UNIT-III

E-PAYMENT SYSTEM

E-payment system is a way of making transactions or paying for goods and services
through an electronic medium without the use of check or cash. Its also called an
electronic payment system or online payment system. Read on to learn more.
The electronic payment system has grown increasingly over the last
decades due to the widely spread of internet-based banking and shopping. As the world
advance more on technology development, a lot of electronic payment systems and payment
processing devices have been developed to increase, improve and provide secure e-payment
transactions while decreasing the percentage of check and cash transaction.

E-PAYMENT METHODS

E-PAYMENT METHODS

Cash Payment System Credit Payment System

Electronic Funds Transfer 1) Credit Card

(EFT) 2) E-Wallet
3) Smart Card

EFT comprises many other

concepts of payment
system include:

1) Direct Debit
2) E-Check
3) E-Billing
4) E-Cash
5) Stored Value Card

CASH PAYMENT SYSTEM

ELECTRONIC FUNDS TRANSFER:
Electronic Funds Transfer is the electronic transfer of money from one bank account to
another, either within a single financial institution or across multiple institutions, via
computer-based systems, without the direct intervention of bank staff.
 1) Direct Debit: that is a financial transaction in which the account holder
instructs the bank to collect a specific amount of money from his account
electronically for payment of goods or services.
2) E-Check: a digital version of an old paper check. Its an electronic transfer of
money from a bank account, usually checking account without the use of the
paper check.
3) Electronic Billing: this is another form of electronic funds transfer used by
companies or businesses to collect payments from customers over electronic
method.
4) Electronic cash (e-Cash): it is a form of an electronic payment system of which
certain amount of money is stored on a client device and made accessible for
internet transaction. Electronic cash is also referred to as digital cash and it
make use of e-cash software installed on the user PC or electronic devices.
5) Stored Value Card: this is another form of EFT used by stores. Stored value
card is a card variety that has a certain amount of money value stored and can
be used to perform the transaction in the issuer store. A typical example of
stored value cards are gift cards.

CREDIT PAYMENT SYSTEM

1) Credit Card: this is another form of the e-payment system which required the
use of the card issued by a financial institute to the cardholder for making
payments online or through an electronic device without the use of cash.
2) Still, one of the most popular e-payment methods are credit and debit card
#payments
3) E-Wallet: it is a form of prepaid account that stored users financial data like
debit and credit card information to make an online transaction easier.
4) Smart Card: this use a plastic card embedded with the microprocessor that can
be loaded with funds to make transactions and instant payment of bills. It is
also known as a chip card.

ADVANTAGES
1) Increased Speed and Convenience: E-payment is very convenient compared to
traditional payment methods such as cash or check. Since you can pay for goods or
services online at any time of day or night, from any part of the world, you don't
have to spend time queuing in banks or merchant offices waiting for your turn to
transact. Nor do you have to wait for a check to clear the bank so you can access
the funds. E-payment also eliminates the security risks that come with handling
cash money.
2) Increased Sales: As Internet banking and shopping become widespread, the
number of people making cash payments is decreasing. In a 2014 survey, Bankrate
established that more than 75 percent of those surveyed carry less than $50 a
day, meaning electronic alternatives are increasingly becoming the preferred
 payment option. As such, e-payment enables businesses to make sales to the
customers who choose to pay electronically and gain a competitive advantage over
those that only accept traditional methods.
3) Reduced Transaction Costs: While there are no additional charges for making a
cash payment, trips to the store typically cost money, and checks also need postage.
On the other hand, there are usually no fees -- or very small ones -- to swipe your
card or pay online. In the long run, e-payment could save both individuals and
businesses hundreds to thousands of dollars in transaction fees.

DISADVANTAGES
1) Restrictions. Each payment system has its limits regarding the maximum amount in
the account, the number of transactions per day and the amount of output.
2) The risk of being hacked. If you follow the security rules the threat is minimal, it
can be compared to the risk of something like a robbery. The worse situation when
the system of processing company has been broken, because it leads to the leak of
personal data on cards and its owners. Even if the electronic payment system does
not launch plastic cards, it can be involved in scandals regarding the Identity theft.
3) The problem of transferring money between different payment systems. Usually
the majority of electronic payment systems do not cooperate with each other. In
this case, you have to use the services of e-currency exchange, and it can be time-
consuming if you still do not have a trusted service for this purpose. Our article on
how to choose the best e-currency exchanger greatly facilitates the search
process.
4) The lack of anonymity. The information about all the transactions, including the
amount, time and recipient are stored in the database of the payment system. And
it means the intelligence agency has an access to this information. You should
decide whether it's bad or good.
5) The necessity of Internet access. If Internet connection fails, you can not get to
your online account.

NATIONAL ELECTRONIC FUNDS TRANSFER (NEFT)

National Electronic Fund Transfer (NEFT) system is a nation-wide system that facilitates
individuals, firms and corporate to electronically transfer funds from any bank branch to
any individual, firm or corporate having an account with any other bank branch in the
country.
The Reserve Bank of India (RBI) maintains this payment network. NEFT system is a
funds transfer mechanism where transfer of money takes place from one bank to another
on a deferred net settlement basis.
For being part of the NEFT funds transfer network, a bank branch has to be NEFT-
enabled. Indian Financial System Code (IFSC) is required to perform a transaction using
NEFT. IFSC code identifies a specific branch of a bank.

Important Points to Know about NEFT:

1) The National Electronic Funds Transfer enables electronic transfer of funds

between two NEFT-enabled bank branches. It can also be used to transfer funds
from or to NRE/NRO accounts in India. Remittance is not allowed to a foreign
country, except Nepal.
2) The transactions are bunched up and settled in batches at specified times. There
are 12 settlements from 8 am to 7 pm on weekdays, and six from 8 am to 1 pm on
Saturdays. If a transaction is initiated after a batch settlement time, its deferred
to the next batch.
3) There is no minimum or maximum limit on the amount that can be transferred under
NEFT. Even those who do not have a bank account with a branch can deposit cash at
the NEFT-enabled branches, but such remittances can be made up to a maximum of
Rs 50,000 per transaction.
4) The credit for the first 10 batches on weekdays (8 a.m. to 5 p.m.) and the first five
batches on Saturdays (8 a.m. to 12 noon) takes place on the same day. For the other
batches, the funds may be credited on the next working day.
5) The inward transactions for NEFT are free, while the outward transactions are
charged. This ranges from a maximum of Rs 2.50 for amounts up to Rs 10,000 to a
maximum of Rs 25 for transfer amounts above Rs 2 lakh.

REAL-TIME GROSS SETTLEMENT (RTGS)

Real-time gross settlement (RTGS) maintains by the Reserve Bank of India (RBI). RTGS
system RTGS is a funds transfer mechanism where transfer of money takes place from
one bank to another on a real time and on gross basis. This is the fastest possible money
transfer system through the banking channel. Settlement in real time means payment
transaction is not subjected to any waiting period. The transactions are settled as soon as
they are processed. Gross settlement means the transaction is settled on one to one basis
without bunching with any other transaction. Considering that money transfer takes place
in the books of the Reserve Bank of India, the payment is taken as final and irrevocable.
RTGS is a large value funds transfer system whereby financial intermediaries can
settle interbank transfers for their own account as well as for their customers. The
minimum value of transaction in RTGS system is Rs 2,00,000. The system effects final
settlement of interbank funds transfers on a continuous, transaction-by-transaction basis
throughout the processing day. Customers can access the RTGS facility between 9 am to
4:30 pm on weekdays and 9 am to 1:30 pm on Saturdays.
Reserve Bank of India (RBI) Governor RaghuramRajan on October 19, 2013 launched
new Real Time Gross Settlement (RTGS) system for fund transfers will improve the
efficiency of the countrys financial markets.
The new ISO 20022 compliant RTGS system provides three access options to
participants thick-client, Web-API (through INFINET or any other approved network)
and Payment Originator module.
Participants can decide the mode of participation in the system based on the volume
of transactions and the cost of setting up the infrastructure.

IMMEDIATE PAYMENT SERVICE (IMPS)

IMPS (Immediate Payment Service) is an instant, 24 * 7, real-time inter-bank electronic
funds transfer system, provided by NPCI ( National Payments Corporation of India)
through which one can transfer money instantly across India, through mobile, internet and
ATMs. IMPS is not only safe but also economical both in financial and non-financial
perspectives.
Unlike the transaction by either NEFT or RTGS, which can done only the working hours,
the IMPS service is available 24*7 throughout the year including bank holidays.
In August 2010, NPCI conducted a pilot study on the mobile payment system with the
banks like SBI, BOI, UBI and ICICI. As a result, on 22 November IMPS public launch
happened by Smt. ShyamalaGopinath, DG RBI at Mumbai and this service is now available
to the Indian public.

