Principles & practices of insurance com 334

Principles & Practices of
Insurance - COM 334
HARESH R
Asst. Professor
Department of Commerce
Christ University, Bengaluru

“Quote, Unquote”
“When we take a risk, we are betting on an
outcome that will result from a decision we have
made, though we do not know for certain what
the outcome will be.” - Peter L. Bernstein

There is nothing certain in this world except the
death and the Tax; yet the Death and Tax are
uncertain as no body knows when will he die or
when the tax will change.” - Benjamin Franklin

Introduction
• Every business is exposed to different types of
risks such as fire, theft, burglary, accident,
etc.,
• Some of the risks can be transferred to
specialised institutions known as Insurance
companies.
• Insurance  socialisation of risks.
• Insurance companies indemnify the loss of the
insured.

RISK
• No single definition for the term Risk.
• Historically Risk means Uncertainty.
• Risk is defined as uncertainty concerning the
occurrence of a loss.
• The economics and finance literature, authors often
make a distinction between risk and uncertainty.
• The term “risk” is often used in situations where the
probability of possible outcomes can be estimated
with some accuracy, while “uncertainty” is used in
situations where such probabilities cannot be
estimated.

• The potential loss that risk presents may be:
financial : i.e. measurable in monetary terms;
physical : death or injury (often having financial
consequences for the individual or his family);
emotional : feelings of grief and sorrow.
We should also be aware that insurers may use
the word "risk" with other meanings, including:
– to signify the situation/premises, or policyholder,
they are insuring;
– to indicate the peril or cause of loss insured (so,
some policies may insure on an "all risks" basis).

Categories of Risk
• Speculative or dynamic risk - a situation in which
either profit OR loss is possible.(Business,
Investments, Betting). This risk is uninsurable
with few exceptions.
• Pure or static risk - a situation in which there are
only the possibilities of loss or no loss, as oppose
to loss or profit with speculative risk. (Premature
death, occupational disability, catastrophic
medical expenses, and damage to property due
to fire, lightning, or flood.)

Other Risks
• Fundamental Risks - Fundamental risks affect
the entire economy or large numbers of
people or groups within the economy. (high
inflation, unemployment, war, and natural
disasters.)
• Particular Risks - Particular risks are risks that
affect only individuals and not the entire
community.(burglary, theft, auto accident,
dwelling fires)

• Subjective Risk - Subjective risk is defined as
uncertainty based on a person's mental condition or
state of mind.(Drunken Driving)
• Objective Risk - Objective risk is defined as the relative
variation of actual loss from expected loss. (For
example, assume that a fire insurer has 5000 houses
insured over a long period and, on an average, 1
percent, or 50 houses are destroyed by fire each year.
Sometimes 45 houses(5 less or 10 Per cent variation).
Objective risk declines as the number of exposures
increases.

• Dynamic Risk - Associated with a changing
economy. Important examples of dynamic
risks include the changing tastes of
consumers, technological change, new
methods of production, and investments in
capital goods that are used to produce new
and untried products.
• Static Risk - Similar to pure risk.

• Financial Risk - A financial risk is one where the
outcome can be measured in monetary terms.
• Non-financial Risks - the great social decisions of
life are examples of non-financial risks: the
selection of a career, the choice of a marriage
partner, having children. There may or may not
be financial implications, but in the main the
outcome is not measurable financially but by
other, more human, criteria. The outcome could
be uncomfortable or disliked in some other way.

• A community can come to the aid of individuals who are affected by
such events, by having a system of sharing and mutual support.
Meaning
 Insurance is based on principles of co-operation.
 The losses of a few are shared by many.
 An insurance company, otherwise called the insurer organize this
co-operative effort.
 Insurance is a contract between the insurer and the insured under
which the insurer undertakes to compensate the insured for the
loss arising from the risk insured against.
 In consideration the insured agrees to pay premium regularly. The
person whose risk insured is called the insured or assured.
 The person who agrees to compensate the loss arising from the risk
is called the insurer or assurer or underwriter.

