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8/2/2019 Unit-1Basic Principles of Insurance
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UNIT-1LIFE INSURANCE
BASIC PRINCIPLES
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INDIAN INSURANCE SECTOR
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The three phases
PhaseI (1918-1972)
245 Life insurancecompanies (pvt)
107 General insuranceCompanies (Pvt)
Phase II (1956-2000)
All Pvt Life insurance cos
Nationalized & LIC emergedin 1956.
All General Insurance Cosnationalized one cos with 4subsidiaries emerged.
Phase III (After 2000)
Opened for privatesector.
16 life & 16 geninsurance
cos emerged apart fromexisting public sectorunits
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INSURANCE INDUSTRY IN INDIA
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Public Sector Private sector
Life
LIC
Post officeinsurance
General
GIC & its
4 subsidiaries
Life
16 Cos
General
16 Cos
IRDA April-2000
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TYPES OF INSURANCE
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Life insurance Non life insurance
General insurance Miscellaneous insurance
Marine insuranceFire insurancePersonal accident insurance
Fidelity guarantee insuranceCrop insuranceBurglary insurance
Flood insurance
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ROLE & FUNCTIONS OF INSURANCE
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Primary Others
Providing protection
Collective risk bearing
Evaluating risk
Provide Certainty
Preventing losses
Covering larger risks with
small capital
Helps in the developmentof larger industries
Risk Free trade
Medium of earning
foreign exchange
Is a savings andinvestment tool
Secondary
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LIFE INSURANCE DEFINED
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A contract of life insurance is that in which one party agrees to pay a given
sum on the happening of a particular event contingent upon the duration
of human life, in consideration of the immediate payment of a smaller sum
or certain equivalent periodical payments by another.
..Bunion
Life insurance business is the business of effecting contract upon human life
insurance acts
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SALIENT FEATURES OF LIFE INSURANCE
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1. Instrument of savings
2. Provides social security
3. Risk coverage starts from the date of accepting of proposal.
4. Beneficiary nominee/ legal heir stands to gain
5. Policy can be assigned / mortgaged.
6. Policy holders can seek loan against the policy
7. Certain policies cover up for treatment to serious ailments
8. Money can be set aside for childrens education/ marriage
9. Provision for old age.
10.I T benefits
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POLICY SPECIFICATIONS
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A life insurance contract will specify
Sum assured Term
Premium Mode of paymentof premium
Premium payingperiod
Participation inprofits
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ADVANTAGES09/04/2012
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Encourages compulsorysavings & forces thrift
Easy settlement & protection
against creditors
Superior to an ordinary
Savings plan with tax relief
Marketable & Liquid
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MODERN CONCEPT OF LIFE INSURANCE
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Economic principle Legal principles
Risk suffered by few isspread over large number ofpeople who face the same
risk.
Spread of risk is theeconomic principle of lifeinsurance
Fixing the contribution orpremium
Everyone shouldcontribute premiumcommensurate with therisk he brings to the fund.
Establishing relationshipbetween individual & the fund.
Relevant law of land will haveto be abided to establishlegally acceptableunderstanding , relationships &mutual understanding.
Actuarial principles
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SCIENTIFIC BASIS OF LIFE INSURANCE
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Shared risk Predictablemortality
Law of largenumbers
Investedassets
Fair & accurateRisk selection
Principle of shared risk works when law of large numbers is applied. Larger the
group less impact on the death of an individual.
Though it is not possible to predict an individuals death, tracking & recording data
about health , lifestyle & mortality trends can give insurer a reasonable informationabout life expectancies. This data is recorded in mortality tables. Once this is known,the insurance companies can predict the number of people who may die in a given
Year & can calculate the premium rates.
The premium is invested for earning income . The projected income is factored intopremium. A % of assets is set aside in company reserves to reduce the impact ofunexpected events.
Insuring people of good health. Every insurance policy coverage is with reasonablerisk
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LAW OF LARGE NUMBERS
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The principle of risk sharing works only when the law of largenumbers Is operational
This is a scientific principle which states that larger the group
lesser the impact of death of one member of the group.
A group with just few hundred members will not work. The base willbe fragile.
Hence larger the group , successful will be the insurance business
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ECONOMIC BASIS OF INSURANCE
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Threats / risks for economic stability
a. Physical & mental disability due to accident or disease.
b. Retirement from active work
c. Death
Three ways to ensure economic stability
1. Social security scheme of the government for BPL categories.
2. Group effort (group life/ general/ health schemes)
3. Individual effort
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VARIOUS ECONOMIC USES OF INSURANCE
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1. Financial security to the family
2. Potent savings instrument
3. Education for children / marriage for daughters
4. Repay the outstanding of housing loan
5. Financial independence at old age in case of survival of the person
6. Insuring debtors in case of business organizations if the debtordies .
7. Insuring the life of partners to pay to the legal heirs & ensure thatthe amount in business is retained.
8. Group insurance for employees .
In the event of the untimely & premature death of bread winner
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HUMAN LIFE VALUE (HLV)
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Proposed by Late S S Hubner in 1924.
HLV is one segment of the general theory of human capital.
People are important element of national wealth
The productive superiority of technically advanced countries is dueto Human capital
Human life is subject to loss due to premature death, temporarydisability , total disability & retirement.
The purpose of life insurance is to protect the family in the event ofany effect on the earning potential of the individual.
HLV is the measure of the actual future earnings of an individual.
It is the capitalized value of an individuals net future earnings
(after maintenance expenses)
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TYPES OF INSURANCE POLICIES
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All the plans of insurance are a combination of both term insurance element& pure endowments element in different proportions.