Objectives of IMPS:
1) To make this user-friendly so that customers can access their bank account and
make remittance anytime.
2) To make payment simpler with the use of mobile number.
3) To achieve the goal of RBI in digitization of retail payment.
4) To make the mobile payment system safe and secure.
5) To build the foundation for a full range of mobile banking services.

Transaction Limits NEFT RTGS IMPS

Minimum Re 1 Rs 2 Lakh Re 1

Maximum No Limit Rs 10 Lakh Rs 2 Lakh

 DIFFERENCE BETWEEN RTGS VS. NEFT
Criteria NEFT RTGS
Settlement Done in batches (Slower) Real time (Faster)
Full Form National Electronic Fund Transfer Real Time Gross Settlement
Timings on Mon 8:00 am 6:30 pm 9:00 am 4:30 pm
Fri
Timings on 8:00 am 12:30 pm 9:00 am 1:30 pm
Saturday
Minimum
amount of No Minimum 2 lacs
money transfer
limit
Maximum
amount of No Limit No Limit
money transfer
limit
When does the
Credit Happen Happens in the hourly batch Real time between Banks
in beneficiary Between Banks
account
Maximum 1) Upto 10,000 Rs. 2.5 1) Rs. 25-30 (Upto 2 5 lacs)
Charges as per 2) from 10,001 1 lac Rs. 5 2) Rs. 50-55 (Above 5 lacs)
RBI 3) from 1 2 lacs Rs. 15 3) (Lower charges for first half
4) Above 2 lacs Rs. 25 of day)
Suitable for Small Money Transfer Large Money Transfer

E-COMMERCE -BUSINESS MODELS

E-Commerce or Electronics Commerce is a methodology of modern business, which
addresses the need of business organizations, vendors and customers to reduce cost and
improve the quality of goods and services while increasing the speed of delivery.
Ecommerce refers to the paperless exchange of business information using the following
ways
1) Electronic Data Exchange (EDI)
2) Electronic Mail (e-mail)
3) Electronic Bulletin Boards
4) Electronic Fund Transfer (EFT)
5) Other Network-based technologies
FEATURES
E-Commerce provides the following features
1) Non-Cash Payment E-Commerce enables the use of credit cards, debit cards,
smart cards, electronic fund transfer via bank's website, and other modes of
electronics payment.
2) 24x7 Service availability E-commerce automates the business of enterprises and
the way they provide services to their customers. It is available anytime, anywhere.
3) Advertising / Marketing E-commerce increases the reach of advertising of
products and services of businesses. It helps in better marketing management of
products/services.
4) Improved Sales Using e-commerce, orders for the products can be generated
anytime, anywhere without any human intervention. It gives a big boost to existing
sales volumes.
5) Support E-commerce provides various ways to provide pre-sales and post-sales
assistance to provide better services to customers.
6) Inventory Management E-commerce automates inventory management. Reports
get generated instantly when required. Product inventory management becomes
very efficient and easy to maintain.
7) Communication Improvement E-commerce provides ways for faster, efficient,
reliable communication with customers and partners.

E-Commerce - Business Models

1) Business - to - Business (B2B)

2) Business - to - Consumer (B2C)
Business 3) Consumer - to - Consumer (C2C)
Models 4) Consumer - to - Business (C2B)
5) Business - to - Government (B2G)
6) Government - to - Business (G2B)
7) Government - to - Citizen (G2C)

BUSINESS - TO BUSINESS:
A website following the B2B business model sells its products to an intermediate buyer
who then sells the product to the final customer. As an example, a wholesaler places an
order from a company's website and after receiving the consignment, sells the endproduct
to the final customer who comes to buy the product at one of its retail outlets.
BUSINESS - TO CONSUMER:
A website following the B2C business model sells its products directly to a customer. A
customer can view the products shown on the website. The customer can choose a product
and order the same. The website will then send a notification to the business organization
via email and the organization will dispatch the product/goods to the customer.

CONSUMER - TO CONSUMER:
A website following the C2C business model helps consumers to sell their assets like
residential property, cars, motorcycles, etc., or rent a room by publishing their information
on the website. Website may or may not charge the consumer for its services. Another
consumer may opt to buy the product of the first customer by viewing the
post/advertisement on the website.
CONSUMER - TO BUSINESS:
In this model, a consumer approaches a website showing multiple business organizations
for a particular service. The consumer places an estimate of amount he/she wants to spend
for a particular service. For example, the comparison of interest rates of personal
loan/car loan provided by various banks via websites. A business organization who fulfills
the consumer's requirement within the specified budget, approaches the customer and
provides its services.

BUSINESS - TO GOVERNMENT:
B2G model is a variant of B2B model. Such websites are used by governments to trade and
exchange information with various business organizations. Such websites are accredited by
the government and provide a medium to businesses to submit application forms to the
government.
GOVERNMENT - TO BUSINESS:
Governments use B2G model websites to approach business organizations. Such websites
support auctions, tenders, and application submission functionalities.

GOVERNMENT - TO CITIZEN:
Governments use G2C model websites to approach citizen in general. Such websites
support auctions of vehicles, machinery, or any other material. Such website also provides
services like registration for birth, marriage or death certificates. The main objective of
G2C websites is to reduce the average time for fulfilling citizens requests for various
government services.

ELECTRONIC PURSES [e-PURSE]

An electronic purse is "designed to facilitate small-value face-to-face retail payments by
offering a substitute for banknotes and coins. They are intended to complement rather
than substitute for traditional retail payment instruments such as cheques and credit and
debit cards.
"Electronic purses differ from other cashless payment instruments in that they are
supplied in advance with generally accepted purchasing power. They can be loaded at bank
counters, through Automated Teller Machines (ATMs) or through specifically equipped
telephones, against a debit entry in a credit institution account, or against banknotes and
coins. The embedded purchasing power is drawn down at the point of sale by an electronic
device that can suitably adjust the information on the card. . . . Their potential to reduce
significantly the use of notes and coins is even greater than that of other debit
instruments since they are the first cashless instrument which would be used for very
small amounts. Their potential to replace other cashless instruments will depend: 1) on the
level of fees and other costs levied by the issuer on those who use or accept these new
instruments;
2) on the technical possibility, and the issuer's willingness, to remunerate the purchasing
power embedded in electronic purses; and
3) on solutions adopted to compensate users in case of the loss, theft or malfunction of
the card.
"For electronic purses to become a success, a distinct business case must exist for
cardholders, for shopkeepers and for issuers. Electronic purses can have various
advantages for cardholders. The most important aspect relates to convenience as there
would be less need to carry loose change for low-value transactions. An additional
advantage might be that, compared with notes and coins, the risk of robbery might
diminish if the use of the electronic purses included a security feature such as a PIN code.
Furthermore, prepaid cards would have the advantage that non-cash payment transactions
could be made without necessarily being linked to a bank account. On the other hand, there
are disadvantages as well: first, transaction costs may apply, and second, the electronic
purse has to be supplied with value in advance, which may give rise to a transfer of float
income from consumers to card issuers.

UNIT-IV& V

OVERVIEW OF INSURANCE
Every risk involves the loss of one or other kind. In older time, the contribution by
the person was made at the time of loss. Today, only one business, which offers all walks
of life, is insurance business. Owing to growing complexity of life, trade and commerce,
individual and business firms and turning to insurance to manage various risks. Every
individual in this world is subject to unforeseen uncertainties which may make him and his
family vulnerable. At this place, only insurance helps him not only to survive but also
recover his loss and continue his life in a normal manner.
Insurance is an important aid to commerce and industry. Every business enterprise
involves large number of risks and uncertainties. It may involve risk to premises, plant and
machinery, raw material and other things. Goods may be damaged or may be destroyed due
to fire or flood. Some risk can be avoided by timely precautions and some are unavoidable
and are beyond the control of a business. These unavoidable risks can be protected by
insurance.