INSURANCE
• Insurance may thus be defined as sharing of
the losses of a few who are unfortunate to
suffer such losses, amongst those exposed to
similar uncertain events / situations.

INSURANCE CONTRACT
• A contract of insurance is an agreement
whereby one party, called the insurer,
undertakes, in return for an agreed
consideration, called the premium, to pay the
other party, namely the insured, a sum of
money or its equivalent in kind, upon the
occurrence of a specified event resulting in a
loss to him. The policy is a document which is
an evidence of the contract of insurance.

History/Origin of Insurance
• The idea of insurance took birth thousands of
years ago. Yet, the business of insurance, as we
know it today, goes back to just two or three
centuries.
• Insurance has been known to exist in some form
or other since 3000 BC. Various civilizations, over
the years, have practiced the concept of pooling
and dividing among themselves, all the losses
suffered by some members of the community.

History/Origin of Insurance
• Insurance through the ages - The Babylonian
traders had agreements where they would pay
additional sums to lenders, as a price for
writing off the loans, in case a shipment was
lost or stolen. These were called “bottomry
loans”.
• Similar practices were prevalent among the
traders from Baruch and Surat sailing in Indian
ships to Sri Lanka, Egypt and Greece.

• The Greeks had started benevolent societies in
the late 7th century AD, to take care of the
funeral – and families – of members who died.
The Friendly societies of England were similarly
constituted.
• The inhabitants of Rhodes adopted a practice
whereby, if some goods were lost due to
jettisoning during distress, the owners of goods
(even those who lost nothing) would bear the
losses in proportion.

• Chinese traders in ancient days would keep
their goods in different boats or ships sailing
over the treacherous rivers. They assumed
that if one of the boats suffered such a fate,
the loss of goods would be only partial and
not total. The loss could be distributed and
thereby reduced.

Modern Commercial Insurance
• Marine insurance was thus the forerunner to other
kinds of insurance.
• “The Great Fire of London” in 1666, in which more
than 13000 houses were lost, gave a boost to insurance
and the first fire insurance company, called the Fire
Office, was started in 1680.
• Lloyds: The origins of insurance business as practiced
today, is traced to the Lloyd‟s Coffee House in London.
Traders, who used to gather there, would agree to
share the losses to their goods being carried by ships,
due to perils of the sea. (maritime perils, such as
pirates who robbed on the high seas or bad sea
weather spoiling the goods or sinking of the ship due
to perils of the sea.)

History of Insurance in India
• Modern insurance in India began in early 1800.
• The first life insurance company to be set up was an
English company, the Oriental Life insurance Co. Ltd.
and the first non-life insurer to be established in India
was the Triton Insurance Co. Ltd.
• The first Indian insurance company was the Bombay
Mutual Assurance Society Ltd., formed in 1870 in
Mumbai.
• Many other Indian companies were set up
subsequently as a result of the Swadeshi movement at
the turn of century.

History of Insurance in India – CONTD.
• In 1912, the Life Insurance Companies Act and the
Provident Fund Act were passed to regulate the
insurance business.
• The oldest insurance company in India which still exists
is National Insurance Company Ltd., which was
founded in 1906. It is still in business.
• The Life Insurance Companies Act, 1912 made it
compulsory that premium-rate tables and periodical
valuation of companies be certified by an actuary.
However, the disparity and discrimination between
Indian and foreign companies continued.

• Nationalisation of life insurance - 1st
September 1956 and the Life Insurance
Corporation of India (LIC) was formed.
• Nationalisation of non-life insurance -
General Insurance Business Nationalisation
Act (GIBNA) in 1972, the non-life insurance
business was also nationalised and the
General Insurance Corporation of India (GIC)
and its four subsidiaries were set up.

