Principles of Insurance& Basics of Underwriting

*Contract Act-1872Insurance is governed by Contract Act 1872Life Insurance is the contract between the Insured & InsurerWhereby for a stipulated consideration called the premium. The Insurer agrees to pay to the Insured or a beneficiary, a defined amount upon the occurrence of death or the covered eventThe principle behind insurance is indemnity which in turn means financial restoration to a level just before the accident or injury or illegal act

*Contract Act - 1872Essentials of Contract Act Invitation to an OfferOfferAcceptanceLegally capable of making a contractValid consideration Agreement must be lawful

*Terms you need to rememberInsured Individual /Group of individuals needing cover to combat a contingency

Insurer - Individual /Group of individuals/company ready to share the contingency by payment of a fixed amount at regular interval called premium

Life assured The person whose life is being insured

Proposer the payor of the policy.

Premium The premium is the amount which each life assured has to pay for sharing the collective risk of pool.

*Basic of Contract ActInvitationAcceptanceCounter OfferOfferWrittenAction

*InsuranceInsuredInsurerPremiumSum assured

*How does a life insurance policy work?

DeathIssuance --------------------------------------------- Maturity Premium payments

*Principles of InsuranceThere are 10 basic Principles of InsurancePrinciple of Co-operationPrinciple of ProbabilityPrinciple of Insurable InterestPrinciple of Utmost Good Faith Uberrimae FidesPrinciple of WarrantiesPrinciple of Causea ProximaPrinciple of IndemnityPrinciple of SubrogationPrinciple of ContributionPrinciple of Mitigation of Loss

*Principles Illustrated

*Principles Illustrated

*Principles Illustrated

*Principles Illustrated

*Principle of WarrantiesIt ensures that the risk remains the same through out the policy & does not increase

Eg The Extra premium rate at inception will remain same through out the term

*Principle of Causea ProximaThe cause of loss must be proximate or immediate and not remote

Eg. The cause of death should be recent not after policy issuance

*Principle of IndemnityThe insured, in case of loss against the policy has been issued, shall be paid the actual amount of loss not exceeding the amount of the policy. This ensures that the insured does not make the profit out of this loss or damage.

E.g.. For a health saver policy if the actual amount spent for hospitalization is 4L & plan limit is 3L will get the amount as per the policy.

*Principle of Subrogation

Applies only to fire & marine insurance. When an insured has received full indemnity in respect of his loss, all rights & remedies which he has against third person will pass on to the insurer and will be exercised for his benefit until the insurer recoups the amount he has paid under the policy

*Principle of Contribution Relevant when there are two or more insurance on one risk. The aim is to distribute the actual amount of loss among the different insurers who are liable for the same risk under different policies in respect of the same subject matter.

*Principle of Mitigation of Loss In the event of mishap to the insured, the insured must take all necessary steps to mitigate or minimise loss, just as any prudent person would do in those circumstances. If he does not do so, the insurer can avoid the payment of loss attributable to his negligence

E.g. Health negligence could be avoidable with medication due to negligence led to surgery.

*Classification of Insurance:Life Insurance Provision for specific events happening to individual such as death based on concept of Human life valueNon Life Insurance Provision for a specific event, which affects property ,such as fire, flood, etc.The need for life insurance :The familys dependence on you is dualEmotionalFinancialIn case of your untimely/premature death, the emotional loss would be irreplaceble,but the financial loss can be prevented by Life Insurance

*Types of Life Insurance:All the life insurance products are either protection, saving or combination of both.

Protection plansSavings plansInvestment plansRetirement plans

*Summary: Protection v/s SavingsInvestment Oriented plansAnticipated EndowmentEndowment Term & Health InsuranceWhole life

*High riskLow riskLife Guard (all variants)Health Products

ULIP plansInvest ShieldSave N ProtectCashbak

ZDB125 % plans

*Conclusion

The principles are applicable to all the products, both Life & Non-Life insurance .

These Principles provide the frame work within which the products and all the contracts of insurance operate.

*Pricing of Products

* PremiumsThe premium is the amount which each life assured has to pay for the sharing of the collective risk pool

It differs due to plan, age, term

It can be paid in several modes

It should be enough to run the business & pay for the claims that arise

The company should also be in a position to fulfill the aspirations of its shareholders

*Calculation of premiumsPremiums depend on

Mortality

Expenses

Contingency factor

Returns promised

Profit Margin

Income on Investment

*Premiums- MortalityThe probability of the Insured dying in any given year

Rate of Mortality at a given age is merely the probable proportion of persons who would die in that year of age

Mortality tables are the important base for premium tables. This is why we need age proofs.