MEANING OF INSURANCE
Insurance means a promise of compensation for any potential future losses. It
facilitates financial protection by reimbursing losses during crisis. There are many
insurance companies offering a wide range of insurance options to choose from. Some of
the popular insurance policies are life insurance, health insurance, automobile insurance
and home insurance.
Several insurances provide comprehensive coverage with affordable premiums.
Premiums are the amount of money that is charged by the insurance companies from the
insurer for a particular insurance policy. These are periodical payment and insurers have
diverse premium options. The periodical insurance premiums are calculated according to
the total insurance amount.
Mainly, insurance is used as an effective tool of risk management as quantified risks
of different volumes can be insured.
DEFINITIONS
As a social device providing financial compensation for the effects of misfortune, the
payment being made from the accumulated contributions of all parties participating in the
scheme - - - - D.S. Hamsell

Insurance is a co-operative device to spread the loss caused by a particular risk over a
number of persons, who are exposed to it and who agree to insure themselves against the
risk

Insurer or Insurance The agency involved in Insurance business is known as insurer

Company
The person who gets his property/life insured is known as
Insured/ Assured insured
The agreement or contract which is put in writing is known as
Policy a Policy
The consideration in return of which the insurer undertakes
Premium to make goods the loss or give a certain amount in case of life
insurance is known as premium.

ESSENTIAL ELEMENTS OF INSURANCE CONTRACT

The contract of insurance is very useful to indemnify any loss. In this light, contract of
insurance is also called as contract of indemnity in which insurer indemnifies the loss
incurred due to the happening or non-happening of any event depending upon contingency.
To make contract of insurance valid in the eye of law, some essential elements must be
considered in its process of validity. The insurance contract, like any other contracts must
satisfy the usual conditions of a contract. The essentials of insurance contracts are as
follows:
Agreement: Agreement means communication by the parties to one another of their
intentions to create legal relationship. For a valid contract of insurance, there must be an
agreement between the parties, i.e. one making offer or proposal and another accepting
the proposal or signifying his acceptance upon proposal.
Free Consent: There must be free consent between the parties to contract. Consent
means that parties to an agreement must agree on a specific thing in the same sense or
their understanding should be the same. Consent must be given by the parties thereto in a
contract, freely, independently, without any fear and favor. The consent is known to be
free when it is not caused by, fraud, misrepresentation, mistakes and other undue
influences .
Components to contract: The parties in an agreement must be legally competent to enter
into the contract. It means both parties in the insurance contract must be age of
majority, posses sound mind and not disqualified by any ;aw of the country. It clears that a
person who is minor, lunatics, idiot and alike cannot enter into a insurance contract. The
contract entered into by these will be declared as void.
Lawful Object: In insurance contract, the object of the contract must be lawful as in
other types of contracts. The agreement must not relate to a thing which is contrary to
the provision of any law or has expressly been forbidden by any law. It must not be of such
nature that if permitted, it implies injury to the person or property of other or immoral or
opposed to public policy.
Lawful Consideration: There must be due and lawful consideration in the insurance
contract. The consideration, for which the contract is entered and created by the parties,
must be lawful. To establish legal relationship, to create obligation between them and to
make it enforceable by law there must be lawful consideration.
Compliance with Legal Formalities: To make an agreement valid, prescribed legal
formalities of writing, registration, etc. must have been observed. In the contract of
insurance, the agreement between parties must be in written form and dully signed by
both parties, properly attested by witness and registered otherwise, it may not be
enforced by the court.

NATURE OR CHARACTERISTICS OF INSURANCE

On the basis of the definitions of insurance discussed above, one can observe the following
nature or characteristics:
1) Contract: Insurance is a contract between the insurance company and the
policyholder wherein the policyholder (insured) makes an offer and the insurance
company (insurer) accepts his offer. The contract of insurance is always made in
writing.
2) Consideration: Like other contracts, there must be lawful consideration in insurance
also. The consideration is in the form of premium which the insured agrees to pay
to the insurer.
3) Co-operative Device: All for one and one for all is the basis for cooperation. The
insurance is a system wherein large number of persons, exposed to a similar risk,
are covered and the risk is spread over among the larger insurable public.
Therefore, insurance is a social or cooperative method wherein losses of one is
borne by the society.
4) Protection of Financial Risks: An insurer is protected from financial risks which
can be measured in terms of money. As such insurance compensates only financial or
monetary loss or risks.
5) Risk Sharing and Risk Transfer :Insurance is a social device for division of
financial losses which may fall on an individual or his family on the happening of
some unforeseen events. When insured, the loss arising out of the events are
shared by all the insured in the form of premium. Therefore the risk is transferred
from one individual to a group.
6) Based upon Certain Principles: The insurance is based upon certain principles like
insurable interest, utmost good faith, indemnity, subrogation, causa-proxima,
contribution, etc.
7) Regulated by Law: Insurance companies are regulated by statutory laws in almost
all the countries. In India, life insurance and general insurance are regulated by
Life Insurance Corporation of India Act 1956, and General Insurance Business
(Nationalization) Act 1972, and IRDA Regulations etc.
8) Value of Risk: Before insuring the subject matter of the insurance contract, the
risk is evaluated in order to determine the amount of premium to be charged on the
insured. Several methods are being adopted to evaluate the risks involved in the
subject matter. If there is an expectation of heavy loss, higher premiums will be
charged. Hence, the probability of occurrence of loss is calculated at the time of
insurance.
9) Payment at Contingency: An insurer is liable to pay compensation to the insureds
only when certain contingencies arise. In life insurance, the contingency the
death or the expiry of the term will certainly occur. In such cases, the life insurer
has to pay the assured sum.
In other insurance contracts, the contingency a fire accident or the
marine perils, may or may not occur. So, if the contingency occurs, payment
is made, otherwise no payment need to be made to the policyholders.
10) Insurance is not Gambling: An insurance contract cannot be considered as gambling
as the person insured is assured of his loss indemnified only on the happening of
such uncertain event as stipulated in the contract of insurance, whereas the game
of gambling may either result into profit or loss.
11) Insurance is not a Charity :Premium collected from the policyholders under an
insurance is the cost of risk so covered. Hence, it cannot be taken as charity.
Charity lacks the element of contract of indemnity and compensation of loss to the
person whosoever makes it.
12) Investment Portfolio: Since insurers liability to pay compensation to the insured
arises on the happening of certain uncertain event, the insurers do not have to keep
the collected premium with them. They invest the premium received in selected
securities and earn interest and dividend on them. Thus, the insurers have two
sources of income: the insurance premium and the investment income (i.e. interest /
dividend) which occurs over time.
FUNCTIONS OF INSURANCE

FUNCTIONS OF INSURANCE

Primary Functions Secondary Functions

1) Certainty of compensation of 1) Prevention of losses

loss 2) Providing funds for investment
2) Insurance provides protection
3) Insurance increases efficiency
3) Risk Sharing
4) Solution to Social Problems
5) Encouragement of Savings

PRIMARY FUNCTIONS
1) Certainty of compensation of loss: Insurance provides certainty of payment at the
uncertainty of loss. The elements of uncertainty are reduced by better planning and
administration. The insurer charges premium for providing certainty.
2) Insurance provides protection : The main function of insurance is to provide
protection against risk of loss. The insurance policy covers the risk of loss. The
insured person is indemnified for the actual loss suffered by him. Insurance thus
provide financial protection to the insured. Life insurance policies may also be used
as collateral security for raising loans.
3) Risk Sharing : All business concerns face the problem of risk. Risk and insurance
are interlinked with each other. Insurance, as a device is the outcome of the
existence of various risks in our day to day life. It does not eliminate risks but it
reduces the financial loss caused by risks. Insurance spreads the whole loss over
the large number of persons who are exposed by a particular risk.

SECONDARY FUNCTIONS
1) Prevention of losses : The insurance companies help in prevention of losses as they
join hands with those institutions which are engaged in loss prevention measures.
The reduction in losses means that the insurance companies would be required to
pay lesser compensations to the assured and manage to accumulate more savings,
which in turn, will assist in reducing the premiums
2) Providing funds for Investment: Insurance provide capital for society.
Accumulated funds through savings in the form of insurance premium are invested
in economic development plans or productivity projects.
 3) Insurance increases efficiency : The insurance eliminates the worries and miseries
of losses. A person can devote his time to other important matters for better
achievement of goals. Businessman feel more motivated and encouraged to take
risks to enhance their profit earning. This also helps in improving their efficiencies.
4) Solution to Social Problems : Insurance take care of many social problems. We
have insurance against industrial injuries, road accident, old age, disability or death
etc.
5) Encouragement of Savings : Insurance not only provides protection against risks
but also a number of other incentives which encourages people to insure. Since
regularity and punctuality pf payment of premium is a perquisite for keeping the
policy in force, the insured feels compelled to save.

