to gain or benefits from the continued existence or well-being of another
individual(s) or property.
 At the same time the individual would suffer a financial loss or inconvenience if there is damage to the
other individual(s) or property.
Insurable interest is not defined by any law; it can be decide on the basis of:
A, Interest B. Relationship C. Legal Decision (Court Judgements)

Circumstances in which insurable interest exists:

1. Own Life (Unlimited) 6. Surety
2. Spouse 7. Employee-Employer
3. Children 8. Employer-Employee
4. Assets 9.Keyman Insurance
5. Creditor 10. Partners

Insurable Interest need to be exists:

In Life Insurance - At the time of Inception of the Policy (need not to be proved at the time of claim)
Non Life Insurance - Both, at the time of Inception of the Policy and at the time of Claim
Marine Insurance - Only at the time of Claim (In Marine Insurance Insurable interest operates in different way
in compare to Life and Non- Life Insurance).

Indisputability clause (Section 45)

 In first two year of policy insurance company can declare the policy null and void if the company comes to
know that some material fact has not been disclosed.
 After tow year, fraud must be established by the insurance company if it wishes to make the policy void.
 This clause applies to life insurance only.

Indemnity:
 It is a financial compensation sufficient to place the insured in the same financial position after a loss as they
enjoyed immediately before the loss occurred.
 Insurance company only compensate the insured for the loss they incurred.
 This principle ensures that insurance cannot be used to make profit.
 Life Insurance contract is a VALUE contact, hence Principle of indemnity don’t apply on L.I.
contract.

Part 2: Insurance Principles

Sources of preliminary information: - Through Mass media advertisements.
Purpose of buying Insurance: - The purpose is based on the need of an individual or non-individual.
How life insurance is written –
 On Single Life basis / Own Life Policy, or
 Joint life Policy (Husband & Wife or Business partners)

Proposal Form
 Proposal form is the basis of the contract

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 Proposer will fill the proposal form and submit it to the insurance company, It contains information’s like:
Name, Age, Address, Weight, Height, Medical history, Type of Insurance plan, Nomination, Riders, details of
earlier insurance plans etc.

Quotation / Illustration / B.I. Document:

 It disclose how much policy will cost and on what terms.
 It will often be held open for a set period.
 It also shows how much the fund will grow at 6% and 10%

Key Documents
1. Proposal form 5. Endorsements
2. Age proof 6. Notices
3. Premium receipts 7. Prospectus (Brouchers)
4. Policy document 8. Documents required during claim

Declaration in the proposal form:

By signing a declaration, the proposer declares that the information they have provided in the form is correct and:
 The insurance company can cancel the contract and keep the premiums if it finds out that any of the
information provided is not true.
 They understood the questions, they cannot claim that they were given wrong information or misled in any
way.
 If proposer is illiterate, then an impression of the left thumb is taken and a third party has to attest the
same and the third party have to declare that they have fully explained the questions to the proposer and
they have correctly entered the answers after consulting the proposer. In this case the address of the
declaring person may also be taken.
 If the proposer signs the declaration in a different language from the proposal form, then the proposer has
to declare, in their own handwriting above their signature, that all the questions were explained to them and
that they answered them only after fully understanding them.

Age Proof
Standard Age Proof Documents Non Standard Age Proof Documents
1. Certificate from school or college record 1. Horoscope prepared at the time of
2. Municipal Date of Birth Record birth
3. Passport 2. A ration card
4. PAN Card 3. An affidavit by way of self declaration,
5. The service register of the employer elders’ declaration
6. A certificate of baptism 4. A certificate from a village panchayat
7. A certificate extract from a family bible, is contains DOB.
8. ID card of defence personnel
9. Marriage certificates issued by the Roman Catholic Church

Premium Receipt:
First Premium Receipts (FPR)
When the insurer accepts the proposal and starts the risk cover he adjust the premium that is paid by the proposer is
adjusted in the office and issue FPR.
 The FPR is the evidence that the insurance contract has begun
 Insurance Contract commences from the date on which insurance company issue FPR
 The policy document may be issued some time later.
 The FPR contains following information’s:
 Name and address of the life insured
 Policy number
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 Premium amount paid

 Method and frequency of premium payment
 Next date that the premium payment is due
 Date of commencement of risk
 Date the policy matures
 Date the last premium will be paid
 Sum insure
Renewal: (Renewal Premium receipts (RPR))
 Life insurance policies are long term policies, running for a set period of often many year.
 General insurance policies on the other hand, issued for one year and renewed every year.

IRDA regulation requires that the decision on proposal has to be passed to the proposer within 15 days.

Free look-in-period or Cooling-off period:

The policyholder has the right to withdraw from the contract within a period of 15days from the date of receipt of
the policy document if they disagree with the terms and condition of the policy. This period is known as free look-in
period.
The Insurance company will return the premium after some deduction:
1. Stamp duty
2. Cost of covering the risk for the short period
3. Medical examination expenses, if any.
Policy Document – (An evidence of the contract between the Insurer and Insured)
A standard policy has the following section:
 Heading – (Contains name, address and logo of the company)
 Preamble- (This section states that the proposal and declaration signed by the proposer
 Operative Clause- This section lays down the mutual obligation of the parties regarding
 The payment of premiums by the insured, and
 The payment of the sum insured by the insurer on the happening of the insured event
 Proviso- States the general provision relating to guaranteed surrender value, nomination, assignment and
loan on security of the policy etc.
 Schedule: gives all the essential particulars of the policy, such as:
 Date of commencement of policy;
 The date of the policy matures;
 The sum insured (when and how much the policy will pay);
 The premium to be paid and their due dates;
 The nominee (if stated in the proposal form)
 Any special clauses, Details of riders, exclusions, and liens.
 Attestation- confirms that the insurers have authenticated the policy document by signature. This can be
done by authorised officials of the insurance company.
 The terms and condition- will refer to the:
 Days of grace for payment of premium;
 Consequences of falling to pay the premium; and
 Availability of loans
 Policy Information statement: Complain related information.
 The person or office to be contacted for any enquiry or service relating to the policy
 What to do in the case of a grievance or complaint; and
 Information on the location of the Insurance Ombudsman.
 Exclusion: Exclusion is a statement that a certain risk is not covered by the policy.
Endorsement:
 Alteration / amendment in the original policy can be done through endorsement.
 Can be made on a blank sheet of paper and attached to the original policy document.
 It is part of the policy.

