Classification of Insurance Business

Shreenivasan K A AP SoM - SASTRA

Introduction

Insurance Business

Long Term
Short Term

Life Insurance
General Insurance

Long Term Life Assurance

Includes
Ordinary Life Insurance Annunities Industrial Life Insured Pensions & Permanent Health Cover

Short Term Insurance

Includes
General Insurance including
Fire Business Interpretaion Marine Cargo and Hull

Aviation Cargo and Hull Engineering Liability

including employers, Public, Product & Profession Liability

Short Term Insurance

Miscellaneous accidents
Including Glass, Credit, Loss of rent etc.

Motor Private and Commercial Vehicles Personal Accident and Health Theft
Including burglary, all risks. Goods-in-transit, Money and fidelity guarantee.

Alternative Classification of General Insurance

a)

Property Insurances
a) b) c) d) Fire, Theft, Engineering and Miscellaneous accident

b) c)

Motor Insurances Liability Insurances

a) b) c) d) Employers Public Product Professional

Alternative Classification of General Insurance

d)

Pecuniary Insurances
a) Fidelity Guarantee b) Credit Insurance

e) f)

Personal Accident and Health insurances Interruption insurances

a) Arising out of fire & b) Engineering risks

Personal & Commercial Business Insurance

Personal Insurance Caters to the needs of individuals and Families

Life insurance & Annuities Pensions Permanent Health

Commercial Insurance Caters to the needs of the Business

Fire Marine Other Insurances

Voluntary & Compulsory Insurance

Voluntary Insurance Left with the option of the individual, firm or body corporate. Compulsory Insurance

Motor Vehicles Act, 1988 Workmens Compensation Act, Factories Act, 1948 Public liability Insurance Act. 1991

Social Insurance

From the goodness of Nation

National health and unemployment Scheme Pension fund protection etc.

Classification of General Insurance business

The three broad classifications specified in the Indian Insurance Act, 1938, and adopted by the Indian insurance industry are
[a] Fire Insurance, [b] Marine Insurance and [c] Miscellaneous Insurance.

Laws of other countries have different and longer lists of classes, for example, in the UK law; there is a list of 18 classes. These actually are derived by subdividing the three major class listed above.

Fire Insurance
The standard fire policy covers damages to the property caused by fire, lightening or explosion, where this explosion is brought about by gas or boilers not used for any industrial purpose. This is limited in scope as property can be damaged in other ways, and to meet this need, a number of extraneous perils, can be added on to the basic policy. These perils are:

storm, tempest or flood burst pipes earthquake aircraft riot, civil commotion malicious damage explosion impact

Marine Insurance

Marine policies relate to three areas of risks, namely,

the hull, the cargo and freight.

The risks against which these items are normally insured are collectively termed perils of the sea and include fire, theft, collision and a wide range of other perils. The word freight used above is the sum paid for transporting goods or for the hire of a ship. When goods are lost by marine perils then freight, or part of it, is lost, hence the need for the cover.

Marine Cargo

Cargo is usually insured under a marine cargo policy on

a warehouse [of departure] to warehouse [of arrival] basis and frequently covering all risks.

Thus, carriage of goods by sea is also accompanied by transportation of goods by land.

Marine Hull / Liabilities

Marine Hull cover is for damage to the ship due to the marine perils. The custom has been to provide insurance for three quarters of the ship owners liability for collisions at sea under the marine hull policy. The remaining quarter and all other forms of liability are catered to by associations set up for the purpose by ship-owners, and known as Protection and Indemnity Clubs [P and I Clubs].

Miscellaneous Insurance
Miscellaneous insurance is described in the Insurance Act as any general insurance business other than fire and marine insurance business. This residual business covers a wide range of insurances.

Motor Insurance

The minimum requirement by law is to provide insurance in respect of legal liability to pay damages arising out of injury caused to any person, unlimited in amount and several countries laws also provide for damage to property of other people subject to certain limits and exception. Broadly, there are three types of motor policies:
An Act only policy covers the minimum required by the law. The third party only policies which cover the insureds liability in respect to third party injury, death or property damage. A Third party fire and theft policy would additionally cover damage to the car and its contents from fire or theft.