PRINCIPLES OF INSURANCE
The main objective of every insurance contract is to give financial security and protection
to the insured from any future uncertainties. Insured must never ever try to misuse this
safe financial cover.Seeking profit opportunities by reporting false occurrences violates
the terms and conditions of an insurance contract. This breaks trust, results in breaching
of a contract and invites legal penalties.
An insurer must always investigate any doubtable insurance claims. It is also a
duty of the insurer to accept and approve all genuine insurance claims made, as early as
possible without any further delays and annoying hindrances.

1) Principle of Uberrimae fidei (Utmost Good Faith),

2) Principle of Insurable Interest,
Principles 3) Principle of Indemnity,
of 4) Principle of Contribution,
Insurance 5) Principle of Subrogation,
6) Principle of Loss Minimization, and
7) Principle of Causa Proxima (Nearest Cause).

Principle of Uberrimaefidei (Utmost Good Faith)

1) Both parties, insurer and insured should enter into contract in good faith
2) Insured should provide all the information that impacts the subject matter
3) Insurer should provide all the details regarding insurance contract
For example - John took a health insurance policy. At the time of taking policy, he was a
smoker and he didn't disclose this fact. He got cancer. Insurance company won't pay
anything as John didn't reveal the important facts.
Principle of Insurable Interest
1) Insured must have the insurable interest on the subject matter
2) In case of life insurance spouse and dependents have insurable interest in the life
of a person. Corporations also have insurable interests in the life of it's employees
3) In case of life or marine insurance, insured must be the owner both at the time of
entering of entering into the insurance contract and at the time of accident.
Principle of Indemnity
1) Insured can't make any profit from the insurance contract. Insurance contract is
meant for coverage of losses only
2) Indemnity means a guarantee to put the insured in the position as he was before
accident
3) This principle doesn't apply to life insurance contracts.
Principle of Contribution
In case the insured took more than one insurance policy for same subject matter, he/she
can't make profit by making claim for same loss more than once
For example - Raj has a property worth Rs.5,00,000. He took insurance from Company A
worth Rs.3,00,000 and from Company B - Rs.1,00,000.
In case of accident, he incurred a loss of Rs.3,00,000 to the property. Raj can claim Rs.
Rs.3,00,000 from A but after that he can't make profit by making a claim from Company B.
Now Company A can make a claim from Company B to for proportional loss claim value.
Principle of Subrogation
After the insured gets the claim money, the insurer steps into the shoes of insured. After
making the payment insurance claim, the insurer becomes the owner of subject matter.
For example :- Ram took a insurance policy for his Car. In an accident his car totally
damaged. Insurer paid the full policy value to insured. Now Ram can't sell the scrap
remained after the scrap.
Principle of Loss Minimization
This principle states that the insured must take all the necessary steps to minimize the
losses to inured assets.
For example - Ram took insurance policy fo his house. In an cylinder blast, his house burnt.
He should have called nearest fire station so that the loss could be minimised.
Principle of Causa Proxima
1) Word "Cause Proxima" means "Nearest Cause"
2) An accident may be caused by more than one cause. In case property insured for
only one cause. In such case nearest cause of the accident is found out.
3) Insurer pays the claim money only if the nearest cause is insured.
TYPES OF INSURANCE

TYPES OF INSURANCE

Business Point of View Risk Point of View

1. Life insurance 1. Property Insurance

2. General Insurance 2. Liability Insurance
3. Social Insurance 3. Other forms of Insurance

LIFE INSURANCE: is a contract providing for payment of a sum of money to the person
assured or, following him to the person entitled to receive the same, on the happening of a
certain event. It is a good method to protect your family financially, in case of death, by
providing funds for the loss of income.Life insurance offers various polices according to
the requirement of the persons:

1) Term Assurance
2) Whole Life
3) Endowment Assurance
4) Family Income Policy
LIFE 5) Life Annuity Joint Life Assurance
INSURANCE 6) Pension Plans
7) Unit Linked Plans
8) Policy for maintenance of handicapped dependent
9) Endowment Policies with Health Insurance
benefits

1) Term Assurance /Insurance plan is a form of life cover, it provides coverage for
defined period of time, and if the insured expires during the term of the policy
then death benefit is payable to nominee. Term plans are specifically designed to
secure your family needs in case of death or uncertainty.
2) Whole Life Insurance is a contract with premiums that includes insurance and
investment components. The insurance component pays a predetermined amount
when the insured individual dies. The investment component builds an accumulated
cash value the insured individual can borrow against or withdraw. This is the most
basic type of cash-value life insurance.
 3) Endowment Assurance Policy: is a life insurance contract designed to pay a lump
sum after a specific term (on its 'maturity') or on death. Typical maturities are ten,
fifteen or twenty years up to a certain age limit. Some policies also pay out in the
case of critical illness.
4) Family Income Policy :Life insurance policy that combines decreasing term life
insurance with ordinary life insurance by providing additional income while children
are growing up. The beneficiary of a family income policy receives payments at the
end of a specified period if the person insured passes away before the end of that
specified period; if the insured is alive at the end of the period the policyholder
receives the face family of the family income policy.
5) Joint Life Annuity: is a life insurance policy that pays a benefit that continues
throughout the joint lifetime of two people until one of them dies.
6) Pension Insurance contract is an insurance contract that specifies pension plan
contributions to an insurance undertaking in exchange for which the pension plan
benefits will be paid when the members reach a specified retirement age or on
earlier exit of members from the plan.
7) Unit Linked Insurance Plan (ULIP): is a type of insurance vehicle in which the
policyholder purchases units at their net asset values and also makes contributions
toward another investment vehicle. Unit linked insurance plans allow for the
coverage of an insurance policy, and provide the option to invest in any number of
qualified investments, such as stock, bonds or mutual funds.

GENERAL INSURANCEGeneral insurance or non-life insurance policies, including

automobile and homeowners policies, provide payments depending on the loss from a
particular financial event. General insurance is typically defined as any insurance that is
not determined to be life insurance.
Type of General Insurance policies available are

1) Health Insurance
2) Medi- Claim Policy
3) Personal Accident Policy
GENERAL 4) Group Insurance Policy
INSURANCE 5) Automobile Insurance
6) Workers Compensation Insurance
7) Liability Insurance
8) Aviation Insurance
9) Business Insurance
10) Fire Insurance Policy
11) Travel Insurance Policy
1) Health Insurance is insurance that covers the whole or a part of the risk of a
person incurring medical expenses, spreading the risk over a large number of
persons.
2) Medi-claim Policy is nothing but a health insurance policy that is designed to take
care of one's healthcare expenses up to the sum assured, in case the person faces
any sort of medical emergency, be it an illness or an accident that has led to
hospitalization.
3) Personal Accident Insurance:Now you can protect your entire family with Personal
Accident Insurance against accidental injuries. The policy provides the benefits to
you and your family, for Accidental Death, Permanent Disability, Broken Bones, and
Burns due to an accident.
4) Group Insurance Policy: gives you advantages of standardized coverage and very
competitive premium rates. You can avail of group insurance policies that a group
you belong to takes. Groups for this purpose - can be employer-employee groups or
non employer-employee groups as defined by IRDAs group insurance guidelines.
(Examples are holders of the same credit card, savings bank account holders of a
bank or members of the same social or cultural association and so on.)
5) Vehicle/Automobile Insurance: An auto insurance is a policy purchased by vehicle
owners to mitigate costs associated with getting into an auto accident. Instead of
paying out of pocket for auto accidents, people pay annual premiums to an auto
insurance company; the company then pays all or most of the costs associated with
an auto accident or other vehicle damage.
6) Workers Compensation Coverage:is a state-mandated insurance program that
covers lost wages and medical treatment resulting from an employee's work-related
injury or illness. It also covers services needed to help an employee recover and
return to work.
7) Liability Insurance: is any insurance policy that protects an individual or business
from the risk that they may be sued and held legally liable for something such as
malpractice, injury or negligence.
Liability insurance policies cover both legal costs and any legal payouts for
which the insured would be responsible if found legally liable. Intentional damage
and contractual liabilities are typically not covered in these types of policies.
8) Aviation Insurance: insurance against claims and losses arising from the ownership,
maintenance, or use of aircraft, hangars, or airports including damage to aircraft,
personal injury, and property damage.
9) Fire Insurance: covers damage or loss to a property because of fire. It is a
specific form of insurance in addition to homeowner's or property insurance, and it
covers the cost of replacement and repair or reconstruction above what the
property insurance policy covers.
10) Travel Insurance: is kind of an insurance policy that covers a policyholder for
certain incidents, such as loss of Flight, delay or cancellation, trip cancellation,
 checked baggage loss, loss of passport, including any emergency that may occur
while traveling to a foreign country.