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 In case of change the nominee, the endorsement can be done on the back of the policy
Notice: During the term of the policy insurance company issues notices to the policyholders. These are:
(Reminder for due date of premium, Bonus notice, Premium default notice, Notice to revive the policy,
Notice about a benefit falling due – survival benefit/maturity benefit and An annual statement ULIP etc.)
Prospectus: The prospectus is used by insurance companies to give information about the product. It contains the
following information’s:
 The scope and benefit offered, The conditions, Any warranties, The term and conditions of the policy
 The entitlements, The exceptions, Any right to participate in bonuses

Key insurance Term:

Lapse: If the policyholder don’t pay the renewal premium within the days of grace it is considered to be a default, in
this case the insurance company is entitled to terminate the contract. This termination is known as a lapse. No claims
can be made on the policy after lapse.

Paid up value: In practice Insurance Act does not allow the insurance company to keep the entire premium paid
when a policy lapses. The reasons for policy acquires a reserve are following:
 Level Premium (Premium of the early years of the policy are more than are justified), and
 The Saving element in the premium
A policy can be made paid up if sufficient premiums have been paid and there is a savings element to the policy.
 In paid up policy the sum assured is reduced to the amount based on the premium already paid.
 When calculating the paid up value of a with profit policy, there is no change in the bonus vested. The
accrued bonus will be added to the reduced sum insured to arrive the paid up value.
 A paid up policy is not entitled to receive further bonuses.
 The paid up value will be paid on the maturity of the policy.

Formula:
Sum Assured
{------------------------------------------------ * Total Premium Paid }+Bonus
Total No. Of premium payable

Surrender value / Cash Value:

 Surrender is voluntary termination of the contract
 Cash value is the amount that the insurance company is liable to pay one a policy is surrendered.
 The surrender value is usually a percentage of the premium paid or a percentage of the paid up value.
 Surrender value will be lower for a long term policy compared to a shorter term policy if both are
surrendered after the same no. of year

Revival: When lapsed policy brought back into full force, this process is called REVIVAL. To revive the policy
following things are necessary:
 A fee for reinstatement or revival
 Payment of outstanding premium with interest
 Proof of continues good health.

Nomination:
 The life insured can nominate one or more than one person as nominees.
 Nominees are entitled for valid discharge and have to hold the money as a trustee on behalf of those entitled
to it.
 Nomination can be done either at the time the policy is bought or later.

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 When the policy assigned to another party nomination cease to exist. But when the policy is assign in
favour of insurance company in consideration of loan nomination remains valid.
Assignment:
 Assignment refers to the transfer of title, right and interest in an insurance policy to another
 One the policy has been assigned, the assignee has ownership of the policy and doesn’t need the consent of
the assignor in any matters relating to the policy.
 The assignee becomes the owner of the policy after the assignment, but they cannot make a nomination in
the policy as the assignee is not the life insured.

Type of assignments:
1. Conditional (Interest in the policy automatically reverts to the assignor on the occurrence of the specified
condition or on the death of assignee.)
2. Absolute (The assignee becomes the policyholder in the policy and cal deal with the policy in any manner
they choose. The assignor can become the policyholder only when the assignee reassign the policy in the
favour of the assignor)

Loan and foreclosure:

Loans against policy:
 Loan amount is a certain percentage of the surrender value (90%) of the policy
 A loan cannot be taken against money back policies
 The insurance policy needs to be assigned absolutely in favour of the insurance company at the time of
raising the loan
 The repayment of loan can be done wholly or in part during the terms of the policy
 If the policyholder continues to pay the premium regularly, the surrender value goes on increasing and
would be more than the outstanding loan and interest at any point of time.

Reasons for foreclosure:

 The borrower has chosen to repay the loan during the policy term and is unable to do so.
 The accumulated debt (Loan + Interest) has exceeded the surrender value of the policy.

Can a foreclosed policy be reinstated?

Yes, but before the discharge voucher is submitted by the policyholder for collecting the balance surrender value.
Some important points:

** What happens to the nomination in case of foreclosure?

Ans. Nomination ceases to be operatives. If a death claim arises before the payment of the surrender value, the
payment is made to the legal heirs of the deceased insured.
**What happens if the insured dies and the premium has not been paid?
Ans. As long as the delay in payment falls within the days of grace given by the insurance company, then the
insurance company is liable to pay the full claim after deducting the outstanding premium amount to the nominee or
legal beneficiary.

**When is the premium deemed to be paid?

Ans. Only when the insurance company receives the funds.

**What if the insured dies while the cheque/demand draft/money order is in transit?
Ans. The insurance company will seek proof of sending this instrument. The proof can be provided for instruments
such as demand drafts and money orders. The insurance company in these cases deems that the premium has been

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paid on submission of the proof. However, if the cheque was sent in the post, the insurance company will require
evidence of posting.

Chapter – 4
Underwriting:
A. The process of insurance underwriting: An underwriter is responsible for the classification, analysis and selection
of the risk. Different companies have different guidelines as to how risks are classified and price. The process of
insurance underwriting is as follows:
 Collect information about the applicant
 Analyse the risk associated
 Estimate the potential exposure
 Determine the probability of loss
 Accept (or reject) the proposal
 Classify and rate into a risk group to calculate the premium
 Issue the insurance policy

Maximum possible loss (MPL): MPL refers to the maximum amount of loss that can occur, it a certain event occurs.

Adverse selection: This is a term used to describe the situation where an insurance company accepts too many
proposer who bring a higher than average risk to the pool.

On the basis of the risk of the proposer – The underwriter can chose to:
 Accept the proposal at ordinary rates;
 Accept the proposal with extra premium;
 Accept the proposal with a lien;
 Accept the proposal with a modified terms;
 Accept the proposal with a specific/modified clause
 Postpone the decision for a certain period; or
 Reject the proposal.

Obtaining the required information: The underwriter can obtain the information about the proposer from the
several sources, such as:

 Proposal form:
 Personal information
 Medical information
 Agents’ remarks
 Medical examination report:- A complete medical check-up on the proposer can be carried out by the
insurance company or by a certified doctor.
 Insurance Agent (ACR-Agent Confidential Report)
 Tax consultants / IT authorities
 Additional information questionnaire
 Special Report – when S.A. is too high and chance of moral hazard is there, underwriter can asked for these
report from the senior employees of the insurance company such as unit manager or sales manager.

Financial Underwriting:

 Financial underwriting works to cap the mount of life insurance and individual can get.
 Amount of life insurance can be arrived at through the Human Life Value (HLV) concept
 Factors analyzed under the financial underwriting include the individual income, age and net worth etc.
 The higher the sum insured, the more justification will required by the underwriter.