These two elements (Term & endowment ) are the basic building blocks of allLife insurance products.
Thus life insurance products can be divided on the basis of the following
1. Duration of the policy
2. Methods of premium
3. Participation in profits
4. Number of lives covered.
5. Methods of payment of the sum.
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IMPORTANT POLICIES
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EndowmentsAssurance
Whole life witha. profitsb. Limited planc. Single premiumd. Convertible W L plan
Money backWith profits
Childrens deferred
Assurance plan
Mediclaim policy Group insurance
ULIP Key man
Assignment-To study & submit a note on the LI plans with features of different companies
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BASIC PLANS OF LIFE INSURANCE
Term insuranceplan
Wholelife plan
Endowmentsplan
Special plans Unit linkedInsuranceplans
Assignment
Study in detail the following aspects
1. Combination of term insurance & pure endowment2. Flexible premium plans3. Variable annuities4. Family protection policies5. Disability income policies6. ULIP
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STANDARD TYPE OF POLICY DOCUMENT
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Heading Preamble
Operative clause Proviso
Schedule Attestation
Conditions &
privilegesgoverningthe agreement
Any special clause
or endorsementAttached to the policy
Assignment
To discuss in detail the various aspects as mentioned above
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RIDERS
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Add-ons to the basic policy to supplement the cover provided.
It can also be set of riders.
The most commonly used riders in life policies are
1. Waiver of premium in case of total disability
2. Accidental death & dismemberment Twice the amount of face value.
3. Guaranteed purchase option- Additional cover without any medical checkup.
4. Accelerated benefit riders- An early payment of some portion due toinjury/ illness
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ASSIGNMENT- NOMINATION
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Assignment is legal transference. It is a method by which a policy holdercan transfer his interest to another person.
It can be done by endorsement on the policy/ as a separate deed.
It can be conditional/ absolute.
Nomination is an act by which the policy holder authorizes anotherperson to receive the policy moneys . The authorized person is nominee.
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ASSIGNMENT & NOMINATION
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All rights pass to assignee
Consideration essential
Irrevocable
Property in the policy passes toAssignee
Assignee has right to sueunder the policy
Entitled to receive the amount in the eventof the death of policy holder
Not essential
Revocable. Nominee can be changed
Gets right to receive the insured amount.
Nominee has no right to sue
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SURRENDER VALUE- PAID UP VALUE
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S V is the amount which is payableby the insurer before the maturitydate
S V is the expression of desire ofnon continuation of the policy
S V represents the present cashvalue of the policy
S V is calculated for each class ofpolicy , premium paid for years for
which policy is in force
Increases with each premium paid
Entitlement of the policy holderRegarding portion of policy amtThat bears to the premium till date
No such desire
Value payable on assureds deathOr at the time of maturity
Calculated on the basis of no ofyears , premium is paid, payable &
sum assured with profits
Always higher than the S V since itnot required to be paid.
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OTHER ASPECTS
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Foreclosure Suicide
Closing beforematurity date.
Action taken whentwo or moreinstallments on loanare due
If principle / intereston the loan is morethan S V , the policywill be subject toforeclosure.
15 to 30 days is
given to thepolicy holderbeyond the duedate to makepayment of thepremium.
Liability of insurer is
modified& limited in case ofsuicide.
Insurer will not paythe insured amount in
some cases thoughIndian law states thatthe company cannotavoid payment on theground of suicide.
Days of grace Revival
Policy lapses
When premium isnot paid withingrace period.
Normally it can berevived within a
period of 5 yearsFrom the due dateof last paidpremium.
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RISK & INSURANCE
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25The pyramid of nature of risk
Risk is the un certainty of loss
Risk due to ownership or transport vehicle
Fidelity risk
Loss due to others failure
Property
Personal
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CLASSIFICATION OF RISK
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Personal Property Liability Others failure Fidelity Ownership
Prematuredeath
Old agedeath
Damage/ use ofThe property
WrongcommittedDue toHuman mistakeseffecting others
failure to meetThe obligation
DishonestyOf employees
DamageOrLoss toThevehicle
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FEATURES OF RISK MANAGEMENT
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Risk management may be defined as identification of risk, analysis of risk& economic Control of the risk
Risk management evaluates the risks identified in the risk assessmentprocess , selects & implements the plan of action that are required to
control the risk
Risk management is vital tool in the modern business / trade/human activities
It is not only essential to prevent the risks but also to control & reduce them
Risk management leads to maximum social , political & economic development.
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FEATURES OF RISK MANAGEMENT
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Risk management helps to
1. Create right corporate policies & strategy.
2. Manage men/ machine effectively
3. Evaluate risk confronted by the business.
4. Effectively handle, spread , monitor & insure the risks
5. Introduce various plans & techniques to minimize the risks.
6. Create risk awareness among the people.
7. Avoid cost , disruption & unhappiness relating to risks.
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OBJECTIVES OF RISK MANAGEMENT
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Protecting employees from accidents that might result in death / injury.
Due attention given to cost of handling risks.
Effective utilization of resources
Maintaining good relation with the society & public.
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SCOPE OF RISK MANAGEMENT
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Control of loss Financing of loss Internal risk control
Extra precautions
Reduce level of riskyactivities
Risk retention &self insurance
Buy insurance policyContracts
Non insurance risktransfer
Diversification
Investment in riskinformation
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METHODS OF HANDLING RISKS
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PreventionOf risk
Shifting/transferring
risk
ReductionOf risks
AcceptanceOf risk
Spreading ofrisks
Assignment
Discuss various aspects of the 5 components of handling the risks
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UNIT-1CONCLUDED
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