SOCIAL INSURANCESocial insurance is any government-sponsored program with the

following four characteristics:
1) the benefits, eligibility requirements and other aspects of the program are defined
by statute;
2) explicit provision is made to account for the income and expenses (often through a
trust fund);
3) it is funded by taxes or premiums paid by (or on behalf of) participants (but
additional sources of funding may be provided as well); and
4) the program serves a defined population, and participation is either compulsory or
so heavily subsidized that most eligible individuals choose to participate.[1]
Social insurance has also been defined as a program whose risks are transferred to and
pooled by an often government organization legally required to provide certain benefits

PROPERTY INSURANCE is a policy that provides financial reimbursement to the owner or

renter of a structure and its contents, in the event of damage or theft. Property
insurance can include homeowners insurance, renters insurance, flood insurance and
earthquake insurance.Property of the individual and business is exposed to risk of fire,
theft marine peril etc. This needs insurance. This is insured with the help of:-

1) Fire Insurance
Property
2) Marine Insurance
Insurance
3) Miscellaneous Insurance

Fire Insurance business means the business of effecting, otherwise than incidentally to
some other class of business, contracts of insurance against loss by or incidental to fire or
other occurrence customarily included among the risks insured against in fire insurance
policies.There are various types of fire insurance policies:

1) Consequential loss Policy

2) Comprehensive Policy
Fire
3) Valued Policy
Insurance 4) Valuable Policy
5) Floating Policy
6) Average Policy

1) Consequential loss policy: Is a policy that insures against consequential or indirect

losses such decreased sales, which arise from damage to an insured property.
 Consequential loss policies help to mitigate indirect risks arising from mishaps, and
are generally sold in conjunction with regular policies that insure properties against
fire, theft, and other forms of damage or destruction.
2) Comprehensive Insurance: is a type of automobile insurance that covers damage to
your car from causes other than a collision. Comprehensive insurance would cover
your vehicle if it was destroyed by a tornado, dented by a run-in with a deer, spray
painted by a vandal, damaged by a break-in or crushed by a collapsing garage, among
other causes.
3) Floating Policy: A policy which provides coverage for property damages which can
be reasonably estimated but not actually determined until the policy expires. Often
used for shipped products, the premiums - and remaining coverage amount - are
calculated by deducting the value of each shipment from the total policy face
amount until the coverage runs out.

Marine Insurance is an arrangement by which the insurer undertakes to compensate the

owner of the ship or cargo for complete or partial loss at sea. So it provides protection
against loss because of marine perils. The marine perils are collisions with rock, ship attack
by enemies, fire etc. Marine insurance insures ship, cargo and freight.The following kinds
of marine policies are:
1) Voyage Policy
2) Time Policy
Marine
3) Hull Policy
Insurance
4) Freight Policy

1) Voyage Policy (also known as marine cargo insurance) refers to a marine policy that
covers the goods transported by a sea vessel. It does not cover the vessel itself,
although the insurer evaluates the vessel and the crew for safety and competence,
respectively, before issuing such a policy.
2) Time Policy: This policy is issued for a particular period. All the marine perils
during that period are insured. This type of policy is suitable for full insurance. The
ship is insured for a fixed period irrespective of voyages. The policy is generally
issued for one year. Time policies may sometimes be issued for more than a year or
they may be extended beyond a year to enable a ship to complete a voyage. In
India, a time policy is not issued for more than a year.
3) Hull Insurance: Hull insurance mainly caters to the torso and hull of the vessel
along with all the articles and pieces of furniture in the ship. This type of marine
insurance is mainly taken out by the owner of the ship in order to avoid any loss to
the ship in case of any mishaps occurring.
4) Freight Insurance: Freight insurance offers and provides protection to merchant
vessels corporations which stand a chance of losing money in the form of freight in
case the cargo is lost due to the ship meeting with an accident. This type of marine
 insurance solves the problem of companies losing money because of a few
unprecedented events and accidents occurring.
Miscellaneous Insurance: It includes various forms of insurance including property
insurance, liability insurance, personal injuries are also insured. The property, goods,
machine, furniture, automobile, valuable goods etc. can be insured against the damage or
destruction due to accident or disappearance due to theft.Miscellaneous insurance covers
1) Motor
2) Disability
3) Engineering and aviation risks
4) Credit insurance
5) Construction risks
6) Money Insurance
7) Burglary and theft insurance
8) All risks insurance

LIABILITY INSURANCEThe insurer is liable top pay the damage of the property or to
compensate the loss of personal injury or death. It includes fidelity insurance, automobile
insurance and machine insurance. The following are types of liability Insurance:-

1) Third party Insurance

2) Employees Insurance Liability
3) Reinsurance Insurance

Third-party Insurance is a policy that protects against the actions of another party. One
of the most common types is third-party automobile insurance, which offers insurance
coverage that protects against claims of damages or losses incurred by a driver who is not
the insured, the principal, and is not covered in the insurance policy. The driver who caused
damages is the third party.
Employees Insurance: is a group or corporate health insurance policy is purchased by an
employer for eligible employees of a company. One of the key employee benefit packages
provided by employers, a group health insurance plan, in some cases, may also provide cover
to family members of employees.
Reinsurance: is also known as insurance for insurers or stop-loss insurance, is the practice
of insurers transferring portions of risk portfolios to other parties by some form of
agreement to reduce the likelihood of having to pay a large obligation resulting from an
insurance claim. The party that diversifies its insurance portfolio is known as the ceding
party. The party that accepts a portion of the potential obligation in exchange for a share
of the insurance premium is known as the reinsurer.
OTHER FORMS OF INSURANCE: It include export credit insurance, state employee
insurance etc. whereby the insurer guarantees to pay certain amount at the happening of
certain events.The following are other form of Insurance-

1) Fidelity Insurance
Other
2) Credit Insurance
Insurances
3) Privilege Insurance

Fidelity Insurance: protects you against the dishonest, unlawful actions by employees that
can seriously hurt your business.
Credit Insurance: is a type of life insurance policy purchased by a borrower that pays off
one or more existing debts in the event of a death, disability, or in rare cases,
unemployment.

REINSURANCE
Reinsurance, also known as insurance for insurers or stop-loss insurance, is the practice of
insurers transferring portions of risk portfolios to other parties by some form of
agreement to reduce the likelihood of having to pay a large obligation resulting from an
insurance claim. The party that diversifies its insurance portfolio is known as the ceding
party. The party that accepts a portion of the potential obligation in exchange for a share
of the insurance premium is known as the reinsurer.

TYPES OF REINSURANCE

REINSURANCE TYPES

Facultative Reinsurance Treaty Reinsurance

Quota Share Surplus Excess Excess Of Loss Pools

Or Proportional of Loss Ratio (Or Stop
Loss )

FACULTATIVE REINSURANCE:Facultative reinsurance is the type of reinsurance which

covers a single risk. It is considered to be more transaction-based. Facultative reinsurance
allows the reinsurer to assess the individual risk and take a call on whether to accept or
reject it. The profit structure of the reinsuring company plays a part in deciding which
risk to take. In such agreements, the ceding company and the reinsurer create a
facultative certificate that states the reinsurer is accepting a specific risk. This type of
reinsurance can be more expensive for the primary insurance companies.

TREATY REINSURANCE: A reinsurance treaty is merely an agreement in between two or

more insurance companies whereby one (Direct insurer) agrees to cede and the other or
others ( reinsurer) agree to accept reinsurance business as per provisions specified in the
treaty. More specifically, it is a pre-arranged agreement whereby the direct insurer cedes
and the reinsurers) accepts cessions within a pre-determined limit. Four types of treaty
reinsurance are:
1) Quota Share Or Proportional: This type of treaty requires the direct insurer to
cede a predetermined proportion of all its business accepted in a certain class to
the reinsurer(s), and the reinsurers, also agrees to accept that proportion in return
for a corresponding proportion of the premium.
2) Surplus Treaty : The important feature here is this that the direct insurer agrees
to reinsure only the surplus amount, after its retention, and the reinsurers agree to
accept such cessions, usually up to a predetermined upper limit. Surplus treaties
are usually arranged in lines, each line being equal to insurers own retention.
3) Excess Of Loss Ratio: This type of arrangement is also known as STOP LOSS
reinsurance and is a bit different from the Excess of Loss arrangement, even
though both basically base on loss rather than sum-insured. Here, a relationship is
usually drawn in between the gross premium and the gross claim over a year in a
particular class of business. The ceding company decides a gross loss ratio up to
which it can sustain.
4) Pools : Pools are basically treaties, either quota share or surplus, in the sense that
under these arrangements various member countries or member companies join
their hands together beforehand for sharing each others premium as well as
claims.