Malhotra Committee and IRDA
• In 1993 the Malhotra Committee was setup to explore
and recommend changes for development of the
industry including the reintroduction of an element of
competition. The Committee submitted its report in
1994. In 1997 the Insurance Regulatory Authority (IRA)
was established.
• The passing of the Insurance Regulatory &
Development Act 1999 (IRDA) led to the formation of
Insurance Regulatory and Development Authority
(IRDA) in April 2000 as a statutory regulatory body
both for Life and Non- life insurance industry.

Restructuring of GIC
• The GIC was converted into a national re-insurer
[and the subsidiaries were restructured as
independent companies].
• In December, 2000 the Parliament passed a bill
de-linking the four subsidiaries from GIC in July,
2002. These are
– National Insurance Co. Ltd.
– The Oriental [Fire & General] Insurance Co. Ltd.
– The New India Assurance Co. Ltd
– United India [Fire & General] Insurance Co. Ltd.

Establishment of IRDA
• Insurance Regulatory and Development
Authority (IRDA) was established in 2000 by
an act of Parliament of 1999 “to protect the
interests of holders of insurance policies and
to regulate, promote and ensure orderly
growth of the insurance industry”.

ASSURANCE
• The term ‘Assurance is applied to contracts,
where the risk insured against is certain to
happen, but the time of its happening is
uncertain.
• Thus the risk insured against death is contract
of assurance. Technically speaking a life
insurance may be called as “Life Assurance”.

Nature/Characteristics of Insurance
1. Sharing of risk
2. co-operative device
3. Large number of insured
persons
4. Evaluation of risk
5. Payment of happening of
specified event
6. Transfer of risk
7. Spreading of risk
8. Protection against risks
9. Insurance is not charity
10. Insurance is not a
gambling
11. A contract
12. Social device
13. Based upon certain
principle
14. Regulation under the law
15. Insurance is for pure risk
only
16. Based on mutual
goodwill

Importance of Insurance
Individual aspects:
1. Security for health and
property
2. Encourage savings
3. Encourage the habit of
forced thrift
4. Provide mental peace
5. Increase efficiency
6. Provision for the future
7. Awareness for the
future
8. Credit Facility
9. Tax exemption
10. Contribution to the
conservation of health
11. Cover for legal liability
12. Security to the
mortgaged property
13. Poster economic
independence

II Economic aspects
1. Safety against risk
2. Protection to employees
3. Basis of Credit
4. Protection from the loss of key man
5. Encourage loss prevention methods
6. Reduction of cost
7. Promote foreign trade
8. Development of big industries
9. Increase in efficiency

III Social aspects
1. Stability in family life
2. Development of employment opportunity
3. Encourage alertness
4. Contributes to the development of basic
facilities

IV National aspects
1. Increase the national savings
2. Helps in development opportunities
3. Develops the money market
4. Earns foreign exchange
5. Capitalizes the savings

PRINCIPLES OF INSURANCE
• A contract of insurance is a mercantile contract. All the principles
applicable to mercantile contracts are applicable to contracts of
insurance.
• Further there are special principles applicable to contracts of
insurance. They are;
– Nature of Contract
– Utmost good faith (PRINCIPLE OF UBERRIMAE FIDEI)
– Insurable Interest
– Indemnity
– Subrogation
– Contribution
– Proximate cause
– Loss of Minimization

1. Nature of Contract
The nature of contract is a fundamental principle of a contract of insurance
required for a valid contract. Essential elements of a valid contract are:
a. Agreement (offer and acceptance) –insurance is an agreement between
insurer and insured. Proposal is made by one party and accepted by other.
b. Lawful consideration- premium is consideration for insurance contract
c. Lawful objects- object of insurance is lawful and not against to public
policy.
d. Free consent- consent of parties to contract should be free. I.e., not by
means of coercion, undue influence, fraud, misrepresentation etc.
e. Competent parties (legal capacity of parties)- parties to an insurance
contract should be competent to contract. Ie, they should not be idiot,
lunatic, minor, insolvent etc.
f. Consensus ad idem- parties to contract should understand the subject
matter of insurance in same sense.
g. Possibility and certainty of performance etc.

