IRDA RATES FOR MOTOR THIRD PARTY INSURANCE IN DE-TARIFF SCENARIO

                         Schedule of Premium Rates for Motor Third Party
                      Liability Only Cover (Effective from 1st January 2007
                for fresh insurances and renewals of motor insurance policies)

 

 

Filed Under: Insurance on Sunday, September 29, 2019

Proposal For Marine Insurance

Proposal For Marine Insurance

There is no requirement for proposal form in case of marine insurance. In U.K, the broker, under the instruction of the proposer, fills up a slip mentioning all the bare essentials needed for assessing the risk proposed. The clauses identifying the liabilities of the underwriter are also included in the slip.

In India the proposer himself has to approach the insurers. The General Insurance industry is capable of underwriting the entire risk, however big it may be, and reinsure any part of it. It had to be approached through agents licensed by the Controller of Insurance, the Govt. of India. Now of course the authority to issue licence lies with the IRDA. The IRDA also allowed private insurers to obtain licences for their agents. Brokers are introduced in Indian market.

COVER NOTES
A cover note is an evidence of insurance. It is as good as an insurance policy. A cover note is a temporary and limited agreement, sent prior to the completion of the proposal (preparation of the final policy document, pending some information to be filled in), or when the proposal is under consideration or the policy is being prepared for delivery. It usually serves as an interim cover, with the same terms and conditions that are generally issued for such proposals. It automatically expires at the end of the declared period. It also expires if the regular policy is issued or declined by the insurer.

Any claim arising during the period for which the cover note remains valid will be determined by the terms of the note and not by the terms of the policy subsequent to it. Where the insurer sends a temporary cover, inviting the renewal of the insurance on its expiry, it becomes enforceable if accepted by the insurer. Or else it remains as an offer waiting for an acceptance.

Some insurers charge a nominal fee for the issue of cover notes. In fact there will be a statement in the cover note that this is issued subject to the terms and conditions of insurance policy to be issued. This cover rate is different from the premium, which is the consideration for the Contract of Insurance.

Some of the circumstances when cover notes are issued are when negotiations for insurance are in progress and it is necessary to provide cover on a provisional basis or when the premises are being inspected for determining the actual rate applicable. The cover note is not stamped but represents the same insurance as that provided by the policy. The cover note is subject to the usual terms and conditions of the insurers policy for the class of insurance insured. It is also subject to any special clauses if applicable, e.g. Agreed Bank Clause, Declaration Clause etc

THE SLIP
 The “Slip” is a document mentioning all the essential information needed for assessing the risk proposed. The clauses identifying the liabilities of the underwriter are also included in the slip. The insurance broker acting as the agent of the insured prepares the slip. The broker takes it to a leading underwriter and tries to get the best deal for this client. The underwriter agrees to the amount he is willing to cover and signifies his ascent on the slip by initialling it.

Unlike the cover note the slip serves as the acceptance to the proposal by the underwriter, and is binding on the underwriter for the issuance of a policy according to its terms.The slip should be correctly stamped under the Stamp Act. Under Sec. 23 of the Marine Insurance Act, 1963, the ‘slip’, ‘covering note’ or any other ‘customary memorandum of the contract’ can only be used for the purpose of reference, and showing when the offer was accepted. However, no action can be brought about on the basis of these documents. ‘The policy may be executed and issued either at the time when the contract is concluded or afterwards’, (Section 24). Section 88 of The Marine Insurance Act 1963 states that, ‘where there is a duly stamped policy, reference may be made, as heretofore to the slip or covering note, in any legal proceeding’. The corresponding British Act was passed in 1906. This practice is not followed in India. This is a British market practice.

CERTIFICATE OF INSURANCE
Many statutory authorities have need to verify the existence of an insurance policy in order to fulfill their duties such as issue of motor driving license, issuing a letter of credit to an international trader, or sanctioning a loan on hypothecation of goods. It is understood that there may be some delay in the issue of insurance policies. This it is hoped may not be the case in future with the advent of information technology and increasing computerization in trading and manufacturing enterprises.

The certificate of insurance will generally be printed and will both be dated and numbered. A certificate will not be valid unless it is signed by an authorized signatory of the insurance company. The certificate of insurance will mention brief details of the insured, the location and situation of property, the sum insured and the period of insurance. Some certificates do mention the premium even though in the majority of cases it is not mentioned. Common examples are Certificates of Insurance in Automobile Insurance, Marine Cargo Insurance and Fire Insurance.