MALHOTRA COMMITTEE
In view to bring Reforms in Insurance sector to evaluate the Indian insurance industry and
to recommend its future direction the central government formed Malhotra Committee,
Headed by former Finance Secretary and RBI Governor, R. N. Malhotra in the year 1993.
The reforms were aimed at "creating a more efficient and competitive financial
system suitable for the requirements of the economy keeping in mind the structural
changes currently underway and recognizing that insurance is an important part of the
overall financial system where it was necessary to address the need for similar reforms".

PURPOSE
1) To suggest the structure of the insurance industry, to assess strengths and
weaknesses of insurance companies in terms of the objectives of creating an
efficient and viable insurance industry, which will have a wide reach of insurance
 services, a variety of insurance products with a high quality of services to the
public and servicing as an effective instrument for mobilization of financial
resources for development.
2) To make recommendations for changing structure of insurance industry, for
changing general policy frame work etc.
3) To make specific suggestions regarding LIC and GIC with a view to improve their
functioning.
4) To make recommendations on regulation and supervision of the insurance sector in
India.
5) To make recommendations on role and functioning of surveyors, intermediaries like
agents etc in the insurance sector.
6) To make recommendations on any other matter which are relevant for development
of hte insurance industry in India.

RECOMMENDATIONS
In 1994, the committee submitted the report and gave the following recommendations
Structure
1) Government stake in the insurance Companies to be brought down to 50%
2) Government should take over the holdings of GIC and its subsidiaries so that these
subsidiaries can act as independent corporations.
3) All the insurance companies should be given greater freedom to operate

INVESTMENT
1) Mandatory Investments of LIC Life Fund in government securities to be reduced
from 75% to 50%
2) GIC and its subsidiaries are not to hold more than 5% in any company (Their
current holdings to be brought down to their level over a period of time.)

CUSTOMER SERVICE
1) LIS should pay interest on delays in payments beyond 30 days.
2) Insurance companies must be encouraged to set up unit linked pension plans.
3) Computerization of operations and updating of technology to be carried out in the
insurance industry.
Overall, the committee strongly felt that in order to improve the customer services and
increase the coverage of the insurance industry should be opened up to competition. But at
the same time, the committee felt the need to exercise caution as any failure on the part
of new players could ruin the public confidence in the industry.
 INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY [IRDA]
IRDA is a statutory body which regulates the Insurance Industry in India. It was set up in
2000 and was initially known as Insurance Regulatory Authority and subsequently renamed
as Insurance Regulatory and Development Authority. The main objective of setting up
IRDA was to promote market efficiency and ensure consumer protection.
It was constituted by a Parliament of India act called Insurance Regulatory and
Development Authority Act, 1999 and duly passed by the Government of India.
The Headquarters of IRDA is located at Hyderabad and the members of IRDA are
appointed by Government of India.

ORGANISATIONAL SETUP OF IRDAIRDA is a ten member body consists of:

1) One Chairman (For 5 Years & Maximum Age - 60 years )
2) Five whole-time Members (For 5 Years and Maximum Age- 62 years)
3) Four part-time Members (Not more than 5 years)
4) The chairman and members of IRDAI are appointed by Government of India.
Note: -The present Chairman of IRDAI is Mr T.S Vijayan.

OBJECTIVES OF IRDA
1) To promote the interest and rights of policy holders.
2) To promote and ensure the growth of Insurance Industry.
3) To ensure speedy settlement of genuine claims and to prevent frauds and
malpractices
4) To bring transparency and orderly conduct of in financial markets dealing with
insurance.

FUNCTIONS OF IRDA
The Insurance Regulatory and Development Authority (IRDA) is a national apex regulatory
agency of the Government of India. It performs the following functions with respect to
the insurance sector in India.
It issues the certificate of registration or renewal to Insurance companies,
insurance agents or surveyors, Insurance brokers. To function in the insurance
sector, a company has to register with the IRDA.
IRDA Protects the interests of the policyholders in matters like, nomination by
policyholders, assigning of the policy, insurable interest, surrender values of the
policy, settlement of insurance claim, and various other terms involved in the
conditions of contracts of insurance.
It specifies the requisite qualification, practical training, and code of conduct for
agents, insurance brokers, and surveyors.
IRDA is involved in promoting efficiency in insurance business conduction.
It promotes and regulates professional organizations that connect with the
insurance and re-insurance business.
IRDA also specifies the code of conduct for surveyors and loss assessors.
 It regulates the fees and other similar charges levied by the insurance companies,
brokers, agents, surveyors, etc.
IRDA controls the rates, advantages, and terms and conditions which are offered
by the insurers.
It specifies the form and manner in which books of accounts are to be maintained
by the insurers and other insurance intermediateries.
It regulates the investment of funds made by the insurance companies and firms.
IRDA settles disputes between insurers and intermediateries, whenever they arise.
It also regulates the maintenance of margin of solvency(To possess sufficient funds
to settle insurance claim amounts).
It specifies the percentage of premium income of the insurer that can go to
finance schemes for promotion and regulation of professional organisations.
It also specifies the percentage of life insurance business and general insurance
business that can be undertaken by the insurer in the social and rural sector.
It supervises the working of the Tariff Advisory Committee also.
IRDA has the power to frame regulations regarding the Insurance market.
It promotes competition among the insurance companies and insurers in order to
enhance customer satisfaction, by providing increased choice to consumers. Like it
allowed Health Insurance Portability.
IRDA is also involved in the field of Consumer education and assistance.

Surrender Value
If a policyholder decides to terminate the policy before maturity, the amount which the
insurance company will pay to the policyholder is known as surrender value.
If the policyholder does a mid-term surrender, he would get a sum of what has
been allocated towards savings and earnings on them. A surrender charge would be
deducted from this amount and this varies from policy to policy. If the policyholder
terminates the cover after five years, then as per the recent IRDAI directive, life
insurance companies cant levy any surrender charges. The policy holder will then get the
fund value of his investment only.
TYPES OF SURRENDER VALUE

TYPES OF SURRENDER VALUE

Guaranteed Surrender Value Special Surrender Value

Guaranteed Surrender Value is mentioned in the brochure and is payable after the
completion of 3 years. It is 30% of the premiums paid, excluding premium for the first
year. It also excludes any additional premium paid for riders and any bonus that you may
have received from the insurer.

Special Surrender Value = (Original sum assured x (No. of premiums paid/No. of

premiums payable) + total bonus received) x surrender value factor
When one stops paying premiums after a certain period, the policy continues but with
lower sum assured. This sum assured is called the paid up value.
Paid up value = original sum assured x (No. of premiums paid/No. of premiums
payable)

Risk
Risk implies future uncertainty about deviation from expected earnings or expected
outcome. Risk measures the uncertainty that an investor is willing to take to realize a gain
from an investment.
Risks are of different types and originate from different situations. We have
liquidity risk, sovereign risk, insurance risk, business risk, default risk, etc. Various risks
originate due to the uncertainty arising out of various factors that influence an investment
or a situation.

TYPES OF RISK

Pure Risk
Speculative Risk
Types of Risk Particular Risk
Fundamental Risk
Static Risk
Dynamic Risk.

