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2. A brief history of Insurance
Insurance is a form of risk management, primarily used to hedge against the risk of a
contingent loss. In essence, insurance is simply the equitable transfer of a risk of a loss, from
one entity to another, in exchange for a premium.
Early methods of transferring or distributing risk were practiced by Chinese traders as early
as the 3rd millennia BC. These merchants travelling treacherous river rapids would cleverly
distribute their wares across many vessels to spread the loss due to any single vessel's
capsizing.
Modern profit insurance manifested in Babylon almost 2000 years B.C., in a contract of loan
of trading capital to travelling merchants. The contract contained a clause that the risk of
loss due to robbery in transit was borne by the party providing the loan. In consideration for
bearing this risk, the lender calculated interest on the loan at an exceptionally high rate.

3. Separate insurance contracts (i.e. insurance policies not bundled with loans or other kinds
of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by
pledges of landed estates. These new insurance contracts allowed insurance to be separated
from investment, a separation of roles that first proved useful in marine insurance.
Insurance became far more sophisticated in post-Renaissance Europe, and specialized
varieties developed.
On 3 December 1591, one hundred Hamburg house-owners concluded the so-called
“Hamburg fire contracts”, which are generally regarded as some of the first examples of true
mutual insurance contracts that we have today.
Insurance - as we know it today - can be traced to the Great Fire of London of 1666
that ravaged London from Sunday, 2 to Wednesday, 5 September.
To make a long story short, insurance (today) is being conducted over a vast array of "lines
of business" that encompass personal, commercial, marine, aviation, agriculture, life, health,
financial and engineering insurance. Virtually anything - from the mundane to the bizarre -
can be insured, as Lloyd’s is famous for insuring the life, health, legs or even noses of actors,
actresses and / or sports figures.

4. What do expect at the end of this session?
The Fundamentals of Insurance.
The basic concepts relating to the business of insurance.
The types of Risks and their classifications.
Acturial and Underwriting responsibilities and functions.
Terms and Terminologies used in the industry.
Types of Contracts and their classification.
Techniques used to Manage Risks.
Importance of Utmost Good Faith and insurance.
Claims and their Settlement.
Agent responsibilities and functions.

5. WHAT IS INSURANCE ?
INSURANCE IS A PROMISE MADE BY THE
INSURER TO THE INSURED TO COMPENSATE
AGAINST ANY SIGNIFICANT POTENTIAL LOSSES
WHICH ARE FINANCIAL IN NATURE, IN
EXCHANGE OF A PERIODIC PAYMENT THE
INSURED MAKES TO THE INSURER.

6. WHY SHOULD ONE BUY AN INSURANCE ?
It is the utterly vital that one buy’s an insurance to
ensure safety against any significant financial losses
he/she may face in future.
Insurance also helps financial planning and provides
tax benefits to the insured

7. How is the premium decided by the insurer?
In a contract for Insurance the Insurer promises to pay to the
Insured a specific amount of money in case of facing a risk or a
peril. The policy holder will pay a certain amount of
consideration for the same. This is termed as the premium. The
insurer will typically decide the premium based on the value of
the insured item or the risk involved. The Actuary does this
complex job of premium calculation. For general understanding
the same can be explained as below.
Net premium = Investment Income + Rate of Mortality
Base Premium = Net Premium + Loading Expenses

8. What is Bonus and how is it paid ?
Bonus is basically that amount of money that is
surplus to the valuation and is distributed amongst
the policy holders. Only policy holders who have
opted for a participating option are paid the bonus.
The calculation of Bonus is done in two ways namely
–
Simple Reversionary Bonus – This is the most
common way of calculating the bonus. For instance
the SA under the policy is Rs. 100000 and the bonus
declared is Rs 75 per Rs. 1000 or 7.5 % of the SA
under the policy would be Rs. 107500

9. Compound Reversionary bonus – In this system
the bonus is simply added to the existing SA
including the vested bonus. Hence the SA would
now become Rs. 108062
The mode of payment of the bonus is however
the discretion of the Insurer as he may offer
many options to the policy holder