In Group Personal Accident Insurance, which covers a large number of employees of a company, insurers have the practice not to issue policies to all the employees but to issue only individual certificates of insurance. Usually, the single policy that is issued is kept with the Employer.

CO-INSURANCE
Where the amount of insurance on large industrial complexes is substantial, it is possible for the insured to interest different insurers in the risk for varying proportions of acceptance, so that the total is covered. The practice is for each insurer to issue a policy with a specification or schedule giving a description of the property insured, with the “co-insurance clause” included therein.

Survey of the risk, rating, collection of premium and preparation of the specification is carried out by the “leading office”, that is the office carrying the largest share in the business.

Co-insurance in British circles means insuring part of the value at risks as agreed with the original insurer. All co-insurances are agreed upon prior to the issue of the original policy. The co-insurances in practice are dictated by business connections or for reducing the insurers’ commitments. Where different insurers have a history of association with subsidiaries, Co-insurance is generally made between them.

The co-insurers will be given a percentage of the original premium depending on their share of the sum insured and also bear a ratable share of loss where there is co-insurance. The names of co-insurers with the share of the sum insured will be mentioned in the original policy. This is called a collective co-insurance policy. Sometimes, co-insurers for their relative share of sum insured issue individual coinsurance policies. Methods by which co-insurance agreements are transacted can be summarised as follows:

Method I: Each insurer issues a separate policy for the proportion of interest insured. In the event of loss, each company’s liability is limited to such proportion of loss.

Method II: The specification of the property is attached to the policy issued by the leading office. The policy is signed by the leading office for its proportion of insurance and then signed by the other insurers for their respective shares of interest. This is called as a collective policy.

Method III: The leading office issues the policy and signs on behalf of the participating insurers. A clause called “collective clause” is incorporated in the policy.

A letter of authority is issued by the “participating insurers” to the “leading office” for the following:

Signing the policies, endorsements, and renewal receipts

Collection and adjustment of premium

Inspection of risk Settlement of standard claims.

After receipt of the premium or the payment of a claim is made, the leading office makes arrangements for payment to or recovery from the co-insurers of their proportion of the premiums and the claims as the case may be.

INSURANCE RENEWAL NOTICE
This is the notice sent by the insurer to the insured calling for renewal of the policy. This is a traditional formality. Although it is not obligatory on the part of insurers to intimate to the insured regarding the policy renewal date, yet as a matter of courtesy and healthy business practice, insurers generally send renewal notices.

This is normally sent at least a month before the expiry of the policy. This is not necessary but useful especially where there is competition. Many times the insureds do not renew the policy merely because they did not receive the renewal notice; then it becomes a matter of prestige.

Sometimes the insurers do not seek renewal where the loss experience is adverse. For renewal notices to be sent, there must be proper registration of all the risks. A renewal register is maintained based on copies of policies issued in an office, that is why, whenever a policy is cancelled a copy of the cancellation notice must be sent to the person or the section maintaining the renewal register. The renewal notice mentions the premium payable for renewal along with the breakup indicating loading and discounts as permissible.

The renewal notice incorporates all the relevant particulars of the policy such as the sum insured, the annual premium, etc. The insured is also advised in the note that he should intimate any material alteration in the risk, if any. In a motor renewal notice for example, the insured’s attention is

drawn to revise the sum insured (i.e. the insured declared value) in the light of current market values.

Lastly, the insured’s attention is also drawn to the statutory provision that no risk can be assumed unless the premium is paid in advance.  

Filed Under: Insurance on

PROPOSAL FOR INSURANCE

  PROPOSAL FOR INSURANCE

(1) Except in cases of a marine insurance cover, where current market practices do not insist on a written proposal form, in all cases, a proposal for grant of a cover, either for life business or for general business, must be evidenced by a written document. It is the duty of an insurer to furnish to the insured free of charge, within 30 days of the acceptance of a proposal, a copy of the proposal form.