The comprehensive policy, which provides the widest and more common form of covers. Motor policies are described by the types of vehicles insured.

There are separate policies for private cars, motor cycles, commercial vehicles [taxies, lorries, vans, hire cars and so on], and special types of vehicles [like forklifts, mobile cranes, etc.]

Theft Insurance

Theft policy is similar to the standard fire policy in that it provides reimbursement to the insured in the event of loss of the property damaged by theft. The property to be insured, will be the same as under the fire policy excepting for the buildings. The theft policy will show a more detailed definition of the stock. The commercial policy, known as burglary insurance policy requires occurrence of force and violence either in breaking into or out of the premises of the insured. Theft insurance for individual householder is also available, under a Householders policy, but it normally does not include the force and violence requirement as in the burglary policy.

All Risk Insurance

Uncertainty of loss in not restricted to events brought about by fire or theft, nor is it limited to events occurring on or about the insureds premises. This realisation led to the developments of a wider form of cover known as all risks. The all risks is unfortunate in the sense that it does not provide cover against all risks, as there are number of exceptions, but it is an improvement on the scope of cover available. The all risks policy can be taken out on particularly expensive items such as jewellery, cameras and fur coats, and can also be arranged on unspecified goods for a lump sum. The twin objectives of such policies are to provide cover for the whole range of accidental loss or damage and to do so wherever the goods themselves happen to be at the time of loss.

Business All Risks

The use of all risks policies in the commercial sector is becoming more popular as increasing expensive and sophisticated pieces of machinery are introduced in the factory and the office, like the desk top computer which could cause considerable loss to the owner if it were to be accidentally dropped or otherwise damaged.

Goods-in-transit
This form of cover provides compensation to the owner of goods, if the same are damaged or lost while in transit. This policy may also be taken in respect of goods sent by post or rail and may also be effected by the courier if he carries responsibility for the safety of the goods being transported.

Money Insurance

Money Insurance provides reimbursement to the insured in the event of money being stolen either from his business premises, his own home or while it is being carried from or to the bank. It is important to any business as large sums of money are drawn from banks to pay the wages.

Personal Accident

The policy is to provide compensation in the event of an accident causing death or injury. What are termed as capital sums are paid in the event of death or certain specified injuries, such as the loss of limbs or sight as may be defined in the policy. A typical benefit schedule will be as under:
Death Loss of two hands or legs or eyes Loss of one hand or leg or eye Permanent total disablement Permanent partial disablement 100% of the sum insured 100% of the sum insured 50% of the sum insured 50% of the sum insured As per a schedule depending upon the level of disablement A weekly benefit of 1% of the sum insured up to a maximum of 104 weeks. Medical benefits Reimbursement up to a certain limit.

Temporary total disablement

Personal accident policies are issued for a maximum period of one year but may be renewed from year to year.

Health Insurance

Health insurance provides reimbursement of hospitalisation, surgical and medical expenses, the policyholder may have to incur the reimbursement being made subject to the limits provided in the policy, provided it is not for an excluded disease. Group policies are mostly taken by employers for the benefit of the employees. Mediclaim policies are similar policies issued for the individual families.

Engineering Insurance

Engineering insurance is intended to provide compensation to the insured in the event of the machinery and plant insured against being damaged by some extraneous cause or its own break-down. The cover is independent of fire insurance and is provided by a separate policy. Briefly engineering insurance covers
damage to or breakdown of specific items of plant and machinery; an inspection service of those items; cost of repair of those items; legal liability for injury caused by (a); legal liability for damage to property of others caused by (a).

Contractors all risk and Glass Insurance

Contractors all risks

The policy provides compensation to the contractor in the event of there being damage to the construction works from a wide variety of perils.

Glass Insurance
Cover is available against accidental damage of plate glass in windows and doors. In case of shops this is often extended to include damage done to shop window contents.

