3-Financial Services - Non Banking Products-Part 2
3-Financial Services - Non Banking Products-Part 2
3-Financial Services - Non Banking Products-Part 2
By Nadya Narsidani
INSURANCE:
FUNCTIONS OF INSURANCE
PRIMARY FUNCTIONS:
The act of bearing financial risks and collecting premiums for the distribution of
risks are the primary of insurance. Some of the primary functions are:
Distribution of risks: Individuals and business are always prone to various risks
which can be eliminated or minimized. Insurance is such a cooperative which
shares risk through distribution of risks. Risks are distributed among all the
insured individuals and business.
SECONDARY/SUBSIDIARY FUNCTIONS
Helps in Economic Progress: The insurance protects the society from huge
losses of damage, destruction, and provides an initiative to work hard for the
betterment of the masses.
Insurance companies are the major source for capital as they have a huge pool
of funds. Insurance companies resort to funds during financial stress and bailout.
LIFE INSURANCE
Based on the arrangement, in the event of the death of the policyholder or, if the
policy matures, the insurance provider shall pay the person or his family a lump sum
amount after a certain amount of time. There are different types of life insurance
policies to suit the individual needs and requirements of the policy buyers.
Though the concept seems like a feature of contemporary society, life insurance
can actually be traced to around 600–100 BCE in ancient Greece and Rome.
These sophisticated early societies provided a form of both health and life
insurance to some of their citizens
Types of Life Insurance Policies:
1. Term Life Insurance Plans
Term life insurance plans are the purest form of life insurance types as they
offer life cover with no savings or profit elements. Term life insurance plans are
the most affordable types of life insurance policies as premiums are relatively
cheaper in comparison to other life insurance plans.
4. Money-Back
Money-back life insurance plans are a unique types of life insurance policy in
which a portion of the sum assured is paid back directly to the insured at regular
intervals as a survival benefit. This way, the policyholder can achieve short-term
financial objectives.
5. Whole Life Insurance
Whole life insurance plans are amongst the life insurance types that cover the life
insured for a lifetime, or in a few cases, up to the age of 100 years.
At the time of purchasing a whole life insurance policy, the sum assured gets
determined. During the purchase, a nominee is mentioned. In case of any
unfortunate event, as per the whole life insurance definition, they get paid with the
death claim and any bonuses, if applicable.
Nevertheless, if the life assured lives longer than 100 years, the insurance provider
gives the life insured with a maturity benefit equal to the endowment corpus.
6. Child Plan
Child life insurance plans aim at building a corpus for the future development of a
child. Typically, such life insurance types helps in funding the education and
marriage of a child.
Such plans provide instalments annually or in one lump sum pay-out, following
the major milestones of a child’s life. In case the insured parent meets with an
untimely death during the policy term – future premiums are waived off, and the
policy benefits continue without disruption.
7. Retirement Plan
Retirement life insurance plans support building a stable financial source for an
individual’s retirement years. The purpose and meaning of life insurance for
retirement is to help one become financially independent and live without any
worry.
Most retirement life insurance definitions fall under life insurance types that offer
annual pay-out (by means of annuities) or a one-time lump sum pay-out (by means
of commutation of the accumulated amount, up to the prescribed limits) on the
completion of 60 years of age.
In case of an eventuality, within the policy term, the insurer pays the insurance
benefit to your family.
NON LIFE INSURANCE
Unlike life insurance policies, the tenure of general insurance policies is normally
not that of a lifetime. The usual term lasts for the duration of a particular economic
activity or for a given period of time. Most general insurance products are annual
contracts. There are however, a few products which have a long term.
Motor Insurance:
As per the Motor Vehicles Act, 1988 it is mandatory for every owner of a vehicle
plying on public roads, to take an insurance policy, to cover the amount, which
the owner becomes legally liable to pay as damages to third parties as a result of
accidental death, bodily injury or damage to property . A Certificate of Insurance
must be carried in the vehicle as a proof of such insurance. Motor insurance needs
to be renewed every year. Driving a motor vehicle without insurance in a public
place is a punishable offence.