(4) Where a proposal form is not used, the insurer shall record the information obtained orally or in writing, and confirm it within a period of 15 days thereof with the proposer and incorporate the information in its cover note or policy. The onus of proof shall rest with the insurer in respect of any information not so recorded, where the insurer claims that the proposer suppressed any material information or provided misleading or false information on any matter material to the grant of a cover.

or in writing or by the completion of a printed proposal form supplied by the insurer. So proposal has to be in writing or confirmed in writing and can not be oral alone.

These proposals are called as applications for insurance in USA, and the Britishers call it Proposal Forms. One who seeks cover is the proposer. The proposer must have a property, which may be at risk or he or she may have dependents who will suffer financial loss at his or her death.

General Insurance deals with property and liability risks (also humans – Personal Accident & Health Insurance). From some event the organizer of the event or the owner of a property or a contractor at a situation may incur a legal liability to others from injury to them. These others are called third parties because the two parties to the contract of insurance are the insured and insurer.

The seeker of cover or protection must furnish accurate and truthful answers to the many questions contained in the Proposal Form. The proposal form will be similar for most property risks, but may differ depending on certain special adverse features of the risk.

Material facts disclosed in a proposal form Some common questions, which occur in all proposal forms, and also particular questions, which relate to specific risks.

A typical property insurance proposal form will, inter alia, include the following common information, which is sought:

(1) Name, address, telephone number, and other personal identification details

(2) The situation of the property

(3) Proposer’s profession

(4) Previous and present insurance

(5) Loss experience

(6) Sum insured

(7) The contents on the premises in the location.

(8) The type of property mentioning whether hazardous, non-hazardous and extrahazardous.

(9) The type of fire protection available.

(10) The proportion of ownership of others in the property at risk, in other words, specifying the interest of mortgagee like banks or lessees.

(11) The nature of adjoining risks, say, what are the people who are the applicant’s immediate neighbours doing.

(12) The value at risk or the sum proposed for insurance or as is generally known as sum insured. The proposal form generally ends with a declaration to be signed by the proposer. In this the proposer must declare that whatever information he has provided is true to the best of his/her knowledge. Such a declaration becomes the basis of the insurance contract. Every proposal form must also be dated.

 Proposal for Non-Marine Insurance Generally in non-marine insurance, the applicant is required to fill a proposal form containing important questions for the purpose of risk assessment. The applicant declares at the end of the form and warrants that all information stated in the proposal form are true to the best of his knowledge. The proposer agrees that the answers to the questions in the form would be the basis of the insurance contract. The material facts disclosed in the form are assumed to remain constant, till the day the contract comes into existence. Any change before this date must be brought to the notice of the insurer to get the offer re-approved.

When the insurance contract comes into being on the basis of the statements recorded in the proposal form the insurer can avoid liability, if any of the above statements are found 

untrue. (underwriter should ensure that none of the questions are left blank or just put ‘---’. Otherwise, in case of dispute, it will be construed in favour of the insured in case of a disputed claim)

Filed Under: Insurance on

INSURANCE REGULATORY AND DEVELOPEMNT AUTHORITY (IRDA)

The Committee on reforms of the insurance sector under the chairmanship of Shri R N Malhotra, ex-governor of Reserve Bank of India, recommended for the creation of a more efficient and competitive financial system in tune with global trends. It recommended amendments to regulate the insurance sector to adjust with the economic policies of privatization. The government in pursuance of the recommendation of the committee, decided to establish a Provisional Insurance Regulatory and Development Authority in 1996, to replace the erstwhile authority called the Controller of Insurance constituted under the Insurance Act, 1938, which initially worked under the Ministry of Commerce and later transferred to the Ministry of Finance.

 Finally, the decision to establish the Insurance Regulatory and Development Authority was implemented by the passing of the Insurance Regulatory and Development Authority Act, 1999. In India, presently after the opening up of the insurance sector, the regulator for the monitoring of the operations of the insurance companies is the IRDA, having its head office in Hyderabad. The regulatory framework mainly aims to focus on three areas, viz.,

The protection of the interest of the consumers
To ensure the financial soundness of the insurance industry
To pave the way to help a healthy growth of the insurance market where both the government and the private players play simultaneously.

