Insurance Procedures and Practices CBCFB5T09A

Syllabus topics (RTMNU)

• History of Life Insurance
• Growth of Life Insurance in India
• Structure of Life Insurance Enterprises in India
• Life Insurance Organisation: Important Activities
• Internal Organisation
• Appointment of Agent & Function of Agent

History of Life Insurance in India

Life insurance is a contract in which the insurer promises to pay a fixed sum (the sum assured) on the death of the insured or on maturity of the policy, in return for regular payments called premium.

The history of life insurance in India can be divided into four stages:

1. Early period (1818–1912): The first life insurer in India was the Oriental Life Insurance Company, started in Calcutta in 1818. It mainly covered Europeans; Indians were charged extra premium. The Bombay Mutual Life Assurance Society (1870) was the first Indian life insurer to cover Indian lives at normal rates. Postal Life Insurance started in 1884 for postal employees.
2. Regulation period (1912–1956): The Indian Life Assurance Companies Act, 1912 was the first law to regulate life insurance. The Insurance Act, 1938 was a complete law covering both life and general insurance. It is still the main insurance law (with amendments).
3. Nationalisation (1956–1999): Many private companies failed and cheated policyholders. So the Government nationalised life insurance. The Life Insurance Corporation of India (LIC) was formed on 1 September 1956 under the LIC Act, 1956, by merging about 245 Indian and foreign insurers and provident societies. LIC had a monopoly for over 40 years.
4. Liberalisation (1999 onwards): On the advice of the Malhotra Committee (1993–94), the IRDA Act, 1999 opened insurance to private companies and set up the regulator IRDA (now IRDAI – Insurance Regulatory and Development Authority of India). Private insurers like HDFC Life, ICICI Prudential Life and SBI Life entered. LIC was listed on the stock exchanges in 2022 through an IPO.

Growth of Life Insurance in India

Life insurance in India has grown a lot after nationalisation and especially after liberalisation. The main signs and reasons of growth are:

1. Wider reach: LIC opened branches in villages and small towns; private insurers added bank and online channels.
2. More products: From simple endowment and whole-life plans to term plans, money-back, pension (annuity) plans, ULIPs (Unit Linked Insurance Plans) and micro-insurance for poor people.
3. Rising income and awareness: A growing middle class buys insurance for family protection, tax saving and savings.
4. Government schemes: Low-cost schemes like Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) have brought crores of people under cover.
5. Competition: Private players brought better service, faster claim settlement and new technology.
6. Regulation: IRDAI protects policyholders, which builds trust.

Even so, India is still under-insured: insurance penetration (premium as a % of GDP) is lower than in developed countries. IRDAI's goal is "Insurance for All by 2047". (For exact penetration and premium figures, check the latest IRDAI Annual Report.)

Structure of Life Insurance Enterprises in India

The life insurance industry in India has the following structure:

Life Insurance Organisation: Important Activities

A life insurance company performs these main activities:

1. Product design: Actuaries design plans and fix premium rates using mortality tables and interest rates.
2. Marketing and sales: Through agents, banks, brokers and online.
3. Underwriting: Checking the proposal (age, health, income, habits) and deciding whether to accept the risk and at what premium.
4. Policy issue and servicing: Issuing the policy bond, collecting premiums, changing address/nomination, giving loans on policies.
5. Investment of funds: Investing premium money safely as per IRDAI rules (mostly government securities).
6. Claim settlement: Paying maturity, survival and death claims quickly.
7. Actuarial valuation: Finding the liability and the surplus, and declaring bonus.
8. Accounts, audit and grievance handling.

Internal Organisation

Taking LIC as an example, the internal organisation has four levels:

1. Central Office (Mumbai): The Board and Chairman make policy, design products, manage investments.
2. Zonal Offices: Supervise divisions in a region.
3. Divisional Offices: Control branches, handle underwriting of bigger cases, claims and agent recruitment.
4. Branch Offices: Deal directly with policyholders and agents – new business, premium collection, servicing. Satellite offices serve small towns.

Private insurers usually have a head office, regional offices and branches, with separate departments: sales, underwriting, operations, claims, finance, investment, actuarial, legal and compliance, HR and IT.

Appointment of Agent and Functions of Agent

Insurance agent: A person appointed by an insurer to sell insurance policies and service them, and who is paid commission.

Procedure of appointment (as per Insurance Act, 1938 and IRDAI regulations – check latest):

1. The applicant should be at least 18 years old and have the minimum qualification (generally Class 10 pass).
2. He/she completes the prescribed training given by the insurer or an approved institute.
3. He/she passes the pre-recruitment examination (IC-38) conducted by the Insurance Institute of India.
4. The insurer checks that the person is not disqualified (e.g. of unsound mind, convicted of fraud).
5. The insurer issues an appointment letter and an agent code. An agent can work for only one life insurer at a time.