Medical Underwriting: Can be done by:

 Checking the medical report of the proposer for a past few year,
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 Can insist for a medical check-up

Non - Medical Underwriting:

 In many cases, specialised medical services would not be available.
 Here insurance is based on the physical characteristics of the individual, such as age height, weight etc. As
revealed by proposal form.
 Chances of adverse selection is very high, therefore these policies may be priced at a higher rate than others.

Safeguard adopted in non-medical business:

 A restriction on the selection (female lives);
 Putting limits on the sum insured;
 a restriction on maximum entry age;
 a restriction on maximum age at maturity
 a restriction on the maximum term for the policy
 a restriction on high risk plan;
 Limiting cover to certain categories of lives based on education, social and economic background.)
 Required a moral hazard report (Special Report) from an officer of the insurer.

Human Life Value (HLV):

A human being is an income generating assets. Through HLV the insurance company tries to measure the economic
value of a person or how much the person is worth in monetary terms, to provide an adequate cover.

How to calculate the HLV of an individual:

Simple Method:
Total Annual income of a person – Expenses on his own life
HLV = --------------------------------------------------------------------------------------------------
Risk free Return / Bank Rate / PPF Rate

Income Replacement method:

Step 1: Calculate the total potential future income of a person (using Future value formula, including increments)
Step 2: Calculate the present value of that amount, This will the persons Human Life Value.

Lien:
There are certain cases where the underwriter will feel that the risk associated with a person might decrease over
time. In such cases, the underwriter can accept the proposal with a lien.
 Lien operates for a certain period on diminishing basis (equal amount).
 Lien can be used as a substitute to charging a high premium for a high risk.
 During the period of lien, if the insured even happen the insurance company will pay a restricted amount of
sum assured.

Clause:
 Clause operates for a full period of the policy
 It excludes the benefit from the policy for full term.

Pricing and calculating the premium: Pricing refers to the calculation of the premium that will be charged on the
insurance policy.
Pricing Elements:
 Mortality rate / Death Rate: is the probability that a certain individual will die before the next birthday. It is
prepared by the mathematicians, known as actuaries. Loading: For Office Expenses and Profit/Bonus.
 Income from investment of premium

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 Benefits promises: The pricing will depend upon the benefit promised by the company. The larger the
benefit offered, the larger the premium.
Type of Premium Plan:
1. Single premium plan
2. Level Premium Plan
3. Flexible Premium Plan

Process of calculate the premium:

Risk Premium (Mortality rate * Sum Insured)

(Based on the risk premium calculate the level premium) ****
(-) Interest Earned ****
__________________
Net Premium ****
(+) Loading (Admn. Exp. , profit margin, Bonus loading etc.) ****
__________________
Gross Premium/Tabular Premium/Office Premium ****
__________________
Note:
 Insurance company generally collect a frequency loading, if the premium is not being paid annually.
 Due to Level Premium, the premium charged in the initial year is more than what is required and the
premium charged in the later year is less than the required premium.
 The investment of the premium collected from the traditional plans is described in the Insurance Act 1938.

Calculating Bonus.
Only with profit policies (participating policies) are entitled to get the bonus. There are four type of Bonus:
 Simple revisionary bonus;
 Compound revisionary bonus;
 Terminal bonus / Persistency bonus / Final Additional Bonus (FAB)
 Interim bonus
Note:
 Bonus declared at the end of the financial year when the actuaries completed the valuation of the company.
 This is paid out at the time of claim or the maturity of the policy.
 Simple Revisionary Bonus is declared on the basis of sum insured.
 Terminal Bonus: Once in a life time, at the time of maturity.
 Interim Bonus: Is being paid if the policy matures between the two valuation dates. Insurance companies pay
the interim bonus at the rates as at the last valuation. It is mandatory u/s 112 of the Insurance Act 1938.
 Compound revisionary bonus: Bonus computed on a compound interest basis. (on the enhanced amount)

The agent’s role in underwriting:

 The agents are in direct contact with the proposer, so their role in the risk selection process is very
important.
 That’s why they are called PRIMARY UNDERWRITER.
 They has to ensure that the proposal form submitted is completely filled out by the proposer with full
honesty and accurately.
 They can help the proposer to calculate the human life value (HLV)
 If the proposal is rejected, the agent can get in touch with the proposer personally and explain the reason(s)
of rejection.

Chapter – 5
Basic Life Insurance Products.
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Protection needs.
General Protection needs of an individual:
 Income Protection
 Medical needs
 Dependants
 Assets and Liabilities
Personal factors affecting protection needs:
 Age
 Income
 Dependents
 Individual protection needs
 Assets and Liabilities
Life Insurance Products:
Basic elements of a life insurance plan:
 Death cover
 Maturity benefit

Basic life Insurance plans:

 Term Insurance Plan :
 Offers only death cover no maturity benefit
 Cheapest Premium plan
 Useful to cover liabilities like home loan, car loan etc.
 Return of premium (ROP) plan:
 Variants of Term insurance plan in the form of return of premium.
 Pure endowment plan
 Only maturity benefit, no death cover (opposite of Term insurance plan).
 Endowment Insurance plan:
 Combination of Term plan and Pure endowment plan
 Both benefits are available i.e. Death cover and Maturity Benefit
 Saving element is added in the premium.
 Partial withdrawal and Loan facility is available in this plan.
 Goal-based investment: can be used for accumulating money for specific plans like child education.
 Some plans offers double the death cover. This plan is known as double endowment insurance plan.
 Whole Life Insurance Plan
 Variants of Term plan, covers the individual throughout their entire life.
 Term of Policy: 100 yrs. – Current Age
 Can make partial withdrawals to meet emergency requirements.
 If the insured survives until age 100, then the sum insured along with the bonuses is paid to the
insured.
 Convertible Insurance plan
 Are useful when the life insured cannot initially afford to pay a higher premium.
 A term plan and whole life plan can be converted into an endowment plan.
 No further underwriting and medical check-up is required at the time of conversion.
 Money back plans is not a convertible plan.

 Joint life Insurance plan

 Plans covered two persons under one policy.
 Each life will be underwritten separately.
 Married couples or business partners can take the policy
 Nomination is not required but both policyholder can nominate jointly
 Bonus is paid on the basis of single life cover
 Death benefit available on the both life

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Group Insurance Plan: A Group Insurance policy provides insurance protection to a group of people who are brought
together for a common objective. (e.g. Bank for its customers, Employer, Trade union, professional body)
Features of Group Insurance:
 Only Master Policy will be issued
 Agreement between Master Policyholder (e.g. Employer) and Insurer
 Employees are not the direct party to the policy
 Premium and other terms and conditions changes every year
 Cover will be based on the salary, designation.
Micro-Insurance Plans:
 Provides cover to low income groups.
 Minimum Sum Assured is Rs. 5000 and Maximum is Rs. 50000.
 Cross selling is allowed of micro insurance product by life insurer and non life insurer

Unit Linked Insurance Plan (ULIP):

 Benefit of both life insurance and returns on investments.
 Investment decision is taken by policy holders
 Investments risk is born by the policy holder
 It given an option to participate in the growth of the capital markets
 Death Claim : Fund Value or Sum Assured whichever is higher, will be paid.
 Maturity Claim: Only Fund Value
 Settlement option: Maturity benefit can be taken as structure payment (periodic instalments) over a period
of time. To take this options insured has to inform the company in advance.