Some of the important duties, powers and functions of Authority include to

 Issue certificate of registration, to applicants interested in insurance business, and also to renew, modify, withdraw, suspend or cancel such registration
Specify requisite qualifications and practical training for insurance intermediaries and agents Specify the code of conduct for surveyors and loss assessors
 Levy fees and other charges for carrying out the purposes of this Act
Control and regulate the rates, terms and conditions that may be offered by insurers in respect of general insurance business
Regulate investment of funds by insurance companies
Regulate maintenance of margin of solvency
Adjudication of disputes between insurers and insurance intermediaries
Supervise the functioning of the Tariff Advisory Committee

Specify percentage of life and general insurance business to be undertaken by the insurer in the rural or social sector.
The Authority shall consist of the following members namely a chairperson, five wholetime members and four part-time members, to be appointed by the Central Government from amongst persons of ability, integrity and standing who have knowledge or experience in life insurance, general insurance, actuarial science, finance, economics, law, accountancy, administration or any other discipline.

 The Chairperson and every other whole-time member shall hold office for a term of five years provided that no person shall hold office as a whole-time member after he has attained the age of sixty-two (65 years for Chairman) years. A part-time member also shall hold office for a term not exceeding five years from the date on which he enters upon his office.

The IRDA shall constitute a fund to be called “the Insurance Regulatory and Development Authority Fund” and there shall be credited thereto –
(a) All Government grants, fees and charges received by the Authority;
(b) All sums received by the Authority from such other source as may be decided upon by the Central Government;
(c) The percentage of prescribed income received from the insurer.
The fund shall be applied for meeting –

Salaries, allowances and other remuneration of the members, officers and other employees of the Authority;

Other expenses of the Authority in connection with the discharge of its functions and for the purposes of this Act

Filed Under: Insurance on Saturday, September 28, 2019

Insurance Business Nationalization Act, 1972

applicable as specified by the Central Government under powers conferred by section 35 of the General Insurance Business (Nationalization) Act.

The important provisions of the Act relate to:

 Registration: Every insurer is required to obtain a Certificate of Registration from the Controller of Insurance, by making the payment of requisite fees. Registration should be renewed annually.

Accounts and audit: An insurer is required to maintain separate accounts of the receipts and payments in each class of insurance viz. Fire. Marine and Miscellaneous Insurance. Apart from the regular financial statements, the companies are required to maintain the following documents in respect of each class of insurance:

Record of Cover notes specifying the details of the risk covered
Record of policies
Record of premiums
Record of endorsements
Record of Bank guarantees
Record of claims
Register of agency force and business procured by each with details of commission
Register of employees
Cash Books
Reinsurance details
Claims register

Investments: 
Investments of insurance company are usually made in approved investments under the provisions of the Act. The guidelines and limitations are issued by the Central Government from time to time.

Limitation on management expenses:
 The Act prescribes the maximum limits of expenses of management including commission that may be incurred by an insurer. The percentages are prescribed in relation to the total gross direct business written by the insurer in India.

Prohibition of Rebates: The Act prohibits any person from offering any rebate of commission or a rebate of premium to any person to take insurance. Any person found guilty would be punished with a fine up to five hundred rupees

Powers of Investigation:
The Central Government may at any time direct the Controller or any other person by order, to investigate the affairs of any insurer and report to the central government.

Other Provisions: Other provisions of the Act deal with the licensing of agents, surveyors, advance payment of premium and Tariff Advisory Committee (TAC).

Prohibition of rebates
Powers of investigation
Licensing of agents
Advance payments of premiums
Tariff Advisory Committee

Filed Under: Insurance on

FUNDAMENTAL PRINCIPLES GOVERNING GENERAL INSURANCE CONTRACTS

The business of insurance aims to protect the economic value of assets or life of a person. Through a contract of insurance the insurer agrees to make good any loss on the insured property or loss of life (as the case may be) that may occur in course of time in consideration for a small premium to be paid by the insured.

Apart from the above essentials of a valid contract, insurance contracts are subject to additional principles. These are:

Principle of Utmost good faith
Principle of Insurable interest
Principle of Indemnity
Principle of Subrogation
Principle of Contribution
Principle of Proximate cause

These distinctive features are based on the basic principles of law and are applicable to all types of insurance contracts. These principles provide guidelines based upon which insurance agreements are undertaken.

A proper understanding of these principles is therefore necessary for a clear interpretation of insurance contracts and helps in proper termination of contracts, settlement of claims, enforcement of rules and smooth award of verdicts in case of disputes.