10. What is a risk?
Risks are basically the consequential losses or damages to
assets making them non-functional before their expected life
time or entire destruction of the assets. The risk actually only
means that there is a possibility of a loss or damage. It may or
may not happen. Insurance covers such risks if they do
happen. Although the word possibility implies uncertainty , it
has a great relevance to Insurance which applies only in such
cases where there is an amount of uncertainty and
predictability

11. What are the types of risks that an
insurer would cover?
Insurance covers only the significant financial
losses occurring due to any critical or
catastrophic risks that are pure and speculative.
Perils that arise out of fire, natural disasters,
breakdowns, accidents, illnesses and that are
static in nature are some which are covered by
the insurer

12. Types of
Risks
Personal Risk to Third Party
Risk Property Risk
Outliving Losses due to
Death Poor Health Financial manmade and
Resources natural disasters

13. Classification of risks
 Risks are classified into speculative and pure risks.
 Speculative risks are never insurable.
 Pure risks are further classified into fundamental and
particular risks.
 Pure risks are always insurable as they are specific and
static.
 Fundamental risks can affect many people at a time
and may be caused due to natural
calamities, wars, epidemics etc. and hence are not
always insurable

14. What is risk management ?
The identification and assessment of a financial risk
is known as Risk Management.
The risk can be managed in four simple ways
Avoid the risk to a possible extent.
Control the risk within limits.
Accept the risk if any peril occurs.
Transfer the risk to decrease the burden.

15. Risk Transfer mechanism in Insurance
Policy Holder
Insurance Contract
Insurer
Re-Insurance Contract
Re-Insurer
Contract of Retrocessionaire
Retrocessionaire

16. What are the characteristics of an
insurance risk ?
 The risk must happen by chance.
 Losses occurring should have a significant value.
 The loss must be definite in terms of time and
amount.
 Risk must have a predictable loss rate.
 The loss must not be catastrophic to the
insurance company.

17. Terms and terminologies in life insurance
Insurer - The Insurance Company is the insurer and
will take instructions only from the policy holder.
Policy holder – the person who enters into a
contract with the insurance company to cover
someone's life is known as the policy holder or the
policy owner.
Insured – The person whose life is covered under an
Insurance policy is known as the insured.

18. Sum insured/assured – The amount of cover
mentioned on the policy is known as the sum
insured/assured.
Premium – The amount paid to the Insurer in order
to keep the policy active is known as premiums.
Proposal form – The application for insurance to be
filled by the policy holder for buying an insurance.
Initial premium – The first payment/premium that is
sent to the Insurer along with the proposal form is
called the initial premium.
Cooling off period – The time allowed to the
applicant to decide whether or not to accept the
policy.

19. What are actuaries and underwriters ?
Actuaries Underwriters
• These are basically • They identify, assess
mathematicians or and evaluate the risk
statisticians who involved in an individual
identify, assess and proposal.
evaluate the risk • They decide the final
involved in a group. premium that is to be
charged to the insured.
• They also decide the
base premium. • They decide whether or
not to accept a proposal
• They design policies and also modify the
for the Insurance terms and conditions.
Company.

20. WHAT IS THE PREMIUM BLOCK ?
(% AGES MENTIONED ARE AN EXAMPLE)
•Government bonds, •Expenses required to
share markets, meet salary expenses,
infrastructure, infrastructural
banks, real estate, maintenance,
gold etc. stationery etc.
Investment Operating
Income Expenses
(10%) (15%)
Policy Cash
Reserves Reserves
(10%) (60%)
•The amount required
to settle claims as and •The Insurer would at
when they occur times declare bonus to
the insured to attract
more business.

21. Investment Income – This is a part of the premiums which is invested in
secured and unsecured markets. The profit from such investments is used by
the insurance company for it’s own benefit.
Operating Expenses – These are the funds that are kept aside to meet the
operating expenses to run the business of the company like payment of
salaries, infrastructure maintenance, stationery etc.
Cash Reserves – Cash reserves are a part of the premiums which are invested
in secured and unsecured markets. The profit from such investments is used
by the Insurance Company to be distributed amongst the policy
holders/beneficiaries in the form of Bonus.
Policy Reserves – Policy reserves are a part of the premiums which are kept
aside in order to pay up claims whenever they arise. This portion determines
the standing of an Insurance Company in the market. Money once kept aside
in the policy reserves is not spent unless there is a claim.