Liability Insurance

Apart from liability insurance arising under various branches of motor, marine and aviation, and engineering insurances, there is what is sometimes termed general liability, which comprises employers liability, public liability, product liability covers and professional indemnity insurance.

Employers liability / Workmens compensation insurance

When an employer is held legally liable to pay damages to an injured employee or the dependent of someone who fatally injured, he can claim against his employers liability insurance policy which will provide him with the required cover. The policy is restricted to damages payable in respect of injury and does not apply where property of an employee is damaged. Insurance is compulsory for all employers so that the injured employee is ensured of compensation in the event of injury in course of his employment. In India, Employees State Insurance Scheme has taken over the bulk of the cover so that need for workmens compensation insurance remains for any worker/employees who are not covered by the scheme. As such, this type of business, which should have formed a large portion of an insurance companys liability insurance portfolio, is limited to only certain residual cover requirements of the employer.

Public Liability Insurance

For Individuals personal liability. Each individual owes a duty to his neighbor or any other person not to cause them injury or damage to their property. Liability may arise out of the ownership of a house, a pet, out of sporting activities or just in the simple act of crossing the road without looking. Public liability policies have been designed to provide compensation for those who may have to pay damages and legal costs for such injuries or for damage of property. For Business risks Every business organization is exposed to the risk of incurring legal liability due to its operations. The public may be in contact with the firm in its office or on various sites where manufacturing process is being carried on. The policy will indemnify the insured for its liabilities thus incurred.

Directors and Officers Liability

The directors and officers liability policy will provide cover for defense costs as well as the amount of compensation for which a director or an officer may be liable to pay for his negligence in operating as a company. Directors are held responsible for the behavior of a company and in this way, shareholders, creditors, customers, employees and other can take action against directors as individuals.

Products Liability Insurance

An exception on most business liability policies is one relating to liability arising our of defects in goods sold. This can be very onerous liability and one that insurers would prefer to deal with separately. If a person is injured by any product he purchase, food stuffs or medicines for example, and can show that the seller, or in some cases the manufacturer, was to blame he could succeed in a claim for damages.

Professional Indemnity Insurance.

Another exception to the basic public liability policy is one relating to liability arising out of professional negligence or more particularly a genuine error of judgment. This can arise where lawyers, accountants, doctors, architects, insurance brokers, actuaries and a whole range of professional people do or say things, which result in other suffering in some sense. The professional can effect professional liability insurance, often known as professional indemnity insurance, to meet the cost of an award against him.

Credit Insurance

Traders can sustain heavy losses by reason of insolvency or protracted default on the part of the buyers of their goods, and credit insurance can afford them the necessary protection. In overseas trade it may be impossible for customers to pay for the goods because of the outbreak of war or government restrictions on remittance, and this so-called political risk can be covered together with the ordinary insolvency risk under Export Credit Guarantee Insurance Scheme.

Fidelity Guarantee
This is another theft cover, which provides compensation to the employer in the event of fraudulent theft of money by the employees from the business. This class of Business provides insurance against loss by reason of dishonesty of persons holding position of trust, which for some guarantees the protection goes dishonesty to cover loss caused by mistake, as, for instance, where a liquidator mal-administers the affairs of a company being wound-up, by making a mistake in law. The main divisions are as follows:

Commercial Guarantees Local Government Bonds: Court Bonds Government Bonds Insurance Rent

Interruption Insurance

This form of insurance was originally called time loss, then loss of profits, or consequential loss, and now, interruption insurance. These losses come about because:
Certain overheads will remain at their full level even though sales are reduced; Net profits will be reduced There may be certain increases in cost incurred to keep the business going in a temporary manner. The most common interruption policies are those which cover loses arising from: Fire and special perils Engineering and machinery breakdown risks; Computer damage and break down risk

Legal expense Insurance

Cover is available to private individuals and organizations, both of whom now face an ever-increasing possibility of legal action. Legal expenses insurance provides a very useful cover in the light of escalating costs of legal action.