PURE RISK is a situation that holds out only the possibility of loss or no loss or no loss.
For example, if you buy a new textbook, you face the prospect of the book being stolen or
not being stolen. The possible outcomes are loss or no loss. Also, if you leave your house
in the morning and ride to school on your motorcycle you cannot be sure whether or not
you will be involved in an accident, that is, you are running a risk. There is the uncertainty
of loss. Your motorcycle may be damaged or you may damage another persons property or
injured another person. If you are involved in any one of these situations, you will suffer
loss. But if you come back home safely without any incident, then you will suffer no loss.
The different types of pure risks that we face can be classified under any one of the
followings:

1) Personal Risks
Pure
2) Property Risks
Risk
3) Liability Risks
Personal Risks are those risks that directly affect an individual. Personal risks
detrimentally affect the income earning power of an individual. They involve the likelihood
of sudden and complete loss of income, or financial assets sharp increase in expenses or
gradual reduction of income or financial assets and steady rise in expenses. Personal risks
can be classified into four main types:

1) Risk of Premature Death

Personal 2) Risk of Old Age
Risk 3) Risk of Sickness
4) Risk of Unemployment

1) Risk of Premature Death: It is generally believed that the average life span of a
human being is 70 years. Therefore, anybody who dies before attaining age 70
years could be regarded as having died prematurely. Premature deaths usually
bring great financial and economic insecurity to dependants. In most cases, a
family breadwinner who dies prematurely has children to educate, dependants to
support, mortgage loan to pay. In addition, if the family bread-winner dies after a
protracted illness, then the medical cost may still be there to settle and of course
the burial expenses must have to be met. By the time all these costs are settled,
the savings and financial assets of the family head may have been seriously
depleted or possibly completely spent or sold off and still leaving a balance of debt
to be settled.
2) Risk of Old Age: The main risk of old age is the likelihood of not getting sufficient
income to meet ones financial needs in old age after retirement. In retirement,
one would not be able to earn as much as before and because of this, retired people
could be faced with serious financial and economic insecurity unless they have build
up sufficient savings or acquired sufficient financial assets during their active
working lives from which they could start to draw in old age.
a. Even some of the workers who make sufficient savings for old age would still
have to contend with corrosive effect of inflation on such savings. High rate
of inflation can cause great financial and economic distress to retired people
as it may reduce their real incomes.
3) Risk of Poor Health: Everybody is facing the risk of poor health. It is only when
people are healthy, that they can meaningfully engage themselves in any productive
activity an earn full economic income. Poor health can bring serious financial and
economic distress to an individual. For example, without good health, nobody can
gainfully engage himself in any serious economic undertaking an maximized his
economic income.
a. A sudden and unexpected illness or accident can result in high medical bills.
Therefore, poor health will result in loss of earned income and high medical
 expenses. And unless the person has adequate personal accident and health
insurance cover or has made adequate financial arrangements for income
from other sources to meet these expenses, the person will be financially
unsecured.
4) Risk of Unemployment: The risk of unemployment is a great threat to all those who
are working for other people or organizations in return for wages or salaries. The
risk equally poses a great threat to all those who are still in school or undergoing
courses of vocational training with the notion of taking up salaried job after the
training period. Self-employed persons, whose services or products are no longer in
demand, could also be faced with the problem of unemployment.
Unemployment is a situation where a person who is willing to work and is looking
for work to do cannot find work to do. Unemployment always brings financial
insecurity to people. This financial insecurity could come in many ways, among which
are:
a. The person would lose his or her earned income. When this happens, he will
suffer some financial hardship unless he has previously built up adequate
savings on which he can now start to draw.
b. If the person fails to secure another employment within reasonable period
of time, he may fully deplete his savings and expose himself to financial
insecurity.
c. If he secures a part-time job, the pay would obviously be smaller than the
full-time pay and this entails a reduction of earned income. This would also
bring financial insecurity.

SPECULATIVE RISK: Uncertainty about an event under consideration that could produce
either a profit or a loss, such as a business venture or a gambling transaction. A pure risk
is generally insurable while speculative risk is usually not.

LIABILITY RISK:Most people in the society face liability risk. The law imposes on us a
duty of care to our neighbour and to ensure that we do not inflict bodily injury on them.
If anyone breaches this duty of care, the law would punish him accordingly. For example,
if you injure your neighbour or damage his property, the law would impose fines on you and
you may have to pay heavy damages.
Unfortunately, one can be found liable for breach of duty of care in different ways
and the best security seems to be the purchase of liability insurance cover.

PROPERTY RISKS: Property owners face the risk of having their property stolen,
damaged or destroyed by various causes. A property may suffer direct loss, indirect loss,
losses arising from extra expenses of maintaining the property or losses brought about by
natural disasters.
Natural disasters such as flood, earthquake, storm, fire etc can bring about
enormous property losses as well as taking several human lives. The occurrence of any of
these disasters can seriously undermine the financial security of the affected individual,
particularly if such properties are not unsecured.
1) Direct Loss: Direct loss is that loss which flows directly from the unsecured peril.
For example, if you insure your house against fire, and the house is eventually
destroyed by fire, then the physical damage to the property is known as direct loss.
2) Indirect Loss or Consequential Loss: Indirect or consequential loss is a loss that
arises because of a prior occurrence of another loss. Indirect loss flows directly
from an earlier loss suffered. The loss is the consequence of some other loss. It
arises as an additional loss to the initial loss suffered. For example, if a factory
that has a fire policy suffers a fire damage, some physical properties like building,
machinery maybe destroyed. The loss of these properties flows directly from the
insured peril (fire). The physical damage to the properties is known as direct fire
loss.

FUNDAMENTAL RISK is a risk which is non-discriminatory in its attack and effect. It is

impersonal both in origin and consequence. It is essentially, a group risk caused by such
phenomena like bad economy, inflation unemployment, war, political instability, changing
customs, flood, draught, earthquake, weather (e.g. harmattan) typhoon, tidal waves etc.
They affect large proportion of the population and in some cases they can affect the
whole population e.g. weather (harmattan for example).

PARTICULAR RISK is a risk that affects only an individual and not everybody in the
community. The incidence of a particular risk falls on the particular individual affected.
Particular risk has its origin in individual events and its impact is localized (felt locally).
For example, if your textbook is stolen, the full impact of the loss of the book is felt by
you alone and not by the entire members of the class. You bear the full incidence of the
loss. The theft of the book therefore is a particular risk.
If your shoes are stolen, the incidence of the loss falls on you and not on any other person.
Particular risks are the individuals own responsibility, and not that of that society or
community as a whole. The best way to handle particular risk by the individual is the
purchase of insurance cover.

STATIC RISKS are risks that involve losses brought about by irregular action of nature
or by dishonest misdeeds and mistakes of man. Static losses are present in an economy
that is not changing (static economy) and as such, static risks are associated with losses
that would occur in an unchanging economy. For example, if all economic variables remain
constant, some people with fraudulent tendencies would still go out steal, embezzle funds
and abuse their positions. So some people would still suffer financial losses. These losses
are brought about by causes other than changes in the economy. Such as perils of nature,
and the dishonesty of other people.
 UNCERTAINITY
By the term uncertainty, we mean the absence of certainty or something which is not
known. It refers to a situation where there are multiple alternatives resulting in a specific
outcome, but the probability of the outcome is not certain. This is because of insufficient
information or knowledge about the present condition. Hence, it is hard to define or
predict the future outcome or events.
Uncertainty cannot be measured in quantitative terms through past models.
Therefore, probabilities cannot be applied to the potential outcomes, because the
probabilities are unknown.

DIFFERENCE BETWEEN RISK AND UNCERTAINITY

BASIS FOR
COMPARISON RISK UNCERTAINTY

Meaning The probability of winning or Uncertainty implies a situation

losing something worthy is where the future events are not
known as risk. known.
Ascertainment It can be measured It cannot be measured.
Outcome Chances of outcomes are known. The outcome is unknown
Control Controllable Uncontrollable
Minimization Yes No
Probabilities Assigned Not assigned

TYPES OF CLAIMS
There are quite a few types of Claims in the Life Insurance Industry but people associate
claims with Death Claims only. Survival and Maturity Claims are often forgotten about.
However, Death Claims constitute of only 14% of the entire Claims of this industry. The
remaining 86% of the claims are Maturity Claims.

1) Death Claims
Claims 2) Maturity Claims
3) Survival Claims

WHAT IS A DEATH CLAIM?

When the Life Insured dies, the amount of money payable to his family is called Death
Claim. Depending on the type of Insurance cover availed and the policy taken, the
Insurance Coverage can also vary. However, there is always a minimum Sum Assured that is
definitely payable to his nominee on death of the life insured.
Death intimation is very important in such a case. This is the most common form of
Insurance Claim where people are worried about the settlement amount is Death Claim, as
there are lots of rules and regulations that the Insurance Company will follow before they
pay out the Claim Amount. Proper information, documentation, etc are required in this
case.
According to Section 45 of Insurance Act 1938, if death occurs within 2 years of
the policy inception, then proper investigation is done before the claim is settled to as to
check whether the facts stated on the proposal form at the time of taking the policy had
been true or there has been a non disclosure or misrepresentation of material facts. If
the facts stated at the time of taking the policy are not found true, then the claim can
also be repudiated and the nominee would be denied of any policy money.

WHAT IS A MATURITY CLAIM?

When the policy completes its tenure, the Maturity Claim amount is settled towards the
life assured. It is usually an easy process, where the life insured needs to fill up the policy
discharge form and the maturity amount is paid out without much hassles. The money is
usually paid out before the maturity date once the policy discharge paper is duly filled and
submitted long before the date of maturity. It usually comes as a post dated cheque. This
is the simplest form of Insurance Claim.