22. Types of policies and their details
Heading Term Policy Whole of life Endowment Policy
• Duration • Min- 5 years Max • Till death max – • Min- 5 years Max
• Bonus – 20 years 99 years – 20 years
• Premiums • No Bonus • Yes • Yes
• Claims paid from • Lowest Premiums • Moderate • Highest premiums
• Maturity/Survival • Policy reserves premiums • Sum assured-
benefit • NA • Sum assured- policy reserves,
• Purpose • Risk Protection policy reserves, Bonus – Cash
for a certain Bonus – Cash reserves
period reserves • Yes thro’ cash
• NA reserves(Entire
• Investment and maturity value)
protection • Investment

23. What is a linked policy ?
The urge of the Investor to participate in the Capital Market to
reap benefits of the Market BOOM diverted a lot of funds to
this arena. The Insurance Companies developed plans that
combine the benefits of Life Insurance while giving the prospect
an option of participating in the growth of the capital market.
Such plans are called Linked Life Insurance Plans They are also
termed as Unit Linked Insurance Plans. (ULIP)
The terms for such plans are usually fixed (not less than 5 years
or age 70 for whole life plans) and the premium is in multiples
of say Rs 500 or Rs. 1000. the Prospect has an option to pay in
monthly, quarterly, half yearly or yearly payment modes. The
Policy holder can also top-up his investments in such plans to a
maximum of 25% of the regular premiums paid till date.

24. What are the fund options that one can select ?
There are a variety of options that the policy
holder can select in terms of funds.
Equity Funds – Also christened as Growth Fund the Insurer would make
more investments in the share and stock markets
Debt Fund – Also christened as the Bond fund the investments would be in
majority done in Government and Government guaranteed securities.
Money Market Funds – Also Christened as Liquid Fund the investment of
such funds may be more in short term money market investments as treasury
bills, commercial papers etc.
Balanced Funds – In this type the Insurer will invest in both the equity as
well as the debt funds.

25. What is NAV (Nett Assets Value) ?
As the word itself suggests NAV represents the net
value of the fund on a particular date and also
reflects the total value of the assets of that fund,
after some adjustments for expenses. The NAV
keeps fluctuating as per the market value of the
shares. NAV is basis for new entrants and for exits
from the fund. The NAV used at the time of entry is
termed as the Offer Price and that while exiting is
termed as the Bid Price. This difference is termed as
the Bid-offer Spread and is normally around 5 %.
There is a minimum of 3 years lock-in period for
such funds per the IRDA guidelines.

26. What are the Insurable/Non insurable interests?
Grand children cannot Beneficiary is the Bank
insure their Grand or the institution and
parents the policy amount is
limited to the Loan
Immediate Financial
amount
Family Relations Relation – Banks,
– Spouse, Children,
Financial
Siblings,
Institutions etc.
Grandparents
Legal Relations - Business
Partners i.e. Employer-employee,
Adopted children/parents, Legal
guardians, trust and trustees
In this case the **Insurable interest reduces the
beneficiary is the possibility that one person will benefit
court and not the From the death of the other. The
legal guardian concept was introduced in 1774 under
the Life Assurance Act Prior to which Life
Assurance was governed under the
Gambling Act**

27. What does the Insurance tree look like?
Insurance
tree
Life General
Assurance Insurance
Death Disability Health Non-Life
Property Casualty
Assurance – The claim is based on the amount mentioned in the Policy Cover. There can be only one claim
Insurance – The claim is based on the actual loss incurred by the claimant. There can be any number of claims on insurance

28. Definition and types of a contract
A contract is a legally enforceable agreement between two or more parties.
Types of contracts –
Contract of Indemnity – Under such contracts the benefit is based on the
actual financial losses incurred. eg. health, property, liability etc.
Valued Contract - Under such contracts the benefit is actually mentioned in
the contract . eg. Life, One off (Lata’s voice)
Bilateral Contract - Under such contracts both the parties involved make
legally enforceable promises eg. marriages
Unilateral Contracts - Under such contracts only one of the parties involved
makes legally enforceable promises eg. The Insurance Companies.