Livestock insurance
Insurance of cattle and horses are quite common where the insurance policies provide cover against mortality risks arising out of diseases or accident. Cattle insurance forms an important part of rural insurances in India. Horse insurance refers mainly to racing horses which are often very highly valued.

Miscellaneous insurance
Whenever there is demand for a particular cover and the criteria for insurable risks have been met, the industry will usually provide the covers necessary. For example, weather [rain and sunshine deficiency or an event, say, a sports event, being washed out due to rain], twins or multiple births, loss of license, kidnap and ransom, key-man insurance and strikes.

Space risks

One modern development is the provision of insurance to those involved with satellites. Ever since the first Sputnik I was launched in October 1957, it was inevitable that the commercial use of space satellites would eventually follow. These satellites are now used for a wide range of telecommunications purposes. A number of risks can now be covered in the marine market, the main ones being material damage, during testing or launch as well as while in orbit, and loss of revenue.

Combined and Comprehensive Policies

Many of the forms of cover already dealt with both under life and general insurance are required by the same individual or business. A householder who owns and occupies his own house will require fire, special perils, loss of rent, additional living costs if the house is damaged, theft, glass, money and liability insurances. Motor car insurance may also be included. The industrial purchaser may require the same with the possible addition of goods-in transit, engineering, fidelity, credit and interruption insurance.

Advantages of Comprehensive policies

The advantages of combining various forms of insurance into one policy are:
less costly from administrative point of view and as such, a discount in premium payable would be possible; Only one premium and one renewal date to worry about; Less change of overlooking any cover; Easier to market as product rather than several independent policies.

Group Policies

Life assurance or annuity cover may be granted to a group of people, for example, employees of a company or members of an association. Actually, the cover is separately on each member of the group but for the sake of convenience only one master policy is issued. The insurer finds it convenient and less expensive to issue one policy and hence is able to grant discount on the standard rates depending on the number of persons to be covered. Further, the insurer may minimize the underwriting requirements for a group policy depending upon the number of members, type of cover and the average age of the members to be covered.

Types of life insurance plans offered in our country:

Term assurance plans Whole life plans Endowment assurance plans Assurances for children Family income policy Joint life assurance Health insurance benefits For handicapped dependents Pension plans Unit linked plan

Historical Classification of life insurance

Historically, however, life insurance benefit patterns have fit into one or a combination of three classes:
Term life insurance Whole life insurance Endowment insurance

Term Assurance Plans - Nature

Protection for a limited number of years. It terminates with no maturity value. The policy is payable only if the insureds death occurs during the stipulated term. Nothing is paid in case of survival. Issued for a short period but customarily provides protection for at least a set number of years, such as

Term Assurance Plans Nature

Initial premium rates are low compared to other life products because the period of protection is limited. Term lapse rates are higher than other policies because these are price sensitive, easily replaceable and only a few penalties for early termination.

Term Assurance Plans Features

Renewability
continuation of the policy for another term without reference to insureds insurability; premiums increase at each interval.

Convertibility
is an option to change over to a cash value policy [whole life or endowment] without reference to insureds insurability; conversion allowed on attained age method or on original age method.

Re-entry
is the facility to pay lower premium than otherwise if insureds can demonstrate that they meet certain continuing insurability conditions.

Term Assurance Plans Features .

Insurers use three types of mortality tables.

1. Select [mortality experience of newly insured lives - generally exhibit lower mortality], 2. Ultimate [mortality experience beyond the select years generally it exhibits higher mortality], and 3. Aggregate [includes both select and ultimate] mortality tables.

Traditional term premiums are based on aggregate mortality experience Reentry term premiums are based on select / mortality split.