Functions of an agent:

1. Finding prospects: Locating people who need insurance.
2. Need analysis: Understanding the client's family, income and goals and suggesting a suitable plan.
3. Explaining the policy honestly – benefits, exclusions, premium, terms.
4. Helping fill the proposal form and collecting documents and first premium.
5. Preliminary underwriting: Giving correct information about the proposer to the insurer (moral hazard report).
6. After-sale service: Reminding for premiums, revival, nomination, loans.
7. Help in claims: Guiding the nominee to submit claim papers.

Likely exam questions

1. (Long, 8/16 marks) Trace the history of life insurance in India from 1818 to the present.
2. (Long, 8/16 marks) Explain the structure of life insurance enterprises in India and describe the procedure of appointment and functions of an insurance agent.
3. (Short, 4 marks) Write a note on the growth of life insurance in India.
4. (Short, 4 marks) State the important activities of a life insurance organisation.
5. (Short, 4 marks) Explain the internal organisation of LIC.

Syllabus topics (RTMNU)

• General Insurance Corporation (GIC) of India: Background
• Main provisions of General Insurance Act 1972
• Establishment and objectives
• Functions of subsidiary companies
• Bancassurance: Meaning, nature and scope
• Insurance Innovation - Innovation, use of Technology by Insurance Industry

General Insurance Corporation (GIC) of India: Background

General insurance means all insurance other than life insurance – fire, marine, motor, health, crop, property, liability etc. It is usually a one-year contract of indemnity (the loss is made good, no profit).

Background:

1. Before 1972 there were about 107 private Indian and foreign general insurers. Many followed unhealthy practices – unfair rates, delay in claims, misuse of funds.
2. The Government wanted insurance funds to be used for national development and wanted to spread insurance to rural areas.
3. So general insurance was nationalised by the General Insurance Business (Nationalisation) Act, 1972 (GIBNA), which came into force on 1 January 1973.
4. The General Insurance Corporation of India (GIC) was formed as a holding company, and the 107 insurers were merged into four subsidiary companies.

Main Provisions of the General Insurance Business (Nationalisation) Act, 1972

1. Transfer of shares: Shares of all Indian general insurance companies were transferred to the Central Government.
2. Transfer of foreign insurers' business: The Indian business of foreign insurers was transferred to Indian companies.
3. Formation of GIC: The Government formed GIC as a company to control, supervise and develop general insurance business.
4. Merger into four companies: The insurers were merged into four companies, which became subsidiaries of GIC.
5. Compensation: The Act provided compensation to the old shareholders.
6. Ban on others: No other person could carry on general insurance business (this monopoly ended with the IRDA Act, 1999).
7. Powers of the Government: To give directions to GIC on policy matters.

Establishment and Objectives of GIC

GIC was established in November 1972 (business from 1 January 1973) with its head office in Mumbai.

Objectives:

1. To carry on general insurance business for the welfare of the people.
2. To spread general insurance widely, especially in rural areas and among weaker sections.
3. To give efficient service and settle claims quickly.
4. To keep premium rates fair and reasonable.
5. To invest funds in the best interest of the nation and the policyholders.
6. To supervise, control and coordinate the four subsidiaries and avoid wasteful competition.
7. To act as reinsurer and reduce outflow of foreign exchange on reinsurance.

Functions of Subsidiary Companies

The four public sector general insurers (earlier GIC subsidiaries) are:

Functions:

1. Underwriting risks: Issuing fire, marine, motor, health, engineering and miscellaneous policies.
2. Premium collection and fixing rates as per guidelines.
3. Claim settlement: Survey of loss through surveyors and payment of claims.
4. Rural and social insurance: Crop, cattle, hut, personal accident schemes for poor people; government schemes like PM Fasal Bima Yojana and PMSBY.
5. Investment of funds as per IRDAI rules.
6. Reinsurance: Passing a part of big risks to GIC Re (obligatory cession – check latest %).
7. Loss prevention and spreading risk awareness.

Bancassurance: Meaning, Nature and Scope

Meaning: Bancassurance means selling insurance products through a bank's branches and customer network. The bank acts as a corporate agent (or broker) of the insurer and earns commission. Example: SBI branches selling SBI Life and SBI General policies.