No- claim discounts are available on renewal of policy, ranging from 20% to
50%, depending upon the type of vehicle and the number of years for which no
claim has been made.
Home Insurance
Home is often the most treasured possession of an individual and also the largest
financial investments one makes in life. Safeguarding the physical structure and
contents of home seems like a logical thing to do. Home insurance protects the
house and/or the contents in it, depending on the scope of insurance policy opted
for. It secures the home against natural calamities and man-made disasters and
threats. Home insurance provides protection against risks and damages from fire,
burglary, theft, flood, earthquakes etc. covering the physical asset (building
structure) and valuables (contents) in it. Certain incidents can lead to sudden and
huge expenses, which you are generally not prepared for. In such instances,
insurance policy will safeguard you from suffering from financial setbacks at that
time, ensuring complete protection to you, your family and your Home.
•Home Insurance/House Insurance Policy provides coverage for losses or
damages caused to properties or contents by an unfortunate event - natural and
accidental
•It is not just limited to Landlords who buy property insurance to those who have
home ownership, it can also be purchased by tenants living in rented properties
for their contents.
•the option to insure either your home or its contents, or both
•The policies may be enabled even when away from home, ensuring a stress free
trip
•Option of Home Insurance Policy for up to 3 years
•Option of Fire Insurance Policy which covers the cost of replacement or repair and
reconstruction of property and contents in case of damage from fire and allied
perils including Earthquake and other natural perils
•Covers your home against loss from burglary and theft
•It also covers the contents of your home, including portable equipment, even on a
worldwide basis
•It provides cover for jewellery, valuables and works of art kept at your home
•Additional benefit of rent for alternate accommodation in case of need of
relocation temporarily from home due to a peril
•Home Insurance/House Insurance Policy comes with useful add-ons to provide
with a complete protection
Home insurance ensures that one’s hard-earned savings are utilised to meet
important needs instead of using them for rebuilding the house if some harm was to
come to it.
Marine (Cargo) Insurance
Business involves the import and export of goods, within national borders and
across international borders. Movement of goods is fraught with risk of mishaps
which can result in damage and/or destruction of shipments. This leads to
substantial financial losses for both the importers as well as the exporters.
Marine cargo insurance covers goods, freight, cargo and other interests against loss
or damage during transit by rail, road, sea and/or air. Shipments are protected from
the time the goods leave the seller’s warehouse till they reach the buyer’s
warehouse. Marine cargo insurance offers complete financial protection during
transit of goods and compensates in the event of any loss suffered.
The party responsible for insuring the goods is determined by the sales contract.
Marine cargo insurance policy can be taken by buyers, sellers, import/export
merchants, buying agents, contractors, banks etc. The policy usually covers the
cargo, but can also be extended to cover
the interest of a third party post transfer of ownership as determined by terms of
sale.
Common types of policies:
•Open Cover
•Open Policy
•Specific Voyage Policy
•Annual Policy
The hull of a ship or boat can be insured under marine hull insurance.
Rural Insurance
Insurance solutions to meet the needs of agriculture and rural businesses form part
of rural insurance. IRDA has stipulated annual targets for insurers to provide
insurance to the rural and social sector.
As per these regulations, insurers are required to meet year-wise targets:
•In percentage terms of policies underwritten and percentage of total gross
premium
income by general insurers under rural obligation
•In terms of the number of lives under social obligation
Commercial Insurance
Fire Insurance
Under section 2(6A) Insurance Act 1938, the fire insurance business is defined as
follows: “Fire insurance business means the business of effecting, otherwise than
independently 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”.
Example: The following are the items which can be burnt/ damaged through fire:
Buildings Electrical installation in buildings Contents of buildings such as
machinery, plant and equipments, accessories, etc. Goods (raw materials, in–
process, semi–finished, finished, packing materials, etc.) in factories, godowns etc..