Uses and Limitations of Term Insurance

Can be useful for persons with low income and high insurance needs. To individuals at the threshold of careers or who started new businesses. To indemnify businesses on the death of key employees. Supplement to an existing life insurance program during the child rearing period. Can be useful as a hedge against financial loss already sustained. For ensuring that the mortgage and other loans are paid on the debtor/insureds death. Vehicle for ensuring juvenile education in the case

Whole Life Insurance Policies Nature

Is intended to provide insurance protection over ones entire lifetime. It provides for the payment of the face amount upon the insureds death regardless of when death occurs. Universal life policies can function as whole life insurance if they have sufficient cash value. The face amounts remain at the same level, although dividends are often used to increase the total amount paid on death. In most policies, the gross premium also remains at the same level through out the premium payment period with some exceptions.

Whole life as endowment or term insurance

Terminal age in all mortality tables 100 years. The company pays the policy face amount to those few persons who live to the terminal age as if they had died. It is also referred as endowment at age 100 policies. Actuarial principles same as term insurance. Hence also called Term toage 100.

Whole life cash values

All whole life policies involve some pre funding of future mortality costs. Cash values are available to the policy owner at anytime by surrendering the policy. Loans can be obtained on interest. [ up to the policys cash value] Loan is deducted from the gross cash value when death claim is payable. Policy loan may, but need not, be repaid at any time and is a source of policy flexibility.

With profit and without profit whole life policies

Most whole life insurance policies are participating. A significant proportion is non-participating, but with some non-guaranteed element. Dividends actually paid may exceed illustrated dividends when investment returns are high. In India it is known as with and without profit policies.

Types of whole life insurance policies

1.

2.
3. 4.

5.
6. 7.

8.
9. 10.

Ordinary life insurance Limited payment whole life insurance Current assumption whole life insurance Variable life insurance Modified life insurance Enhanced ordinary life insurance Graded premium whole life insurance Single premium whole life insurance Indexed whole life insurance Special purpose life insurance

Endowment Insurance Concept

1. Mathematical concept Endowment Insurance = Term life insurance + pure endowment [to pay the face amount if the insured dies during the period + to pay the maturity amount only if the insured is living at the end of a specific period, with nothing paid in case of prior death]

2. Economic concept Divides endowment insurance into two parts:

a) Decreasing term insurance b) Increasing savings

The savings part of the contract is available to the policy owner through surrender of the policy. The increasing savings feature is supplemented by decreasing term insurance, which, when added to the savings accumulation, equals the policys

ENDOWMENT POLICY FEATURES

It promise protection from risk in the event of death of the insured during the policy term as well as an assured sum upon the maturity of the policy. The maturity of the policy is usually chosen to coincide with the retirement of the person. These are issued for specific terms chosen by the proposer who can choose the duration of the policy which may be 10, 15, 20 or 30 years. Where the duration is short the premium involved is higher. It is to be noted that whether the assured meets a premature death or not the full amount of the policy has to be paid by the insurance company provided the premiums have been paid as stipulated in the policy.

ENDOWMENT POLICY FEATURES.

The endowment amount at the end of the term can be used to

- Purchase an annuity policy for getting a stream of monthly pension for the rest of his life. - For parking the money in some investment to generate returns.

These policies are eligible for loans within the surrender value of the policy. If a person wants to meet expenditure like his childrens education and marriage, he can go for this plan since he is entitled to the proceeds under the plan on maturity of the policy. The term can be selected to suit these contingencies.

Types of endowment policies

Single premium endowment policies Retirement income policy the amount payable at death is the face amount or cash value, which ever is greater. A semi endowment policy pays upon survival. Modified endowment policy provides for payment periodically. Deposit term first year premiums were set to be higher than renewal premiums. Juvenile endowment policies designed to cover childs education, marriage, and independence.

Optional benefits and riders

1. Disability benefits
A common practice is to attach riders that provide certain benefits in the event of the insureds disability. The two most common disability benefits are l waiver of premium l disability income

2. Accelerated death benefits

This provision involves the payment of all or a portion of a life insurance policys face amount prior to the insureds death because of some specified, adverse medical condition of the insured. It typically takes one of the three forms. l terminal illness coverage l catastrophic illness coverage l Long-term care coverage.