2. PRINCIPLE OF UBERRIMAE FIDEI
(UTMOST GOOD FAITH)
• Both the parties i.e. the insured and the insurer
should have a good faith towards each other.
• The insurer must provide the insured complete,
correct and clear information of subject matter.
• The insurer must provide the insured complete,
correct and clear information regarding terms and
conditions of the contract.
• This principle is applicable to all contracts of
insurance i.e. life, fire and marine insurance.

3. PRINCIPLE OF INSURABLE INTEREST
• The insured must have insurable interest in the subject
matter of insurance.
• In life insurance it refers to the life insured.
• In marine insurance it is enough if the insurable interest
exists only at the time of occurrence of the loss.
• In fire and general insurance it must be present at the
time of taking policy and also at the time of the
occurrence of loss.
• The owner of the party is said to have insurable interest
as long as he is the owner of it.
• It is applicable to all contracts of insurance.

4. PRINCIPLE OF INDEMNITY
• Indemnity means guarantee or assurance to put
the insured in the same position in which he was
immediately prior to the happening of the
uncertain event. The insurer undertakes to make
good the loss.
• It is applicable to fire, marine and other general
insurance.
• Under this the insurer agreed to compensate the
insured for the actual loss suffered.

5. PRINCIPLE OF SUBROGATION
• As per this principle after the insured is
compensated for the loss due to damage to
property insured, then the right of ownership of
such property passes to the insurer.
• This principle is corollary of the principle of
indemnity and is applicable to all contracts of
indemnity.
• According to the principle of subrogation, when
the insured is compensated for the losses due to
damage to his insured property, then the
ownership right of such property shifts to the
insurer.

6. PRINCIPLE OF CONTRIBUTION
• According to this principle, the insured can claim the
compensation only to the extent of actual loss either
from all insurers or from any one insurer.
• If one insurer pays full compensation then that insurer
can claim proportionate claim from the other insurers.
Example - Mr. A insures his property worth Rs. 100,000
with two insurers "AIG Ltd." for `90,000 and "MetLife
Ltd." for `60,000. A's actual property destroyed is worth `
60,000, then Mr. A can claim the full loss of `60,000 either
from AIG Ltd. or MetLife Ltd., or he can claim `36,000
from AIG Ltd. And `24,000 from Metlife Ltd.

7. PRINCIPLE OF CAUSA PROXIMA
(NEAREST CAUSE)
• Proximate means nearest.
• The loss of insured property can be caused by
more than one cause in succession to another.
• It is only the nearest reason and not the
remote reason is the factor to be taken into
account.
• The property may be insured against some
causes and not against all causes.
• The insurer is liable only if the nearest cause
comes within the meaning of risk insured.

Proximate Cause Definition
• “the active and efficient cause that sets in
motion a train of events which brings about a
result, without the intervention of any force
started and working actively from a new and
independent source”.

8. PRINCIPLE OF LOSS MINIMIZATION
• Under this principle it is the duty of the
insured to take all possible steps to minimize
the loss to the insured property on the
happening of uncertain event.
• The insured must not neglect and behave
irresponsibly during such events just because
the property is insured. Hence it is a
responsibility of the insured to protect his
insured property and avoid further losses.

Functions of Insurance
• Insurance is risk bearing
• provides saving
• provides protection
• stimulates business enterprise
• encourages efficiency
• promotes loss prevention
• provides capital
• solves social problems
• Use of reserve funds

Role of Insurance in Economic
Development
• Pooling of resources
• Policyholder benefit
• Capital protection
• Removal of anxiety
• Increased creditworthiness
• Sharing of risk expertise
• Foreign exchange
• Widespread industry association

Reinsurance(Insurance of Insurance)
• Reinsurance is a process whereby one entity
takes on all or part of the risk covered under a
policy issued by an insurance company in
consideration of a premium payment.
• Reinsurance is a transaction whereby one
insurance company (the “reinsurer”) agrees to
indemnify another insurance company (the
“reinsured, “cedent” or “primary” company)
against all or part of the loss that the latter
sustains under a policy or policies that it has
issued. For this service, the ceding company pays
the reinsurer a premium.