WHAT IS A SURVIVAL CLAIM?

When money is due to the policy holder before the policy matures, provided he is alive, is
called Survival Claim. It is usually settled like a Maturity Claim. This type of claim arises in
policies like Money Back Plans where money comes back to the policyholder after regular
intervals of 5 to 10 years. When Life Insurance Policy is taken, it is usually done as a
Protection tool for the financial stability of the family. Thus, it comes in most handy in
case of the death of the life insured, where the money is required by the family to run
daily expenses. Maturity and Survival Claims are anticipated money and the expenditure
can be planned well in advance as their time is known. Death Claim amount cannot be
planned as the time of death of the Life Insured is not known ahead of time. Thus, people
are most worried in death claims, as the person who is insured is not around and his
nominee might not be well versed with the claim procedures, thus making the process even
more lengthy and cumbersome. Hence, each and every individual should be aware of the
policy details and the claim procedure so that in case of an emergency, it doesnt seem too
much of a pain to get it settled.
 RIDERS IN INSURANCE

Riders are add-ons or additional benefits which you can opt for along with your current
life insurance policy at affordable rates. Riders are the valuable tools that help you in
expanding your life insurance coverage.

DIFFERENT LIFE INSURANCE RIDERS

Waiver of Premium: It ensures that your life insurance policy stays active even if you
are unable to pay your premiums. The effect of this policy would be waiving off all future
premiums but the continuation of the policy benefits.
Critical Illness: Under this rider, you pay an extra amount to get yourself covered in case
you are being diagnosed with any of the critical ailments mentioned in the policy document.
Acting like an income replacement plan, the amount received under the rider can be used
to meet both medical and household expenses. Though the critical illnesses covered under
the policy may vary from one insurer to another, some ailments like cancer, heart attack,
brain tumor, etc.; are covered under the rider.
Accidental Death Rider: All life insurance policies cover accidental death. However, when
you buy an accidental death rider, the insurer pays double the sum assured to your
nominee in case you die in an accident.
Permanent & Partial Disability: It is helpful in case you become temporarily or
permanently disabled due to an accident. In most of the cases, the insurer pays a certain
sum assured for the next five or ten years. Also, all future premiums on the main insurance
policy are waived off by the insurance company.
Income Benefit Rider: It offers a regular source of income to the family in case of the
demise or disability of the policyholder.

OMBUDSMAN'

An official who investigates complaints (usually lodged by private citizens) against

businesses, financial institutions and/or the government. An ombudsman can be likened to a
private investigator; although the decision is not typically binding, it does carry
considerable weight with those who are sanctioned to uphold the rules and regulations
pertaining to each specific case. When appointed, the ombudsman is typically paid via
levies and case fees.
 LIST OF INSURANCE PALYERS IN INDIA

In Life Insurance:
S.No Name of the Insurance Company S.No Name of the Insurance Company
1 Bajaj Allianz Life Insurance Co. Ltd. 13 Aviva Life Insurance Company India
Limited
2 Birla Sun Life Insurance Co. Ltd 14 Sahara India Life Insurance Co. Ltd.
3 HDFC Standard Life Insurance Co. Ltd 15 Shriram Life Insurance Co. Ltd.
4 ICICI Prudential Life Insurance Co. Ltd 16 Bharti AXA Life Insurance Co. Ltd.
5 Exide Life Insurance Co. Ltd. 17 Future Generali India Life Insurance
Co. Ltd.
6 Life Insurance Corporation of India 18 IDBI Federal Life Insurance Co. Ltd.
7 Max Life Insurance Co. Ltd 19 Canara HSBC Oriental Bank of
Commerce Life Insurance Co. Ltd.
8 PNB Metlife India Insurance Co. Ltd. 20 AEGON Life Insurance Co. Ltd.
9 Kotak Mahindra Old Mutual Life 21 DHFL Pramerica Life Insurance Co.
Insurance Co. Ltd Ltd.
10 SBI Life Insurance Co. Ltd 22 Star Union Dai-ichi Life Insurance Co.
Ltd.
11 Tata AIA Life Insurance Co. Ltd. 23 IndiaFirst Life Insurance Co. Ltd.
12 Reliance Nippon Life Insurance Co. Ltd. 24 Edelweiss Tokio Life Insurance Co.
Ltd.

In General Insurance :
S.No Name of the Insurance Company S.No Name of the Insurance Company
1 Bajaj Allianz General Insurance Co. 16 Shriram General Insurance Company
Ltd. Limited,
2 ICICI Lombard General Insurance Co. 17 Bharti AXA General Insurance Company
Ltd. Limited
3 IFFCO Tokio General Insurance Co. 18 SBI General Insurance Company Limited
Ltd.
4 National Insurance Co. Ltd. 19 HDFC General Insurance Company Limited
5 The New India Assurance Co. Ltd. 20 Kotak Mahindra General Insurance Company
Limited
6 The Oriental Insurance Co. Ltd. 21 Aditya Birla Health Insurance Co. Limited
7 United India Insurance Co. Ltd. 22 DHFL General Insurance Limited
8 Royal Sundaram General Insurance
Co. Limited
9 Tata AIG General Insurance Co. Ltd.
10 Cholamandalam MS General Insurance
Co. Ltd.
11 HDFC ERGO General Insurance Co.
Ltd.
12 Export Credit Guarantee Corporation
of India Ltd.
13 Agriculture Insurance Co. of India
Ltd.
14 Star Health and Allied Insurance
Company Limited
15 Future Generali India Insurance
Company Limited

In Reinsurance:
S.No Name of the Insurance Company
1 General Insurance Corporation of India
2 ITI Reinsurance Limited

KEY TERMS - INSURANCE

1) The Policy. The written document or contract between you or your company and the
insurance company.
2) Premium. The periodic payment paid to the insurance company for the benefits
provided under the policy.
3) Rider. A special provision, sometimes referred to as an endorsement, attached to a
policy that either expands or restricts the policy.
4) Claim. Notification to an insurance company that you believe a payment is due to you
or your company under the terms of the policy.
5) Commission. A fee or percentage of the premium paid to an insurance broker or
agent.
6) Deductible. The amount of out-of-pocket expenses that you or your business must
pay before the payment is made by an insurer. For example, if the deductible for
business equipment loss is $1,000 per year and you suffer $1,000 in damage in one
year, there will be no payment under the policy.
7) Exclusions. Losses an insurance policy will not cover.
8) Underwriter. The person or company that evaluates your business and determines if
it qualifies for insurance coverage.
9) Death Benefit It is the amount of benefit on a life insurance policy or pension that
will be paid to the beneficiary in the event of the death of the insured person.
10) Fiduciary The term refers to a person who holds something in trust for someone
else.
11) Maturity It refers to the date upon which the promised face amount of a life
insurance policy is paid to the policyholder, if not collected beforehand due to the
policy holders sudden demise.
12) Maturity Claim The Payment of an agreed amount made to the policy holder at the
end of the contracted term of the policy is called maturity claim.
13) Nomination An act by which the policy holder authorizes another person to receive
the policy moneys.
14) Survival Benefit Guaranteed survival benefits are benefits given to the policy
holder during or upon completion of the policy tenure. In the case of money back
policy, Survival Benefit is a certain pre-determined amount paid to the insured
after regular intervals. It is applicable when the insured is alive.
15) Annuity Plans These plans offer a "pension" (or a mix of a lump sum amount and a
pension) to be paid to the policy holder or his spouse. In case of death of both
during the policy period, a lump sum amount is offered to the next of kin.
16) Lapsed Policy It is a policy which has expired and is no longer in force due to non-
payment of the premium due.
17) Agent - individual who sells and services insurance policies in either of two
classifications:
1) Independent agent represents at least two insurance companies and (at
least in theory) services clients by searching the market for the most
advantageous price for the most coverage. The agent's commission is a
percentage of each premium paid and includes a fee for servicing the
insured's policy.
2) Direct or career agent represents only one company and sells only its
policies. This agent is paid on a commission basis in much the same manner as
the independent agent.
18) Indemnity Restoration to the victim of a loss by payment, repair or replacement.
19) Renewal - The automatic re-establishment of in-force status effected by the
payment of another premium.
20) Umbrella Policy Coverage for losses above the limit of an underlying policy or
policies such as homeowners and auto insurance. While it applies to losses over the
dollar amount in the underlying policies, terms of coverage are sometimes broader
than those of underlying policies.

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