Goods in the open Furniture, fixture and fittings Pipelines (including contents)
located inside or outside the compound, etc. The owner of abovementioned
properties can insure against fire damage through fire insurance policy which
provides DIPLOMA IN INSURANCE SERVICES MODULE - 4 Notes Fire
Insurance Practice of General Insurance 4 financial protection for property against
loss or damage by fire.
Liability Insurance
Legal liability means the liability which can be enforced in the court of law and the
same can be insured. The legal liability can fall under two heads: 1) Criminal
Liability 2) Civil Liability
1) Criminal Liability : is enforced by the State Government and punishable under
the law in the form of fine or imprisonment or both
2) Civil Liability: occurs when an action is taken by one party against another party
resulting in the damage of the property or death or bodily injury of the aggrieved
party and the compensation is payable under the law of the land.
The Bhopal Gas Tragedy in which many died or were left permanently disabled
prompted the Government to pass the Public Liability Insurance Act, 1991 which
imposes a no fault liability on anyone who handles hazardous substances to pay
compensation to the victims of an accidental occurrence. Besides the compulsory
insurance, the growing awareness of the public and the high compensation being
awarded by the courts has made this class of insurance a necessity for
professionals and businessman who may become liable to pay for damages.
1. Compulsory Public Liability Policy: For those industries which are using
hazardous material in their manufacturing process.
2. Public Liability Policy (Industrial / Non-Industrial Risks): ¾ Industrial Risks
are manufacturing premises including godowns, warehouses etc., forming part
thereof, ¾ Non-Industrial Risks are Hotels, Motels, Club houses. Restaurants,
Boarding and Lodging houses. Flight kitchens, Cinema Hails, Auditoriums,
Theatres, Public Halls, Pandals and Open air theatres.
3. Product Liability: If the use of a product causes death or bodily injury or
property damage then the manufacturer is liable to pay compensation. Product
liability insurance is available to cover that risk. This is useful for manufacturer of
food products and for the auto industry.
4. Professional Indemnities : Professional indemnities are designed to provide
insurance protection to professionals such as doctors, solicitors, chartered
accountants, architects etc. against their legal liability to pay damages arising out
of negligence in the performance of their professional duties.
Health Insurance
•Cashless facility Each health insurance company ties up with a large number of
hospitals to provide cashless health insurance facility. If you are admitted to any of
the network hospitals, you would not have to pay the expenses from your pocket.
In case the hospital is not part of the network, you will have to pay the hospital
and the insurance company will reimburse the costs to you later.
•Pre-hospitalisation expenses
In case you have incurred treatment costs for the ailment for which you later get
admitted to a hospital, the insurance company will bear those costs also. Usually
the payout is for costs incurred between 30 to 60 days before hospitalisation.
•Hospitalisation expenses
Costs incurred if a policyholder is admitted to the hospital for more than 24 hours are
covered by the health insurance plan.
•Post- hospitalisation expenses
Even after you are discharged from the hospital, you will incur costs during the
recovery period. Most mediclaim policies will cover the expenses incurred 60 to 90
days after hospitalisation.
•Day care procedure expenses
Due to advancement in technology some of the treatments no more require a 24
hours of hospitalisation. Your health insurance policy will cover the costs incurred
for these treatments also.
•Ambulance charges
In most cases the ambulance charges are taken up by the policy and the policy
holder usually doesn't have to bear the burden of the same.
•Cover for pre-existing diseases
Health insurance policies have a facility of covering pre-existing diseases after 3 or 4
years of continuously renewing the policy, i.e. if someone has diabetes, then after
completion of 3 or 4 years of continuous renewal with the same insurer (depending
on the plan offered and his age), any hospitalisation due to diabetes will also be
covered..
•No claim bonus
The premiums paid for a Health Insurance Policy are exempted for Under Section
80D of the Income Tax Act. Income tax benefit is provided to the customer for the
premium amount till a maximum of Rs. 15,000 for regular and Rs. 20,000 for senior
citizen respectively.
•Tax benefits
If there has been no claim in the previous year, a benefit is passed on to the
policyholder, either by reducing the premium or by increasing the sum assured by a
certain percentage of the existing premium.