Double Insurance
• Double insurance is a type of insurance where
the same subject matter is insured more than
once. In such cases the same subject is insured,
but with different insurers.
• The method of double insurance is considered a
legal act. In case of loss the insured can claim
from both the insurers and the insurers are liable
to pay under their respective policies.
• The insured cannot claim more than the actual
loss.

Types of Insurance
• Insurance may be classified as follows:
– Classification on the basis of nature of insurance
– Classification from business point of view
– Classification from risk point of view

Classification on The Basis of
Nature of Insurance
• Life Insurance
• Fire Insurance
• Marine Insurance
• Social Insurance
• MiscellaneousInsurance (Motor, Accident,
Crop, Duty, Erection All Risks Insurance(EAR),
Contractor’s All Risk Insurance (CAR),
Machinery Breakdown Insurance, Engineering,
Sports, Burglary, Baggage, Etc.)

Classification of Insurance from
Business Point of View
• Life Insurance
• General Insurance

Classification of Insurance from Risk
Point of View
• Personal Insurance
• Property Insurance
• Liability Insurance
• Fidelity Guarantee Insurance

Proposal to Policy
• Proposal is a comprehensive term and includes
– The proposal
– The agent’s report
– The medical report
– The moral hazard report
– All special reports
• Proposal form is the most important and basic
document required for insurance contract
between the insured and insurance company.

• The term(proposal) also includes other
documents like
– Age proof
– Income proof
– Employment proof etc.,

Over Insurance
• When the amount for which a subject-matter
is insured is more than its actual value, it is
called over insurance

Underwriting of Risks
• The underwriting is a process by which a
decision is taken either to accept or reject an
insurance proposal.
• Only the proposals which are favourable and
advantageous to the insurer are accepted and
others are rejected.
• In the words of Mehr and Cammack,
“Underwriting is the process of accepting or
rejecting risks (prospective insureds).”

Life Insurance
• Life insurance contract may be defined as the
contract, whereby the insurer in consideration
of a premium paid either in a lump sum or in
periodical instalments undertakes to pay a
certain sum of money either on the death of
the insured or on the expiry of a fixed period
whichever is earlier.

General Insurance
• General Insurance business means “fire,
marine or miscellaneous insurance business
whether carried on single or in continuation
with one or more, but does not include
redemption business and annuity business”
• From the above definition general Insurance
include all different types of insurance except
life insurance.

Marine Insurance
• A contract of insurance under which the
insurer undertakes to indemnify the insured
against losses incidental to marine adventure.
• Covers loss or damage to the ship, cargo,
freight, vessels or any other subject of marine
adventure.

Fire Insurance
• A Contract of agreement  insurer  Insured
• Insurer undertakes to indemnify the insured
for destruction or damage to property caused
by fire or other specified perils during an
agreed period of time, in return for payment
of a premium in lump sum or by instalments.

Motor Vehicle Insurance
• In motor insurance, the owner’s liability to
compensate people who were killed or injured
through the negligence of the motorists or
drivers is passed on the insurance company.

Principles of Life Insurance
Nature of Contract
A contract is an agreement between parties,
enforceable at law. The provisions of the Indian
Contract Act, 1872 govern all contracts in India,
including insurance contracts.
An insurance policy is a contract entered into
between two parties, viz., the company, called the
insurer, and the policy holder, called the insured
and fulfills the requirements enshrined in the Indian
Contract Act, 1872.