29. Commutative Contracts - Under such contracts both the parties involved
specify in advance the values of exchange. Eg. Sales agreement
Bargaining Contract - Under such contracts both the parties involved
specify in advance the terms and conditions of the contract and reserve
the right to accept or reject the same. Eg. Insurance Companies.
Adhesion - Under such contracts one of the parties involved dictates the
terms and conditions.
Aleatory Contract - Under such contracts one of the parties involved
provides something of value in exchange of a conditional promise. Eg.
Insurance.

30. Legal status and requirements of a valid contract
Valid – A contract is held to be a valid contract only if it is enforceable by law.
Void – A void contract is that contract which was never deemed to be valid
under the law.
Voidable – A voidable contract can be terminated by either of the parties
involved.
A contract is valid only if it meets the following criteria –
Contractual Adequate
Mutual Assent Lawful Purpose
Capacity Consideration
• Policy holder • Policy holder is a • Policy holder pays • Policy holder has
applies for a policy Major and of the initial insurable interest
• Insurance sound health premium
Company Accepts • Insurance • Insurance • Insurance
the application Company is Company promises Company is
registered to pay claims registered

31. What is utmost good faith ?
It is the primary duty of the applicant to voluntarily
and fully disclose all facts which are material to the
risk being proposed. It is also the duty of the
Insurance Company to disclose all benefits, risks and
material facts to the applicant. Any
misrepresentation whether material or fraudulent
between the contracting parties will affect or
influence the decision making process. Hence it is
expected that no party involved makes any
misrepresentation of the material facts to each
other. The entire process of insurance revolves
around this faith.

32. What is a claim ?
A claim is the demand that the Insurer should redeem the
promise made in the Insurance Contract. This is the time when
the Insurer has to play his part of the contract and settle the
claim after he is satisfied that all the terms and conditions in the
original contract have been complied with. He should check that :
The Insured event has in fact taken place.
The obligations to pay per the contract are complied with.
 The persons asking for performance are eligible to do so.
Nominees, Income tax Officials, Prohibitory orders, assignees
are some of the relevant eligible's.

33. Type of claims
Maturity Claims – The survival amount in the
endowment type of policies is to be paid when the term
of the policy expires (Maturity Date). Such claims are
settled by the Insurer after he confirms that there are no
assignments , the identity of the insured is clear, the age
stands admitted, the premiums are fully paid up, the
original policy is handed over to the insurer and the
discharge voucher is duly completed and signed by the
insured.

34. Survival Benefit Payments – In this case the
benefit on a Money Back Policy is paid during
the existence of the policy before the date of
maturity and the procedure is the same as in the
case of a Maturity Claim except for the fact that
the payments are made by post dated cheques
placed with the insured in advance.

35. Death Claim – Settlement of a death claim is rather
complex as it involves too many factors –
The facts relating to the death and the identity of
the deceased has to be established beyond any
doubt.
Has the death occurred within 3 years from the
commencement of the policy or the date of revival.
Whether the death was natural or unnatural due
to reasons like accident, suicide etc.
Documents like the Policy, Deeds of assignments,
proof of age, certificate of death, legal evidence of
the title, form of discharge are referred to while
settling such claims.

36. Accidents and Disability Benefits – There are certain
parameters that govern such claims. Such claims
should not arise out of intentional self injury,
attempted suicide, insanity, immorality or
intoxication. Claims arising out of accidents caused
due to aeronautics, riots, civil commotion are
excluded in such cases.
Settlement of such claims will depend on the FIR,
Panchnama, police report, post mortem report,
chemical analysis of the viscera, hospital reports etc.

37. Critical Illness Claims – Such claims are settled
after satisfactory evidence is placed before the
insurer along with all the reports. It is necessary
under such payments that the conditions of
criticality, waiting period and the illness are met.

38. Vital functions of an Broker/Advisor
The Broker’s/Advisor’s primary functional area is to solicit and procure
life insurance business for the Insurer, who has appointed him for the
purpose. Incidentally he is also trusted by the prospect to provide
suitable advise keeping in mind the circumstances and needs. The agent
has a unique role to play between the prospect and the insurer. He
would be required to –
Understand the prospects needs and persuade him to buy a plan that
suits him the best.
Help the prospect complete all the paper work expeditiously.
Assist the prospect to clear his claims if they occur.
To be ethical and honest to both the prospect and the insurer.

39. Thank you for your attention
and wish you all the best