The principle of utmost good faith

Definition A positive duty voluntarily to disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not.

This principle of insurance stems from the doctrine of “Uberrimae Fides” which is essential for a valid insurance contract. It implies that in a contract of insurance, the concerned contracting parties must rely on each other’s honesty.

Normally the doctrine of “Caveat Emptor” governs the formation of commercial contracts which means ‘let the buyer beware’. The buyer is responsible for examining the good or service and their features and functions. It is not binding upon the parties to disclose the information, which is not asked for.

But in case of insurance, the products sold are intangible. Here the required facts relate to the proposer, those that are very personal and known only to him. The law imposes a greater duty on the parties to an insurance contract than those involved in commercial contracts. They need to have utmost good faith in each other, which implies full and correct disclosure of all material facts by both the parties to the contract of insurance.

The term “material fact” refers to every fact or information, which has a bearing on the decisions with respect to the determination of the severity of risk involved and the amount of premium. The disclosure of material facts determines the terms of coverage of the policy. Any concealment of material facts may lead to negative repercussions on the functioning of the insurance company’s normal business.

Non-disclosure of any fact may be unintentional on the part of the insured. Even so such a contract is rendered voidable at the insurer’s option and it can refuse any compensation.

Any concealment of material facts is considered intentional. In this case also the policy is considered void. The intentional non-disclosure amounts to fraud and un-intentional disclosure amounts to voidable contract.

 For example, disclosures in life insurance pertain to age, income, health, residence, family details, occupation and plan of insurance. Similarly, in case of property or general insurance, the material facts pertain to the details of the property (car) such as year of make, usage, model, seating capacity etc. particularly in case of marine insurance, the insurance company may not always be in a position to inspect the ship at the port physically and it relies solely on the facts provided by the insured. Hence it is imperative on the part of the insured to disclose all the facts voluntarily

Utmost good faith principle imposes duty of disclosure on both the insurance agent and the company authorities also. Any laxity at this point may tilt judgments-in favor of the insured in case of a dispute.

However, some the following facts need not be disclosed:

Circumstances which diminish the risk (such as fire or burglary alarms set)
Facts which are known or reasonably should be known to the insurer in his ordinary course of business
Facts which are waived by the insurer
Facts of public knowledge
Facts of law Facts covered by policy conditions.
Breach of duty of Utmost Good Faith
Breach of duty of Utmost good faith arise under one or both of the following:

a) Misrepresentation which may be either innocent or fraudulent with reference to false facts, material to the acceptance or assessment of the risk.
b) Non-disclosure which may be either innocent or fraudulent gives grounds for avoidance by the second party where a fact is within the knowledge of the first party and not known to the second party.

Principle of Insurable Interest
 Definition: The legal right to insure arising out of a financial relationship recognized under the law, between the insured and the subject matter of insurance.

The existence of insurable interest is an essential ingredient of any insurance contract. It is an important and fundamental principle of insurance. Insurable interest simply means “right to insure”. The policyholder must have a pecuniary or monetary interest in the property, which he has insured. The subject matter of insurance can be any type of property or any event that may result in a loss of a legal right or creation of a legal liability.

Therefore the essentials of insurable interest include:

There must be some property, right, interest, liability or potential liability capable of being insured. It is this property, right etc, which must be the subject matter of insurance.

The insured must stand in a relationship with the subject matter of insurance

whereby he benefits from its safety, well being or freedom from liability and would be prejudiced by its loss, damage or existence of liability.

The relationship between the insured and the subject matter of insurance must be recognized at law.

 For example, the subject matter of insurance under a fire policy can be a building, stocks, machinery, under a liability policy it can be a person’s legal liability for injury or damage, a ship in a marine policy etc. Any damage to the property must result in financial loss to the policyholder. Only then insurable interest is said to exist.

There are a number of ways in which insurable interest will arise or be limited:

a) By Common Law: under common law insurable interest is automatically created by ‘ownership’ rights. Similarly, the common law of ‘duty of care’ that one owes to the other may give rise to a liability which is also insurable. For E.g. the owner of a tractor who depends on it for his agricultural operation stands to lose financially if the tractor meets with an accident, as his business will come to a standstill. Thus the owner has an insurable interest in the asset, i.e., his tractor. Hence the tractor forms the subject matter when insurance is purchased on it.

b) By Contract: sometimes insurable interest is also created by contractual obligations. For example, a lease agreement between a landlord and a tenant may make a tenant responsible for the maintenance or repair of the building. This contract places the tenant in a legally recognized relationship to the building which gives him insurable interest.

c) By statute: sometimes an act of parliament may create insurable interest either by granting a benefit or by imposing a duty.