The nature of contract is a fundamental principle
of a contract of insurance required for a valid contract.
Essential elements of a valid contract are:
• Agreement
• Lawful consideration
• Lawful objects
• Free consent
• Competent parties
• Consensus ad idem (parties to contract should
understand the subject matter of insurance in same
sense.)
• Possibility and certainty of performance

Principles & practices of insurance com 334

Insurance contracts – Special features
• Utmost Good Faith
• Insurable interest
• Representation
• Assignment
• Proximate Cause
• Nomination

Utmost Good Faith
(Uberrimae fidei)
• “A positive duty to voluntarily disclose, accurately
and fully, all facts material to the risk being
proposed, whether requested or not".
• The insured should not make any
misrepresentation regarding any fact that is
material for the insurance contract. The insured
must disclose all relevant facts.
• The policyholder is expected to disclose the
status of his health, family history, income,
occupation etc. truthfully without concealing any
material fact so as to enable the underwriter to
assess the risk properly.

Insurable interest
• A general definition used for insurable interest is “The
legal right to insure arising out of financial relationship,
recognized under law, between the insured and the
subject matter of insurance.”
• A person is deemed to have insurable interest on his
own life to an unlimited extent, as in the event of his
pre-mature death, there will be loss of his future
earnings of individual. Spouses are presumed to have
insurable interest in each other’s life.
• However in case of other members of the family,
insurable interest is not presumed to exist. A person
cannot, therefore, insure, say his brother or sister
though they may dependent on him.

Representation
• All disclosures relating to an insurance policy
must be made at the time of entering into the
insurance contract. The insurance company
hands over the application proforma to the
person buying insurance seeking complete
details.
• The person has to mention his profession,
income, age, family, history of family, general
health, ailments suffered, medical reports,
matters relating to conduct and character, any
criminal record, etc.

Assignment
• Assignment is the transfer of the rights to receive the
benefits under a contract accruing to the party to that
contract.
• In life insurance parlance, assignment is the transfer of
rights to receive benefits stated in the life insurance
policy from the Policyholder to the Assignee.
• In practice, a ‘space for endorsements’ is provided in
the insurance policy contract where the Policyholder
(Assignor) affixes the statement of assignment along
with reasons therefor. This endorsement is required to
be signed by the Policyholder and the signature should
be witnessed by any person competent to contract. An
assignment can be only for valid reasons.

Proximate Cause
• Proximate cause is defined as the active and efficient
cause that sets in motion a chain of events which
brings about a result, without the intervention of any
force started and working actively from a new and
independent source.
• Life insurance provides for payment of a death benefit,
regardless of the cause of death, the principle of
proximate cause would not apply.
• However many life insurance contracts also have an
accident benefit rider wherein an additional sum
assured is payable in the event of accidental death. In
such a situation, it becomes necessary to ascertain the
cause - whether the death occurred as a result of an
accident. The principle of proximate cause would
become applicable in such instances.

Nomination
• Nomination is a facility that enables a
Policyholder to nominate an individual, who can
claim the proceeds of the Policy, upon the demise
of the Policyholder.
• Under Section 39 of the Insurance Act, 1938. It
lays down that the Policyholder who holds a
policy of life insurance on his own life, may
nominate the person or persons to whom the
money secured by the policy shall be paid in the
event of his death.

Overview of Life Insurance Products
• Product is a bundle of attributes
• Products may be:
– Tangible
– Intangible
• Life insurance is a product that is intangible.
• A life insurance agent has the responsibility to
enable the customer to understand the features
of a particular life insurance product, what it can
do and how it can serve the customer’s unique
needs.

LIFE INSURANCE PRODUCTS
(a) Pure protection plans;
(b) Protection cum savings plans;
(c) Pure savings and pension plans;
These can be further classified into:
I. Term insurance & Health Insurance plans
II. Endowment & Money-back plans
III. Whole life plans
IV. Pension and savings plans
V. Unit linked insurance plans (ULIPs)
VI. Variable Insurance plans (VIPs)

Pure Protection Plans
• A simple risk cover insurance product where
the sum assured becomes payable upon the
happening of the risk event during the term
of the policy.
• The two variants of a pure protection plan are:
1. Term Insurance plan
2. Health Insurance plan

Term Insurance plan
• A pure risk cover where the sum assured
becomes payable upon death of the life assured
during the term of the policy.
• The premiums are usually low and affordable
and the policy assures a financial security to the
family members upon death of the life assured.
• The term of the policy is fixed and where the life
assured survives the full term, no amount is
payable.
• The benefit arising to the insurance company in
such case is the income out of the premiums
invested during the term.