Nature:

1. It is a tie-up (partnership) between a bank and an insurer.
2. The bank uses its trust and customer base; the insurer gives products and training.
3. It is a distribution channel, not a merger of banking and insurance.
4. It is regulated by IRDAI (corporate agent rules) and RBI (bank rules). Under IRDAI rules a bank can tie up with a limited number of life, general and health insurers – check latest limit.
5. Sale must be voluntary – a bank cannot force a loan customer to buy a policy.

Scope: Selling life, general and health policies; credit-linked insurance with home and vehicle loans; crop insurance to farmers through rural branches; schemes like PMJJBY and PMSBY through savings accounts; group policies for account holders.

Insurance Innovation – Innovation and Use of Technology by Insurance Industry

Innovation means introducing new products, new processes or new ways of reaching customers. Insurance innovations in India include:

1. New products: Term plans with return of premium, ULIPs, cyber insurance, pay-as-you-drive motor cover (telematics), weather-index crop insurance, health covers for OPD.
2. Micro-insurance for low-income people.
3. Online sale: Buying and renewing policies on websites and apps, web aggregators like Policybazaar.
4. e-Insurance account (eIA): Keeping policies in electronic form in one account; IRDAI encourages electronic policies.
5. Bima Sugam: An IRDAI-backed online marketplace for buying policies and settling claims (check latest status).
6. Digital KYC and payments: e-KYC with Aadhaar, UPI and auto-debit for premiums.
7. Artificial Intelligence and data analytics: For underwriting, pricing and fraud detection; chatbots for service.
8. Cashless claims and app-based survey: Video survey of motor loss, quick hospital approvals.
9. Drones and satellite images to measure crop loss.
10. Insurtech start-ups such as Acko and Digit offering fully digital insurance.

Likely exam questions

1. (Long, 8/16 marks) Explain the background and main provisions of the General Insurance Business (Nationalisation) Act, 1972. State the objectives of GIC.
2. (Long, 8/16 marks) What is bancassurance? Explain its nature, scope and benefits.
3. (Short, 4 marks) State the functions of the subsidiary companies of GIC.
4. (Short, 4 marks) Write a note on innovation in the insurance industry.
5. (Short, 4 marks) Explain any four uses of technology by the insurance industry.

Syllabus topics (RTMNU)

• Privatisation of Insurance Business in India
• Contribution of Private sector
• Liberalisation required for privatisation
• Effect of globalisation on Insurance sector
• Methods of payment of the amount insured
• Premium as consideration for insurance benefits
• The nature of instalment premiums

Privatisation of Insurance Business in India

Privatisation of insurance means allowing private (and foreign-partnered) companies to do insurance business, which was earlier reserved for LIC and the public sector general insurers.

1. In 1993 the Government set up the Malhotra Committee (chairman R.N. Malhotra). Its 1994 report recommended opening the sector to private companies, a strong independent regulator, and limited foreign participation.
2. The IRDA Act, 1999 was passed. It ended the monopoly of LIC and GIC and created IRDA (now IRDAI).
3. From 2000 onwards private insurers were registered – first life and general insurers came in 2000–01.
4. The FDI limit was 26% at first, raised to 49% (2015) and 74% (2021); a move to 100% was proposed in the Budget 2025-26 – check latest.
5. LIC was partly disinvested through its IPO in 2022; GIC Re and New India Assurance are also listed.

Contribution of Private Sector

1. More choice: Many new products – ULIPs, term plans, health and critical illness plans, travel and cyber cover.
2. Better service: Faster policy issue and claim settlement; 24×7 call centres and apps.
3. New distribution channels: Bancassurance, brokers, online sale, corporate agents.
4. Growth of market: Total premium and number of policies grew fast; the private share in new business is now large.
5. Employment: Lakhs of agents, advisers and employees.
6. Foreign capital and know-how through joint ventures.
7. Long-term funds for infrastructure and capital markets.
8. Competition pushed public insurers to improve.

Liberalisation Required for Privatisation

For privatisation to succeed, certain liberal policies were needed:

1. Removing legal monopoly – amending the LIC Act and GIBNA.
2. An independent regulator (IRDAI) with clear rules for registration, solvency and investments.
3. Allowing foreign investment in insurers and intermediaries.
4. Freedom in pricing (de-tariffing of general insurance from 2007).
5. Freedom to design products within IRDAI guidelines (use-and-file system).
6. Allowing new channels – brokers, bancassurance, online sale.
7. Protecting policyholders – Ombudsman, grievance systems, rural and social sector obligations so that private insurers also serve villages.

Effect of Globalisation on Insurance Sector

Globalisation means linking the Indian economy with the world economy – free flow of capital, technology and services.