•Health check up
Some health insurance policies have a facility of free health check-up for the well
being of the individual if there is no claim made for certain number of years.
•Organ donor expenses
The medical expenses incurred in harvesting the organ for a transplant is paid by the
policy.
Corporate Agency Regulations- Banks can act as corporate agents for only one life
and one non life insurance company for a commission, as per the current regulatory
framework set up by IRDA. The banks are not eligible for any payout other than
commission. It is also mandated that banks should also observe code of conduct
prescribed towards both customer and the principal who is the insurer.
The reinsurance business assumes greater importance in case of war and natural
calamities when the smaller firms are unable to take on the full risk due to their
lower capital base.
Reinsurance contracts are those contracts in which one insurance company transfers
its risk to another insurance company. Insurance companies which transfer the risk
are known as ceding companies also, direct writers. Accepting company .i.e. the
company which accepts the risk is also known as reinsurer.
Say for instance Mr. X has a life insurance policy with an insurance company for
Rs.10 crore and the insurance company wants to transfer 30% of the risk to a
reinsurer then in case of loss direct writer has to pay the sum assured to X’s
beneficiary and then claim for the 30% from reinsurer. Mr. X has no relation with
the reinsurer. It has contract with the direct writer alone and direct writer is bound to
fulfill his part of the contract in case risk happens and then claim for it from the
reinsurer. It has a separate contract with the reinsurer.
Not all insurance players are in this business because the capital requirement is
much higher than if the insurance company functions only in insurance. In India
LIC, GIC, Lloyds of London are few reinsurers. Ceding company may shift part or
all of the insurance originally written to the reinsurer. The amount of insurance
retained by ceding company for its own account is known as retention. There are
basically two types of reinsurance namely :-
(i) Facultative- reinsurer can accept or reject any risk presented by ceding company.
Used to cover large industrial firms
(ii) Treaty reinsurance
Facultative coverage insures against a specific risk factor. The underwriter would
evaluate the individual risk factor and write a policy accordingly.
Facultative reinsurance is when all individual policies are taken into consideration
and then a decision as to which policy needs reinsurance and what % of risk needs
to be transferred. It is called facultative because it need not be covered by one
company; it can be covered by multiple companies. What risks need to be
transferred is decided by ceding company.
Reinsurance by treaty is when there is an agreement between direct writer and the
reinsurer. Reinsurance companies come up with proposals to the direct writers as to
what is the maximum amount of risk they are ready to accept and what kinds of
risks they are ready to accept from the direct writers. The direct writers choose the
best offer and they enter into agreement. Reinsurance by treaty is basically of two
types; namely :
Quota or Quota share- It’s not always on an individual basis, it is always
consolidated. Direct writer transfers some percentage and keep certain percentage
of risk. Here the percentage is fixed.
Surplus reinsurance (excess of loss)- Here 3 aspects are looked into
i) Maximum coverage available .i.e. what amount reinsurer is ready to accept.
ii) Estimated maximum loss .i.e in case of life insurance it is sum assured and in
case of general insurance it has to be assessed by the direct writer.
iii) What is the % of loss or risk to be transferred?
Treaty and facultative reinsurance policies can be proportional or non proportional
in structure. A proportional reinsurance (also known as "pro rata" or Quota
reinsurance) agreement obligates the reinsurer to bear a portion of the losses, for
which it receives a prorated share of the insurer's premiums. Non-proportional
reinsurance (also known as "excess of loss" or surplus reinsurance) agreements
kick in when the insurer's losses exceed a set amount.
Facultative and treaty reinsurance are both common in India. There is a regulatory
expectation that only retail lines of insurance are covered under treaty reinsurance.
Facultative reinsurance has been mainly reserved for unconventional risks, project
risks, mega risks, and liability lines.
Reinsurance policies in India commonly include:
Claims control/claims co-operation clause.
Follow the fortune clause.
Set off clause.
Ex-gratia payment exclusion clause.
Comprehensive dispute resolution and arbitration clauses.