Health Insurance plan
• A pure risk cover where the sum assured becomes
payable upon the life assured being diagnosed of certain
identified illness during the term of the policy.
• Popularly known as Medical Insurance or Mediclaim
that covers medical expenses including hospitalization
expenses.
• Some of the critical illnesses that are usually covered
under a health insurance plan are:
Blindness − Stroke − Major organ transplant − Multiple
Sclerosis − Paraplegia − Arota Surgery − Kidney failure − Heart
attack − Cancer − Coma
• The list of illnesses differs between various health plans
of different insurance companies and the premium
would also differ according to the illnesses covered.

PROTECTION + SAVINGS INSURANCE
• In addition to getting a pure term insurance
cover, the policyholder is also able to leverage
long term savings.
• Life insurance plans are an excellent choice for
providing for Protection needs, Long term goals
such like children’s education and marriage,
retirement and others.
• In such plans, the premium payable is divided
into two parts:
Premium for life coverage – provides financial
protection in case of death
Premium for savings element – Is invested by the
insurance company on behalf of the policyholders.

Endowment Insurance
• An endowment insurance offers death cover if
the life insured dies during the term of the
policy and also offers a Survival benefit if the
life insured survives until the maturity of the
policy.

Key Features of An Endowment
Insurance Plan
• If the life insured survives the entire term of the
plan, then a specified amount is paid to him/her on
maturity of the plan
• If the life insured dies before the maturity of the
plan, then the death cover benefit is paid to the
nominee/beneficiary
• Savings element
• Goal-based investment
• Some insurance companies also allow partial
withdrawal or loans against these policies

Whole of Life Insurance
• A term insurance plan with an unspecified
period is called a whole life plan. Some plans
also have a savings element to them.
• As the name of the plan specifies, this plan
covers the individual throughout their entire
life. On the death of the life insured, the
nominee/beneficiary is paid the sum insured
along with the bonuses accumulated up until
that point in time.

• During the individual’s lifetime they can make
partial withdrawals to meet emergency
requirements.
• An individual can also take out loans against the
policy.
• Although, in case of Whole Life Plans, sum
assured is payable only on death, some insurers
pay the sum assured when life insured completes
a certain age. For example, 80 years, 90 years,
100 years, etc.

Unit Linked Insurance Plan
• A Unit Linked Insurance Plan or ‘ULIP’ as it is popularly
known is basically a combination of insurance as well
as investments.
• A fund is created from a pool of premiums collected
from policyholders and the fund is used to invest in
various market instruments (debt and equity) in
varying proportions similar to mutual funds.
• The Policy holders can select the type of funds (debt or
equity) or a mix of both based on their investment
need and risk appetite.
• ULIP policy holders are allotted units and each unit has
a net asset value (NAV) that is declared on a daily basis.
The NAV varies from one ULIP to another based on
market conditions and the fund’s performance.

Variable Insurance Plan
• Variable life insurance is a permanent life insurance
policy with an investment component. Variable
universal life insurance can help meet the needs of
those who want life insurance protection with the
potential to build cash value.
• The policy has a cash value account, which is invested
in a number of sub-accounts available in the policy.
• A sub-account act similar to a mutual fund, except it's
only available within a variable life insurance policy.
• A typical variable life policy will have several sub-
accounts to choose from, with some offering upwards
of 50 different options.

Money Back Policy
• Provides for periodic payments of partial
survival benefits during the term of the policy,
so long as the policy holder is alive.
• A distinguishing feature of money back policy
is that in the event of death at any time within
the policy term, the death claim amount
comprises full sum assured without deducting
any of the survival benefit amounts already
paid as money back components.