Methods of Payment of the Amount Insured

The sum assured (amount insured) plus bonus can be paid in these ways:

1. Lump sum: The whole amount is paid at one time on maturity or death. This is the most common method.
2. Instalments (settlement option): The amount is paid in equal yearly/half-yearly/quarterly/monthly instalments over a fixed number of years, chosen by the policyholder.
3. Survival benefits: In money-back plans a part of the sum assured is paid at fixed intervals (e.g. 20% every 5 years) while the insured is alive; the balance at maturity. On death full sum assured is paid.
4. Annuity / pension: The amount is used to give a regular income for life (life annuity) or for a fixed period.
5. Family income benefit: On death, the family gets a monthly income for the remaining term, plus the sum assured at the end.
6. Fund value (ULIP): The value of units on the date of maturity or death is paid.
7. Accelerated benefit: Part of the sum assured paid on diagnosis of a terminal or critical illness (if the rider is taken).

Payment is made to the policyholder (on maturity), or to the nominee/assignee or legal heirs (on death).

Premium as Consideration for Insurance Benefits

Every valid contract needs consideration (something in return). In insurance, the premium paid by the insured is the consideration for the insurer's promise to pay.

1. Without payment of the first premium the risk generally does not start.
2. Premium is fixed by the insurer on the basis of mortality (chance of death at that age), interest the insurer can earn, expenses (loading) and bonus loading.
3. Net premium = cost of risk + savings part; gross (office) premium = net premium + loading for expenses and bonus.
4. Premium depends on age, sum assured, term, plan, health and habits (e.g. smokers pay more).
5. GST is charged on premium (rates differ by product and have changed – check latest GST rates).

Nature of Instalment Premiums

Premium may be paid as a single premium (one time) or in instalments. Features of instalment premiums:

1. Level premium: The same amount is paid every year throughout the term, even though the risk of death rises with age. In early years the insurer collects more than the risk cost and keeps the extra as a reserve (this creates the policy value).
2. Modes: Yearly, half-yearly, quarterly, monthly (often through ECS/auto-debit). Yearly mode is cheapest; insurers give a rebate for yearly and half-yearly modes and may charge more for monthly mode.
3. Due date and grace period: If the premium is not paid on the due date, a grace period is allowed (generally 30 days; 15 days for monthly mode – check latest IRDAI rules). The policy stays in force during grace.
4. Limited premium: Premium paid for fewer years than the policy term (e.g. pay 10 years, cover 20 years).
5. Unpaid instalment is deducted from the claim if death happens during grace period.
6. If not paid within grace, the policy lapses or becomes paid-up (Unit IV).

Likely exam questions

1. (Long, 8/16 marks) Explain the privatisation of insurance business in India and the contribution of the private sector.
2. (Long, 8/16 marks) Describe the various methods of payment of the amount insured. Explain premium as consideration for insurance benefits.
3. (Short, 4 marks) What liberalisation measures were required for privatisation of insurance?
4. (Short, 4 marks) State the effects of globalisation on the insurance sector.
5. (Short, 4 marks) Explain the nature of instalment premiums.

Syllabus topics (RTMNU)

• Policy Value - Meaning
• Types of Policy value
• Equation
• Alteration of policy contracts
• Special reserves: Meaning
• Types of reserves maintained in Insurance
• Valuation of liability - Meaning and Importance
• Surrender of policy
• Surrender value
• Lapse of policy
• Reserve for Revival of lapsed policy

Policy Value – Meaning

Policy value (also called the reserve of a policy) is the amount the insurer must keep aside today for a policy so that, together with future premiums and interest, it can pay the future claims under that policy.

It arises because of the level premium system: in early years the premium is more than the cost of risk, and the surplus is accumulated; in later years the risk cost is higher than the premium and the reserve is used. Policy value is the liability of the insurer towards the policyholder.

Types of Policy Value and the Equation

1. Prospective policy value (looking forward):
   Policy value = Present value of future benefits − Present value of future net premiums.
2. Retrospective policy value (looking back):
   Policy value = Accumulated value of past net premiums − Accumulated cost of insurance (claims) already provided.
3. Net premium policy value: Calculated using net premiums (without expense loading). Conservative and commonly used.
4. Gross premium policy value: Uses actual office premiums and allows for future expenses and bonus.

Under the same basis (same mortality table and interest), the prospective and retrospective values are equal.

Illustration: At the end of the 10th year, present value of future benefits under a policy = ₹60,000 and present value of future net premiums = ₹45,000. Prospective policy value = 60,000 − 45,000 = ₹15,000. The insurer must hold ₹15,000 as reserve for this policy.