Optional benefits and riders

3. Accidental death benefit [double indemnity]

This provision may be added to most life insurance contracts, which provides that double of the face amount is payable if the insured dies as a result of an accident. The expression accidental insists that both the cause and result of the death must be accidental.

4. Guaranteed insurability option

It was developed to permit young individuals to be certain that they would be able to purchase additional insurance, as they grew older, regardless of their insurability.

5. Cost of living rider [COLA]

This rider can be useful when ones needs for insurance are expected to change over time in approximately the same proportion as changes in the cost of living.

6. Additional insurance coverage

Attaching term riders to basic policies enhance the total death benefit.

Available Life Insurance plans in the Indian Market - Life Insurance Corporation of India

I. Basic Life Insurance Plans

1. Whole life Assurance (Table Nos. 2, 5 & 8) 2. LICs Jeevan Tarang (Table No. 178) 3. Endowment Assurance (Table No.s 14 & 48)

4. Jeevan Anand (Table No. 149) II. Term Assurance Plans

1. Anmol Jeevan (Table No. 164) 2. Amulya jeevan (Table No. 177)

Cont

III. Specific Plans for children

1. Children Deferred Endowment Assurance (Table Nos. 41 & 50) 2. Komal Jeevan (Table No.159) 3. Jeevan Kishore(Table No.102) 4. Jeevan Chhaya (Table No.103) 5. Child future plan (Table No.184) 6. Child career plan (Table No.185)

Cont

IV. Unit Linked Plans

1. Market Plus (Table No.181) 2. Fortune Plus (Table No.187) 3. Profit Plus (Table No.188)

V. Micro Insurance Plan

1. Jeevan Madhur (Table No.182)

VI. Plans for Handicapped Dependants

1. Jeevan Aadhar (Table No. 114) 2. Jeevan Vishwas (Table No.136)

Cont

VII. Other plans

1. New Jana Raksha (Table No.91) 2. Fixed term (marriage) endowment/educational Annuity. (Table No. 90) 3. Jeevan Anurag (Table No.168) 4. Money Back Plans (Table Nos.75, 93) 5. Jeevan surabhi (Table Nos.106, 107 & 108) 6. LICs Bima Bachat (Table No.175) 7. Jeevan Saathi (Table No. 89) 8. Jeevan Mitra (Table Nos.88 & 133) 9. Jeevan Shree (Table No.162) 10. Jeevan Pramukh (Table No.167) 11. Jeevan Bharathi (Table No.160) 12. Jeevan Saral (Table No.165) 13. Bima Nivesh (Table No.171) 14. New Bima Gold (Table No.179) 15. Jeevan Amrit (Table No.186)

Ref: Date: 12-07-2013 Updated list - Life Insurers

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Bajaj Allianz Life Insurance Company Limited. Birla Sun Life Insurance Co. Ltd HDFC Standard Life Insurance Co. Ltd ICICI Prudential Life Insurance Co. Ltd ING Vysya Life Insurance Company Ltd. Life Insurance Corporation of India Max Life Insurance Co. Ltd PNB Metlife India Insurance Co. Ltd. Kotak Mahindra Old Mutual Life Insurance Limited SBI Life Insurance Co. Ltd Tata AIA Life Insurance Company Limited Reliance Life Insurance Company Limited.

Life Insurers.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Aviva Life Insurance Company India Limited Sahara India Life Insurance Co, Ltd. Shriram Life Insurance Co, Ltd. Bharti AXA Life Insurance Company Ltd. Future Generali India Life Insurance Company Limited IDBI Federal Life Insurance Company Ltd., Canara HSBC Oriental Bank of Commerce Life Insurance Company Ltd. AEGON Religare Life Insurance Company Limited. DLF Pramerica Life Insurance Co. Ltd. Star Union Dai-ichi Life Insurance Co. Ltd. IndiaFirst Life Insurance Company Limited Edelweiss Tokio Life Insurance Co. Ltd.