Child Plan:
In child plans, child are the beneficiary who is entitled to receive the benefit on the maturity of the policy.
Characteristics of a Child Plan:
 Policy Holder – Parents
 Life Insured – Child
 Deferment period is the gap between the policy start date and the date of commencement of risk.
 Deferment date: The date on which the risk will commence at the end of hte deferment period. The
deferment date will be the policy anniversary date.
 Vesting : When the child reaches the age of majority the title of the policy will be automatically passed on to
the insured child. This process is called Vesting, and the date on which this happen is known as vesting date.
 After vesting the policy become a contract between child and the insurance company. Now the child can
make the nomination.

Money Back policy:

 Survival benefits are paid to the policyholder during the term of the policy at specific intervals.
 The survival benefits will “% of basic Sum insured.”
 At least 40% of Sum insured should be remaining at the time of maturity.

Salary saving schemes (SSS)

 Its cater to the needs of working classes
 Contract between the Employee and Insurance Company
 Who is responsible to pay the premium – Ans. Employee, ( Employer act as a facililitator who collect the
premium from the all employees and pay it to the Insurance company)
 The insurance company benefits as it receives the consolidated premium from the employer for all the
employees who have enrolled on the scheme, that’s why they don’t charge monthly mode loading.
 Only FPR will be issued, no RPR, No month mode loading

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 SSS is not a specific insurance plan. It is just a convenient arrangement to collect the premium.

Taxation and inflation:

Investment stage: Premium paid under life insurance policy is deductable from taxable income us 80C if the following
condition is fulfilled.
 The premium paid should be 20% or less than 20% of the sum insured; or
 The sum insured should be minimum 5 times of the premium paid.
Maturity stage: Maturity benefit or the death claim received is tax free under section 10(10D) of I.T. Act.

Chapter – 6
Saving Products (Marks – 5)
Need for savings/Investment advice:
 Ignorance about financial planning process
 Ignorance about full range of financial products
Factors that determine the savings needs of a client:
 Individual with no capital need to consider comprehensive financial planning:
 Their common savings needs include:
 Building an emergency fund;
 Health Insurance;
 Income protection need;
 Planning for child education;
 Planning for child marriages;
 Buying a house;
 Planning and investing for other goals like buying a car;
 Planning and investing for retirement.
 Individual with Capital have different needs like increasing their existing capital, leaving behind inheritance
for children, being able to live comfortable retirement etc.

Factors determining saving needs of a particular individual

 Duration
 Amount of Disposable Income
 Existing Assets and Liability

Features and benefits of savings products

 Return (Capital Growth, Regular Income, Guaranteed return)
 Lock-in Period
 Penalties
 Risk Appetite
 Buying and selling mechanism
 Flexibility (to switch from one investment to other)
Type of saving products:
1. Life Insurance – Life Cover, Capital Growth
2. Bank Deposit (Saving A/c, RD, FD, Cumulative Deposits)- Interest Quarterly
3. Mutual Funds (Equity, Debt, Balance & Liquid) – Regular Income & Capital Growth
Equity MF – High Risk High Return
Debt MF – Low Risk, Low Return (Highly Liquid – Preferable for contingency fund)
4. Shares - Regular Income & Capital Growth, Bonus
5. Bonds - Regular Income & Capital Growth
6. Post office savings schemes - PPF, NSC, KVP, MIS, etc.
7. Gold and Silver (Gold and Silver ETF) – Capital Growth
8. Real Estate – Capital Growth
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Mutual Funds:
 Managed by Assets Management Company (AMC);
 Objective is predetermined;
 Pool of various individual’s money;
 Profit and Loss is being shared by the Unit holder;
 Investment denominated in Units and Investors known as Unit holders.
Shares
 Shares provides OWNERSHIP in the company
 Can issue on PAR, Discount and Premium
 Provides three type of income i.e. Dividend (Tax free), Bonus and Capital Growth
Bond
 Issued by Govt., PSU and Corporate
 Provides fixed rate of return every year for the entire term
 Issued on PAR, Discount, or Premium but maturity is on Face Value
 Provides regular income and capital growth

Gold ETF
 Denomination is in UNITS
 Can be purchase from any broker associated with any exchange, like- NSE, BSE etc. In de mat a/c
 Provides complete security against stolen
 1 Unit Gold ETF is equal to either 1 gram or .5gram
 Price of UNITS is depends on the market price of physical gold.
Inflation Impact on Saving Products:
If Inflation increases:
 Interest rate will increase (Saving and Lending both) – it will reduce the demand for credit and
increase saving among individuals.
 Share price will come down
 Value of Bond or Bond price will come down
If Inflation decreases:
 Interest rate will decrease (Saving and Lending both) – it will increase the credit demand, and
encourage consumers to spend more and increase demand for goods and services.
 Share price will go up
 Value of Bond or Bond price will go up

Example of Impact of Inflation:

Question: Mr. A earn 8% on his investment, and the inflation is running at 5%. What will be his net income?
Ans : His income net of Inflation is:
Net Income =Interest Rate – Inflation Rate
= 8% - 5%
= 3%

Some Important Income Tax Sections:

 Sec. 80C – Exemption for Investments ( Limit – Rs. 1,00,000/-)
 Sec 80D – Exemption for Medi claim ( Limit – Self & Spouse Rs. 15,000/- for Parents Rs. 20,000/-)
 Sec. 80DD – Exemption for medical expenses for Depended disable person.
 Sec. 24B – Exemption for the Home Loan Interest payment.