Actuary
• A business professional who analyzes the financial
consequences of risk.
• Mathematics, Statistics, and Financial Theory  to
study uncertain future events, especially those of
concern to insurance and pension programs.
• An actuary is an expert who applies mathematical
and statistical methods for assessment of financial
and other risks relating to various contingent events
and for scientific valuation of financial products in
the fields of insurance, retirement and other
benefits, investments etc.

• Actuaries may work for
– insurance companies
– consulting firms
– government, employee benefits departments of
large corporations, hospitals, banks and
investment firms

Nature of Job
• The Actuary designs insurance & pension plans.
• Determines insurance premium rates and
contract provisions for each type of policy offered
• Compiles data relating to rates of mortality,
sickness, injury, retirement and property loss
from accident, theft, fire or any other hazard.
• On the basis of data thus collected, he/she
analyzes insurances’ claims from Corporation or
Company.
• Also evolves new types of attractive policies
ensuring greater business.

Services of Actuary
(1) Design an insurance product and set its price
(2) Select the right people for insurance products.
(3) Minimise the amount of losses for the company by
reinsuring the company’s insurance policies with another
insurer (called reinsurers)
(4) Maximize the profits for the company
(5) protect the customers’ amounts kept with the insurance
company for a number of years etc.
(6) Prepare on a given date a summary of the company’s
liabilities (commitments)
(6) To determine the adequacy of the reserves.
(7) To certify the solvency of the Insurance Company.

Required Traits of an Actuary
• Natural problem solving ability
• See situation from different vantage points.
• Develop lateral thinking.
• Practical Outlook.
• Probing curiosity & business sense with highly
developed inter personal Communication skills
• An Aptitude for Mathematics
• Deep knowledge of Statistics & Commerce

Actuary Appointment– Eligibility
Criteria
• IRDA(Appointed Actuary) Regulations, 2000
prescribe that an insurer registered to carry on
insurance business in India shall, appoint an
actuary, who shall be known as the 'Appointed
Actuary' for the purposes of the Act.
• A person shall be eligible to be appointed as an
appointed actuary for an insurer, if he or she shall
be
(a) Ordinarily resident in India;
(b) A Fellow Member of the Actuarial Society of India;
(c) An employee of the life insurer, in case of life
insurance business;

(d) An employee of the insurer or a consulting actuary, in
case of general insurance business;
(e) A person who has not committed any breach of
professional conduct;
(f) A person against whom no disciplinary action by the
Actuarial Society of India or any other actuarial
professional body is pending;
(g) Not an appointed actuary of another insurer;
(h) A person who possesses a Certificate of Practice
issued by the Actuarial Society of India; and
(i) Not over the age of seventy years.

Risk Management
• Risk management refers to the practice of
identifying potential risks in advance,
analyzing them and taking precautionary steps
to reduce/curb the risk.
• Risk management may be defined as “the
identification, analysis and economic control
of those risks which can threaten the assets or
earning capacity of an enterprise.”

• A risk management plan includes strategies and
techniques for recognizing and confronting these
threats.
• Good risk management doesn’t have to be
expensive or time consuming; it may be as
uncomplicated as answering these three
questions:
– What can go wrong?
– What will we do, both to prevent the harm from
occurring and in response to the harm or loss?
– If something happens, how will we pay for it?

Features of Risk Management
• Scientific Approach and deals with Pure Risk of
individuals and business
• Importance is given to Insurable and
uninsurable interests
• Emphasizes reducing the cost of handling risk

Methods of Handling Risks
• Prevention of Risks
• Reduction of Risks
• Shifting of Risks
• Acceptance of Risks
• Spreading of Risks

Risk Management Process
• Risk Identification
• Risk Evaluation
• Risk Removal
• Risk Reduction
• Risk Re-valuation
• Risk Retention
• Risk Transfer

Principles & practices of insurance com 334

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