Alteration of Policy Contracts

Alteration means a change in the terms of a policy after it is issued, made on the request of the policyholder and with the insurer's consent. An endorsement is attached to the policy. Common alterations:

1. Change of plan or term (e.g. endowment to whole life, or reduce the term).
2. Reduction of sum assured (increase is generally not allowed without fresh underwriting).
3. Change in mode of premium (yearly to monthly etc.).
4. Adding or removing riders (accident benefit, critical illness).
5. Removal of extra premium when health improves; correction of age or name.
6. Change of nomination or assignment (Sections 38 and 39 of the Insurance Act, 1938).
7. Splitting a policy into two or more policies.

Alterations which increase the risk need medical evidence; those which reduce the risk are usually allowed easily. A fee may be charged.

Special Reserves: Meaning and Types Maintained in Insurance

Special reserves are funds kept aside by an insurer, besides the normal policy reserves, to meet uncertain or unusual liabilities and to keep the company solvent.

1. Reserve for unexpired risk (UPR): In general insurance, the part of premium relating to the unexpired period of policies on the balance sheet date.
2. Outstanding claims reserve: For claims reported but not yet paid.
3. IBNR reserve: For claims "Incurred But Not Reported" yet.
4. Catastrophe reserve: For huge losses from floods, earthquakes, cyclones.
5. Investment fluctuation reserve: To meet a fall in value of investments.
6. Bonus / surplus reserve: For future bonus to with-profit policyholders.
7. Reserve for lapsed policies and revival (explained below).
8. Solvency margin: Extra assets over liabilities required by IRDAI (required solvency ratio is 150% – check latest).

Valuation of Liability – Meaning and Importance

Valuation of liability is the actuarial process of finding the present value of all future obligations of an insurer under its policies, and comparing it with the value of its assets. The difference is the surplus (or deficit). It is done by the Appointed Actuary at least once a year as required by the Insurance Act and IRDAI.

Importance:

1. Shows the financial soundness (solvency) of the insurer.
2. Finds the surplus from which bonus is declared to policyholders and dividend to shareholders.
3. Helps in fixing correct premium rates.
4. Protects policyholders – ensures claims can be paid.
5. Required for accounts and IRDAI returns.
6. Helps in investment planning (matching assets with liabilities).

Surrender of Policy and Surrender Value

Surrender means the policyholder voluntarily ends the policy before maturity and takes back a cash amount. The amount paid is the surrender value.

1. Guaranteed Surrender Value (GSV): A minimum amount stated in the policy, usually a % of premiums paid (excluding first-year premium and rider premium) – the % rises with the duration.
2. Special Surrender Value (SSV): Calculated by the insurer from the paid-up value and bonus; usually higher than GSV. The higher of the two is paid.
3. Earlier a policy got surrender value only after premiums for a minimum period (usually 2–3 full years) were paid; IRDAI's newer product rules allow it earlier – check latest IRDAI rules.
4. Surrender value is less than total premiums paid because the insurer deducts the cost of risk and expenses. Surrender is a loss to the policyholder; a policy loan is often better.

Lapse of Policy

A policy lapses when the premium is not paid even within the grace period. The cover stops (fully, if no surrender value is acquired).

1. If the policy has acquired surrender value, it may not lapse fully but become paid-up with a reduced sum assured.
2. Paid-up value = Sum assured × (Number of premiums paid ÷ Number of premiums payable) + vested bonus.

Illustration: Sum assured ₹2,00,000, 20 yearly premiums payable, 8 premiums paid. Paid-up value = 2,00,000 × 8/20 = ₹80,000. If vested bonus is ₹50 per ₹1,000 per year for 8 years = 200 × 50 × 8 = ₹80,000, total paid-up value = ₹1,60,000.

Reserve for Revival of Lapsed Policy

Revival means bringing a lapsed policy back into force by paying all arrears of premium with interest and, if needed, giving proof of good health. It is allowed within the revival period (generally 5 years from the first unpaid premium for traditional plans, shorter for ULIPs – check latest IRDAI rules).

Since many lapsed policies may be revived, the insurer must keep a reserve for revival of lapsed policies. When a policy lapses, its reserve is not fully released as profit; a part is kept because the insurer will have to restore the full liability if the policy is revived. This prevents showing false profits and ensures the insurer can honour revived policies.

Likely exam questions

1. (Long, 8/16 marks) What is policy value? Explain its types and the policy value equation.
2. (Long, 8/16 marks) Explain the meaning and importance of valuation of liability. Describe the types of special reserves maintained by insurers.
3. (Short, 4 marks) What is alteration of a policy contract? Give any four types.
4. (Short, 4 marks) Explain surrender value and its types.
5. (Short, 4 marks) What is lapse of a policy? How can a lapsed policy be revived?