Chapter – 7
OTHER KEY FINANCIAL PRODUCTS

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Other Financial needs:

 Health Insurance
 Insurance riders – Riders are additional benefits that can be added to insurance policies. It is a condition
or clause that can be added with the base plan by paying extra premium.
 Annuity / Pension plan

Type of products, their features and benefits

Type of health plan:
 Individual health insurance plan – cover a single individual
 Family floater health insurance plan –
 cover an individual, their spouse, children and parents
 cover is shared among the family on first come basis. (No fixed proportions)
 Group health insurance plan
 Daily hospitalization cash benefit plan
 Pay a fixed amount on a daily basis in the event of hospitalization
 Cash amount is fixed, irrespective of the actual amount spent on treatment
 Limit of total number of days in a year as per the terms and conditions of the policy
 The daily amount paid under this policy can be in addition to any other medical insurance policy that
the insured may have

Features and benefits of health plan

1. Pricing 6. No claim bonus
2. Family Medical History 7. Permanent exclusions
3. Cashless facility 8. Immediate care
4. Medical examinations 9. No need of lump sums from saving or loan
5. Pre-existing illness
Riders:
Accidental death benefit rider (ADBR) : pay an additional amount over and above the normal sum insured
Term Rider: Can e used to enhance the death cover amount in a policy at a nominal cost.
Critical illness (CI) rider:
 Payment of a specified amount on the diagnosis of critical illness
 The illness should be covered in the list of CIs specified by the insurance company.
 Total 12 illness is covered under this rider: (kidney failure, Heart attack, Cancer, Aorta
surgery, Major organ transplant, Multiple sclerosis, Illnesses, Stroke, Paraplegia, Coma,
Blindness)
Waiver of premium rider (WOPR):
 The rider waives future premium in the event of the disability of the policyholder due to illness or accident.
 The company continues to pay the premium on behalf of the policyholder and policy continues normally
 This rider helps the policy lapsing due to non-payment of premiums due to disability or death of the
policyholder.

Other riders offered by insurance companies

A. Hospital care rider
B. Surgical care rider
C. Guaranteed insurability rider: This rider helps the policyholder to increase their cover in response to
different life event, such as marriage, child birth, buying a home etc.

Features and benefits of riders

Additional cover Nominal cost Tax benefit
Customisation: riders help in customisation of the health plan according to the preference of the customer.
Flexibility: many riders can be added or removed at the will of the policyholder, thus provide high flexibility.

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Note: Premium paid for Health Insurance Plans and Insurance riders qualifies for deduction from taxable
income under relevant sections of I.T. Act. If an individual is a senior citizen (65yrs) then the deduction
will be higher than the other individual.
IRDA regulations for riders:
 The premium on all riders relating to health or critical illness, in case of term or group insurance products
shall not exceed 100% of the premium of the base policy.
 The premium on all the other riders put together should not exceed 30% of the premium of the base policy.
 The benefits under each of the riders shall not exceed the sum insured under the base policy.

Annuity – (Reverse of Insurance)

Type of annuity
Immediate Annuity - Here the whole amount is paid in limpsum, and starts pension immediately
Deferred Annuity – Here pension begins after the lapse of some time
Some Annuity Plans:
 Life Annuity – till annuitant survives and alive
 Joint life – Both husband and wife will get the pension
 Certain Annuity – For a prescribed term, like 5, 10, 15, 20 years. If still annuitant is alived then it gets
converted into life annuity. It the annuitant dies during the selected term, annuity instalments for the
remaining part of the selected term will be paid to the beneficiaries.
 Life annuity with return of purchase price
 Increasing annuity
Pension Plans
 Accumulation Phase
 Regular annuity phase
 Commutation: Before regular annuity payments the individual can make a lump sum withdrawal of up to one
third of the accumulated fund. This is known as commutation.
Note:
 Accumulation as well as Regular annuity can be in monthly, quarterly, biannually, annually.
 No Insurance cover is provided by any annuity or pension plan
 Accumulation is Tax free u/s 80C of I.T. Act, Commutation is Tax free (upto 1/3rd), Pension – is taxable as
regular income.
 A per IRDA norms all ULIP pension plans has to guarantee minimum 4.5% returns (if all premiums are paid),
and no partial withdrawal is allowed during the accumulation period.

Chapter – 8
Identifying client needs
Prospective clients:
Prospective clients may have various needs which they themselves may not be aware of. In such a case it is the duty
of the insurance agent to make the prospective client realize their needs and recommend suitable insurance
protection and/or investment products to meet them.

The process involves the following steps:

 Identifying needs
 Quantifying needs
 Prioritizing needs.

The typical life stages of a client:

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 Childhood
 Young unmarried
 Young married
 Young married with children
 Married with older children
 Pre-retirement
 Retirement

Childhood: At this stage there are two basic needs for parents/guardians:
 To secure their children’s financial position, if they themselves die prematurely
 To provide for their education, marriage and other living expenses
Agent’s duty:
 Determine regular amount of money needed to be invested towards children’s future
 Suggest suitable investment products

Young married
 Young married with no dependants:
 Protection need is low
 Invest in such an instruments which provides higher return
 Looking for saving money for their marriage, purchasing a house, providing health insurance for
parents and themselves.
 Young married with dependants:
 Looking to protect their income
 After protecting family’s financial need they can be invested for long-term wealth accumulation.

Young married no kinds (DINK)

 Double income family:
 An individual term plan for both partners is suitable at this stage
 The couple may also look to invest in products that can offer them high returns.
 Single Income family:
 Income protection is high priority over other needs
 The income earner should buy a term plan.

Young married with children:

 Double income family:
 An individual term plan for both partners is suitable at this stage
 A suitable child plan should be recommended
 A family floater health insurance plan covering the couple and their children is advisable
 The couple should also start making small contributions towards a retirement plan which can be
stepped up later.
 Single income family:
 A suitable term plan should be recommended
 A suitable child plan should be given priority after the income protection
 A family floater health insurance plan covering the couple and their children is advisable

Married with older children:

 Income is likely to be higher
 The couple should review their investments to ensure that there will be sufficient fund to cover the cost of
higher education and the marriages of their children.
 The need to focus towards their retirement fund
 As their age increases, the couple will be more vulnerable to sickness and disease and should therefore also
look at enhancing their health cover

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Pre-retirement
 At this stage children will have completed their higher education, be married and financially independents.
 Income of the individual/couple will still be high
 Entire focus is shifted towards the retirement fund and health protection
 Should review their health cover and see if it is adequate

Retirement
 Income is limited to the returns on investments they have already made in their working life
 If the returns of investments are not sufficient to meet their financial liabilities little can now be done
 They can use their accumulated retirement fund and their employee benefits amount to buy an annuity plan
 Should review their health cover and see if it is adequate and look for their ESTATE planning.