Current Life Premiums are based on LIC Mortality tables of 94-96

Health Premiums are based on the Reinsurance Morbidity data

*Premiums-MortalityExample

Standard Mortality : At age 30, if 1,000 people are insured for a year for Rs 1,00,000/- each and if the expected number of deaths are 13, the Insurance company will pay out Rs 13,00,000 as claims .Here the contribution will be 13,00,000/1000= Rs 1300

This is the premium paid by each life to be insured.

The mortality is in turn based on Age.

Other factors are also priced in mortality, viz. Disease prevalence, habits, family history etc

*Premiums - ExpensesThere are various expenses incurred in obtaining business including Field costsAdministrative expenses- staff, buildingPolicy costs e.g.stamp dutyClaims

All these have to be paid from the premium collected and this factor is loaded in the premium being charged, these being high in the first years

Therefore paid up value after 3 years

*Premiums - Contingency FactorIn addition a small loading for covering contingencies andfluctuations is also included in the premiums.

The assumptions made in pricing will be conservativeand will include a charge for contingencies.

A margin is kept so that the company can continue tomeet the reasonable expectations of policyholder whenexperience is worse, than expected.

An example of this could be the Catastrophe Insurance

*Differential PricingAll the components that go into pricing are not present in all products

Therefore the premiums for various products differ

For example in Term & Health products the premiums collected are for pure protection and not investment

Risk is therefore high for Term & Health products

*Basics of Underwriting

*Underwriting What is it?

It is the term used to describe the consideration given to an application for insurance, to determine whether or not a policy applied for should be issued. Basically, underwriting is the selection of risks and an effective underwriting means a profitable business. It is said that underwriting is rather an art than a science and that it requires an underwriter to be wise and determined in making proper decisions of issuing policies, which are equitable to the clients, deliverable by agents, and profitable to the company

*The Objective of underwritingThe objective of underwriting is to ensure that the risk accepted by the company is corresponding to that assumed in the rating structure. Underwriting Policies at ICICI Prudential involves laying down underwriting guidelines by making use of universally accepted underwriting principle, past experience of the company, feedback from Claims, Actuaries & Reinsurance.The broader objectives of underwriting policies at ICICI Prudential are as follows:To keep actual experience within the mortality assumption used in calculating the premium ratesTo offer insurance cover at competitive terms.To maintain equity between policyholders.To guard against anti-selection.To offer cover to as wide a group of lives as possible.

*Why underwriting is needed?The function of underwriting is to select lives. Good underwriting enables company to meet the actuarys mortality assumption and it helps the company to remain competitive, to maintain equity between policyholders (impaired / sub standard lives are charged an extra premium based on extra mortality) and to help identify individuals who wish to defraud the company (the underwriter guards against anti-selection). A good underwriting is the ability to bring together all aspects of the case, building up as full a picture of the life applied as possible. For example, similar medical histories can be viewed quite differently against the background of the individuals occupation, pursuits, avocations, life style, financial status and the general environment in which he/she lives.

*RISK SELECTIONThe underwriting process must be vigilant enough to ensure that an impaired life is not offered assurance at the standard premium rate. It would be easier for the underwriter to go through his/her work when he/she takes into account all necessary, relevant factors of and tools for risk selection

Underwriters are the risk managers of the organization

*Factors of risk selectionAgeGenderOccupation & HobbiesHabitsBuildPhysical conditionMedical historyFamily HistoryResidenceMoral Hazard

*Risk ClassificationStandard Classes (Normal Premium rates)

Substandard Classes (increased Premium rates)

Decline Classes (Unacceptable risk)

People with similar levels of risk are placed in common rating classes and charged the same premium.

The lower the risk , lower the premium

*Underwriting is based on Underwriting Tools:Proposal Form

Sales Report Agents Confidential Report;Client Confidential Report

Age Proof

Income Document

Medical Reports

Questionnaires- Medical, Occupation, NRI, Key man, Partnership etc

*Please RememberTHE ADVISOR IS THE PRIMARY UNDERWRITER

*ACR/CCR- Important InformationApplication SourcingSource of LeadRelationship and DurationOccupation DetailsSpecify the exact BusinessYears in the businessFinancial Status and Surrogate markersIncome and documents verifiedHealth statusVisible Indicators: Overweight, Underweight, Physical Deformities and habits.

If Material information is not disclosed, kindly get back to the risk function with the details.

*Client Confidential Reports :Underwriter should call for CCR if :1. The insurable interest does not exist.2. The cover Sum Assured Proposed does not commensurate with the income of the proponent.3. Seeking large amount of insurance for the first time at advanced age.4. Non-disclosure of previous insurance history regarding declinature or extra charged.5. Non-disclosure of any facts related to health, habits or income of the life proposed or the proposer.

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Thank You

*Legally capable of making a contract- Minors ,Lunatic Person& those who have been declared as insolvent by the court of Law.*Exclusion for 1 yr. In case of suicide & for ADBR in case of self inflicted injury.