Factors that affect the life stages

1. Age 5. Individual income and expenditure
2. Marital status and dependants 6. Individual assets and liabilities
3. Employment 7. Divorce, separation and bereavement
4. Health issues
Client needs: Real and Perceived
 Real needs are the actual needs of a client which should take priority over others
 Perceived needs are imagined or thought to be important by the client
 Real need are determined by the use of financial planning techniques and analysis
 Perceive need can be understood by analyzing an individual’s thoughts and desires

Communication, questioning and listening skills:

Communication skills: Good communication skills include:

 Good command of the client’s local language
 A friendly approach towards clients and a genuine interest in them. An agent should encourage clients to
speak about their concerns relating to their future and present needs
 Agent should engaged the client in a two-way dialogue.

Questioning skills: An agent needs to ask different questions in order to understand client’s financial plan.

Different types of questions:

 Open ended questions - encourages the client to talk freely & highlight issues that hold importance for the
client
 Closed ended question – structured in a manner where the client has to provide short specific answers.

Phrasing of question
Questions need to be:
 Linked to earlier questions asked
 Put in simple terms that a client will easily understand
 Personalized according to the client

Listening skills
 Developing good listening skill is also important for an insurance agent so that they can interpret the client’s
answer correctly
 The agent should concentrate on the client’s answers and the other information that is provided.

Handling objections from clients

Some of common objections are:

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 The product doesn’t meet my need(s)

 A competitor’s products are offering additional benefits
 I don’t have the funds for investments.

Understanding priorities
An insurance agent should help his clients to prioritise their real financial and protection needs based on several
factors:
 Lifecycle
 Existing insurance policies
 Amount of surplus funds available

Chapter – 9
The fact-find and financial Planning
What is fact find?
Fact finding consists of obtaining the answer to a series of questions about your client’s profile, status, finance and
ambitions for the future. Good fact finding is the key to successful financial planning. It enables the insurance
adviser to:
 Indentify a client’s financial planning needs
 Quantifying the need in monetary term
 Prioritise then based on the resources available for investments

Objective of fact finding:

 Identify need
 Gathering client data
 Analyzing client cash flows
 Provide for anticipated changes

Structured interview
Typically, the interview structure moves through the following stages:
 Making the client feel comfortable and relaxed
 Explanation of the fact-finding process and its purpose
 The information gathering session
 A discussion of priorities and the client’s personal concerns
 An agreement, in principle, of the main problems to be addressed by the adviser’s report.

After the fact finding interview, the agent will carry out a more comprehensive analysis of the information and, if
necessary, seek any specialist guidance required. The agent should prepare the recommendation within a budget
fixed by the client and it should be written.

Using a fact-find:
A fact finding form is divided into separated sections covering the client details. It includes:
 Personal details – (Name, Address, Contact details, Marital status DOB, etc.)
 Family details – (Spouse, Children, Parents, other dependents)
 Employment details
 Financial details – (Assets & Liabilities)
 Existing insurance and investments
 Monthly income and expenditure analysis
 Financial planning objectives and considerations

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 Agent should record long term and short term plans of clients, either personal and/or family like
child education or marriage, changing home, Estate on death
 Future changes
 Inheritances, Birth of a child, complete a professional qualification etc.

Assessment and analysis

Assessment:
The key tasks of the agent include:
 Identifying the amount to be provided for the needs of each client in each need area;
 Identifying the client’s affordable contribution;
 Allocating this contribution to produce the best financial planning currently available; and
 Evaluating and reviewing the performance of the financial plan on a regular basis with the client.

Applying products features and benefits to a client situation – Objective of fact finding is to identify a product that
suits the client’s needs.

Product short listing process:

 Product should be short listed for each needs
Making recommendations:
 When all information has been assembled, the agent can fulfil the ultimate objective of fact-finding, to
recommend the products or portfolio of products that best meets the client’s needs for the contribution they
can afford to pay now and sustain in the future.
 The product recommendation presentation should have a proper structure.
 Once the presentation is over, the agent should sit with the client and clarify if they have any doubts. If not
the agent should proceed with completing form-filling formalities.
 The agent can use the benefit illustration document to show the client the projected growth ( at the rate of
6% and 10%) of investments.
 Along with the duly filled form the client needs to issue a cheque in the name of insurance company.
 The client should submit the KYC document required:
 Photographs
 Proof of identity
 Proof of address

Chapter – 10
Good Client Practice
The duty and responsibilities of an insurance agent:
Sec. 42 of the Insurance Act 1938 defines and insurance agent as: “a person who is licensed under section 42 of the
Insurance Act, in consideration of his soliciting or producing insurance business, including business related to
continuance, renewal or revival of insurance policies”.
 An insurance agent’s duties and responsibilities include establishing the client’s need and identifying the
most suitable products to meet those needs. They act an intermediary between insurance company and the
client.

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Agent’s remuneration and upfront disclosure methods:

 The remuneration of life insurance agents is governed by IRDA regulation.
 Max. Remuneration:
 1st year 35%
 2nd & 3rd Year 7.5%
th
 4 year and onwards 5%

Note: During the first 10 years of the insurer’s business and insurance company can pay a maximum of 40%
of the first year premium. This doesn’t apply to immediate or deferred annuities.

The insurance Act, (sec. 44) states the following condition on agents (whose agency has been terminated for
receiving commission on the renewal premium:
 The agent should have been working with the insurer for more than five years and policies of not less than
Rs. 50,000/- sum insured are in force at least one year before the termination of the agency.
 The agent should have been working with the insurer for at least 10 years and, after ceasing to act an agent,
are not directly or indirectly soliciting or procuring insurance businesses for any person.
 In case of an agent’s death, the commission is payable to his legal heirs.

Disclosures:
 The agent must disclose the amount of remuneration, on demand.
 Disclosure of commission is mandatory in the benefit illustration document in case of ULIPs
 The benefit illustration documents show the details of charges and growth of the fund as per the Life
Insurance Council’s assumed growth rate of 6% and 10%.
 Disclosure helps in increasing the transparency in selling of life insurance products.

Recommending suitable policies.

The different issues may arise on the recommendation of suitable policies to clients with regards to:
 Checking the client’s commitment to the needs
 Outlining the reasons for the recommendation of a particular policy
 Acceptance or rejection of the recommendation
 Churning and product switching (if necessary)

Churning / Switching:
 Repeatedly encouraging the clients to switch policies or investments from one to another is known as
churning.
 It is an unprofessional and unethical practice that results in clients suffering losses in the form of surrender
charges and reduced long-term benefits of their policies are not kept held until maturity.
 Churning / Switching is allowed when it is in the interest of the client.

Persistency: Persistency refers to the amount of business that insurance companies are successful in retaining with
lapse or surrender of the policy. It can be calculated as follows:

The number of policies remaining in force at the end of the year

Persistency =---------------------------------------------------------------------------------------------------
The total number of policies in force at the beginning of the year

A low persistency ratio affects the whole insurance industry adversely:

 For the insurance company it means that a large number of policies lapsed or have been surrendered,
resulting in loss of profit and a reduction in the accumulation of reserves
 For clients it means fewer benefits than originally expected and a loss of insurance cover
 For agents it means the loss of renewal commission

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Benefits of persistency:
 Help the client in achieving goals
 Increased revenues of the company and the agent
 Reduction of costs
 Increased client satisfaction

Factors affecting persistency:

 Product design
 Role of an agents
 Persistency
 Change in client’s financial circumstances
 Policy servicing

Different methods of maintaining high persistency:

 Flexibility in premium payment

 Constant reminder of due premium dates
 Continuous contact with clients
 Policy servicing

Building long terms relationships with clients:

 It is advisable to have an ongoing relationship with the client

 Thus an agent should have an ongoing system to review their client’s financial needs and financial planning
 Review could be irregular but triggered by relevant event, such as
1. Marriage 2. Moving house 3. Birth of a child 4. Change of job

Chapter – 11
Claim:
What is Claim?
A claim is a demand that the insurer redeem the promise made in the contract.
Type of claim:
 Maturity claims
 Death claims
 Rider benefits
Maturity Claims:
Some life insurance plans, such as endowment plans and whole life plans, promises to pay the insured a specific
amount at the end of the plan, if they survive for the plan’s entire term. This amount is known as Maturity Benefits.
The amount payable at maturity is:
 Sum Insured / Accumulated Amount
 Accumulated Bonuses
 Final Additional Bonus
 Minus (-) any outstanding premiums and interest thereon
 ULIPs – Fund Value or in some cases Fund value and sum insured

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Survival benefits payments:

 For money back policies the insurance company makes specific payments to the policyholder at specific
times during the term of the policy. These payments are known as survival benefits.
Discounted Claims: Those options which are exercised by the policyholder within one year of the maturity date of
the policy are known as Discounted Claim.

Death Claim
Death claim is where the life insurance company pays the sum insured to the nominee/beneficiary on the death of
the insured during the term of the plan.
 Participating policies –Sum insured and Accumulated bonus will be paid
 Whole life plans – No fixed term, the benefit will be paid on death
 ULIP – Sum insured or FV whichever is higher or in sum cases FV and sum insured both are payable
 Loan – Any outstanding loans and interest will be deducted before the final amount is paid
 There are certain policies where the benefits is not paid on death but on the specified date as chosen by the
life insured when taking out the policy.
Early death claims:
If the claim occurs within three years from the date of risk, or from its revival. In such cases insurance companies
will carry out a detailed investigation.
Additional documents may be called for in order to make certain that material facts where not suppressed at the
time of proposal/revival. These documents include:
1. A statement from the last medical attendant to attend the deceased before death, giving details of their last
illness and the treatment gives;
2. A statement from the hospital, if the deceased has been admitted to a hospital;
3. A statement from the person who attended the last rites and had seen the dead body; and/or
4. A statement from the employer (if the deceased was employed) showing details of leave taken.
In case if unnatural death, such as an accident, by suicide etc. the following will also be looked into:
1. Police First information report (FIR)
2. Panchanama (inquest);
3. Forensic report;
4. Post mortem report; and
5. Coroner’s report.

Duties after loss and documentary advice:

The claimant needs to inform the life insurance company of the death of the life insured and submit the following
documents to settle the claim:
1. The policy document;
2. Deeds of assignments / reassignments
3. Proof of age, if age is not already admitted
4. The death certificate
5. The claimant’s statement
6. Legal evidence of title, if the policy is not assigned or nominated
7. Discharge form, sent by the insurance company, must be executed and witnessed and returned to the
insurance company.
Valid Claim:
Validity of a claim can be checked by asking following questions:
1. Policy was enforce when the event occurred?
2. Has the insured event taken place?
3. Have the original Policy document, a completed claim form and all the other required documents has been
submitted?

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 Insurance Certification Examination Notes

4. Has the policyholder performed their part with regards to age admission and the disclosure of material facts
relevant to the policy?
5. Did the claim demand come from the right person?
6. Have all the other formalities that are required for a claim to be valid been fulfilled?
Settling claims:
IRDA guidelines for claim settlement – IRDA has laid down guidelines for the settlement of claim under (IRDA
protection of Policyholders Interest Regulation 2002)

Maturity claim
 Initiative taken by insurance company
 Post dated cheque (PDC) are usually sent in advance, provided a signed discharge form has been received
 If the policy is reported lost, then the insurer may settle on the basis of indemnity.
 Before making the payment, the insurer will satisfy itself that:
 The original policy has been handed in
 The identity of the policyholder has been proved
 The discharge form has been duly completed
 The correct age was admitted
 All the premiums have been paid and are up to date
 There are no assignments
Assigned Policies
 In case of absolute assignment, the claim will be pay to the assignee
 In case of conditional assignment, on completion of condition the payment will be made to policyholder
Settlement option: Some maturity claims may be payable, not on date of maturity as chosen by the policyholder in
lump sum, but later and in instalments. This is known as the settlement option.

Death Claims:
 The process is started by the claimant,
 The insurance company will waits for the relevant documents
 Once it is satisfied that the claim is a valid one, it will send the sum insured to the nominee or beneficiary
within a reasonable time frame, i.e. it will settle the claim.
Fraudulent claims:
Insurance fraud includes bogus claims and the misrepresentation of facts.
Loss of Policy:
 Claim will be settle on the basis of indemnity
 The indemnity is in the form of a statement, signed by the claimant, stating that should the original policy
come to light and evidence of ownership by another party is provided, then the claimant will reimburse the
insurance company for a claim payments made to them.

Caution points at the time of handling death claims:

Death claims are where most fraud occurs, and therefore insurers tend to be more cautions when handling them.
The following are some indications that a death claim may be fraudulent:
 If the notification of death received from a stranger, there is reason to ask: “Why has it not come from a
family member or a relative?”
 Too many enquiries about progress in the settlement of the claim should raise doubts
 If the notification of death is received three years after the death.

Presumption of death:
Section 107 and 108 of the Indian Evidence Act, 1872 deal with presumption of death, under this Act if an individual
has not been heard of for seven years they are presumed to be dead.
This has the following effect on the actions of the life insurance company:

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 If the nominee or heirs claim that the life insured is missing and must be presumed to be dead, insurers insist
on a decree from a competent court.
 The insurer may also act on its own, without a decree of the court, if reasonably strong circumstantial
evidence exists to show that the life insured could not have survived a fatal accident or hazard.
 It is necessary that the premiums should be paid until the court decrees presumption of death, although
insurers may, as a concession, waive the premiums during the seven year period.

IRDA Guidelines for settlement of claims:

 IRDA ( Protection of Policyholder’s Interest) Regulation 2002

 Date of Claim
 All document related with claim should be asked within 15 days of the claim once not in piece meal manner;
 Claim should be pay or disputed within 30 days from the date of receipt of all documents and clarification;
 If any investigation is required, it should be completed with six month of lodging the claim.
 Delay in claim:
 Due to Claimant: Saving bank interest (effective from 30 days following the submission of all paper
and information.
 Due to Company: Saving bank interest plus two percentage (prevalent at the beginning of the
financial year in which the claim is reviewed by it.

Miscellaneous
Ombudsmen:
 Objective: To resolve complaints related with claim, terms of policy, premium payment, or non-issuance of
policy document.
 The Governing body of Insurance Council (GBIC) was established under RPG rules 1998 to set up the
Institution of Insurance Ombudsman in India.
 Territorial Jurisdictions – Twelve Ombudsmen across the country
 Manner of Lodging Complain:
 Complain can lodged by policyholder or by the legal heirs
 Complain should be of personal lines
 Complain should be written
 First complain should be to the insurer
 If insurer has either rejected the complaints or failed to respond within a period of one months, or
the customer is dissatisfied with the insurer’s response can lodge the complain
 The complain must be made within one year of the insurer’s response or one year from the end of
30 days when insurer failed to respond;
 The complain should not be pending before any court, consumer forum or arbitrator;
 Functions of the Ombudsman:
 Conciliation : within one month of the complain (settlement)
 Award : within three months of the complain
 Insurance Company :
 Insurance company are required to honour the award within 15 days of awards if it is accepted by
the complainant;
 They cannot go against the order in any court
 Policyholder / Claimants :
 If policyholder is not satisfied with the award, they can approach to consumer forum, court, etc.

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Integrated Grievance Management System (IGMS): Features of IGMS are as followes:-

 Gateway for policyholders to register complaints with insurance companies first;
 Classify different complaint types based on pre-defined rules;
 System will assign, store and track unique complaints Ids and notify various stakeholders;
 System will setup alerts for pending tasks nearing turnaround time;
 IGMS will be able to generate reports on all criteria such as status, nature of complaint and any other
parameters that is defined.

Consumer Affairs Department :

Internal grievance redressal cell of the insurer: To be setup by all Insurance companies.
Guidelines issued on 28th July 2010 by the IRDA on the grievance redressal procedure.

Grievance Redressal Cell of IRDA (IGCC):

 Complaint can be lodge with the IRDA by calling the IGCC on
 The toll free number “155255”; or
 By email – at complaints@irda.gov.in
 The IGCC also educates policyholders about the role of the Insurance Ombudsman

Married Women’s Property (MWP) Act 1874

 The proposer should be a married, divorced or widowed man;
 The policy must be on his own life;
 Each policy will remain a separate trust, Either his wife or child (if adult) can be appointed as a trustee;
 Two or more trustees can be appointed;
 Corporate trustee, such as a bank transacting trustee business can be appointed by the proposer
 The policy under the MWP Act is free from court attachments, tax attachment and creditors; and even
 Life insured doesn’t have any right to deal with the policy
 Once the policy has been registered under this act the beneficiaries of the Policy can be :
 Wife alone; or
 One or more children; or
 The wife and one or more children jointly.
 The policy can’t be amended or surrendered
 Nomination and assignment are not allowed.

The Consumer Protection Act 1986

Consumer Forum:
 The complaint should be filed within 2 years from the date of cause of action.
 Appeals are require to be filed within 30 days from the date of receipt of the court's order.
Limit of Complain in Consumer Forum:
District Forum : Can accept the complain for a maximum amount of Rs. 20 Lacs
State Commission : Can accept the complain for >20 Lacs but <= 1cr
National Commission : Can accept the complain for >1cr

If a consumer is not satisfied by the decision of a District Forum, he can appeal to the State Commission.
Against the order of the State Commission a consumer can come to the National Commission.

Prevention of Money Laundering Act (PMLA) 2002

Money Laundering is the process of illegally bringing money into the financial system by hiding its origin so that it
appears to be legally acquired. Three steps of Money Laundering is:
 Placement

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 Layering; and
 Integration
AML guidelines for Insurance companies were issued on 31 st March, 2006 and IRDA made it mandatory for all life
insurance companies to follow the AML guidelines from 1 st August, 2006. Highlights of AML guideline are:
 The appointment of a principle compliance officer;
 Threshold for payment of premium in cash cannot exceed Rs. 50,000/-.
 Internal policy, procedures and control;
 Internal audit/control; and
 Recruitment and training of insurance agent/employees on AML measures.

Who can supersede the IRDA:

Central Government can supersede the IRDA if IRDA is failing to carry its functions. It can be done by issuing a
notification.

IRDA Code of Conduct: -

The IRDA (Licensing of Insurance Agents) Regulations, 2000 prescribes a Code of Conducts for Insurance agents.
 Every Insurance Agent shall:
 Identify himself and the insurance company of whom he is an agent
 Disclose his license to the prospect on demand;
 Disseminate the requisite information in respect of products offered for sale and take into account
the needs of the prospect while recommending a specific insurance plan;
 Disclose the scale of commission, if asked by the prospect;
 Indicate the premium to be charge
 Bring the notice of the insurer about the adverse habits or income inconsistency of the prospect by
ACR
 Inform prospect about the acceptance or rejection of the proposal;
 Obtain the requisite documents at the time of filing the form
 Help the policyholder or claimants at the time of claim;
 Advice the policyholder about nomination or assignment or change of address etc.

Non-adherence of Code of Conducts:

 May lead to the disqualification of the agent;
 The company may initiate internal proceedings against the agent
 May result in cancellation of license and for future commission payable to agent.

Some Important Topics for IC -33 Examinations

1. Peril and Hazard
2. Hazards – Physical, Moral
3. Micro Insurance
4. BI Documents
5. Primary Underwriter
6. KYC
7. Churning
8. Ombudsman
9. Loss of Policy / Policy Lost
10. Daily Hospitalization Cash Scheme
11. Family Floater
12. Commutation
13. Open Market for Annuities
14. Assignment

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15. Policy Lost

16. Monthly EMI Limit
17. Re-Insurance
18. Real and Perceived Needs
19. Pooling of Risk / Law of Large No.
20. Section – 80C
21. Section – 45
22. Paid up Value
23. FDI Limit
24. COPA Act
25. MWP Act 1874

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