Application of insurable interest

 There are three main categories of application of Insurable interest as mentioned below:

Life

Every individual has unlimited insurable interest in his or her own life. In life insurance context, insurable interest is deemed to exist in the case of certain relationships based on sentiment. (E.g. Husband & wife, parent & child) Insurable interest is also deemed to exist when the members of a family are in business together. Under such circumstances, it is not the family ties which create insurable interest but it is the extent of financial involvement that creates insurable interest. The business partners can insure each other’s lives because they stand to loose in the event of the death of any of them. 

Filed Under: Insurance on

GENERAL INSURANCE CONTRACT DESIGN

LEARNING OBJECTIVES
To understand the mechanism of insurance as a risk transfer system, a business and a contract To understand the application of the provisions of the Indian Contract Act to insurance contracts To study the fundamental principles governing general insurance contracts To examine the various provisions required for enforcement of an insurance contract

INTRODUCTION OF INSURANCE 
Every individual family and business organization needs insurance, for inherent risk exposures to which they are exposed. Insurance seeks to redress the assured from the financial consequences of the loss exposures in the event of the uncertain event happening, resulting in a loss of his assets, or properties or even income earnings.

 Insurance is actually a combination of three elements 
 A transfer system A business A contract Insurance as a Transfer System As a transfer system, insurance enables a person, family or business to transfer the costs of losses to an insurance company. In turn the company pays for the insured

losses and distributes the costs of losses among all insureds. Thus, the key elements of insurance as a transfer system refers to the transferring of risks from the insured to the insurance company which is financially sound and has the capacity and willingness to take risks. The person transfers the consequences of a loss to the company, thereby exchanging the possibility of a large loss for the certainty of a much smaller periodic payment (premium). For transferring a cost of loss it is not necessary for a loss to occur or exist. A mere possibility of a loss constitutes a loss exposure that can be insured or transferred.

A Loss exposure can give rise to three types of losses, namely:

Property loss (including net income loss),
Liability loss, and
Human and personnel loss.
On the other hand, sharing of risks implies the pooling of premiums paid by the insureds into a fund out of which the losses are paid as and when they occur.

Thus, the role of insurance is to protect insured’s assets from the financial consequences of loss. But, not all risks are insurable. Insurance covers only pure risks. (Discussed in Chapter I of Module I).

Insurance as a Business
As a business, insurance primarily attempts to meet its costs and expenses from the premium that it earns and also make a reasonable margin of profit for its own sustainability. As a business organization, it provides jobs to millions of people in life and non-life insurance companies, agencies, brokerage firms. The various operations of these companies include marketing, underwriting, claims handling, ratemaking and information processing. As a business concern, it also needs to satisfy the regulators, insureds and others of its financial stability. Therefore, to protect the consumers, the regulator monitor the rates, policy forms, solvency margins, and also investigate complaints and consumers’ grievances. In addition to payment of losses, the business of insurance offers several benefits to individuals and families and to the society as a whole such as:

Payments for the costs of covered losses
Reduction of the insured’s financial uncertain
Efficient use of resources
Support for credit Satisfaction of legal requirements
Satisfaction of business requirements
Source of investment funds for infrastructure development
Reduction of social burden

However, the benefit of insurance is not cost free. There are some direct costs as well as indirect costs which are incurred, such as the premiums paid, operating costs of the insurers, opportunity costs, increased losses, and increased law suits.

Insurance as a contract
 As a contract, an insurance policy is a legally enforceable contract. The contract is between the insurance company and the insured. Through insurance policies, the insured transfers the costs of losses to insurance company. In return for the premiums paid by the insured, the insurers promise to pay for the losses covered under the policy.

The policy contains all the terms and conditions for its enforceability, and the benefits payable by the insurer. The breach of these conditions by either party will result in the invalidation of the contract. Thus, through the coverage provided by insurance polices, the individuals, families and businesses are enabled to protect their assets, and minimize the adverse financial affects of losses. Hence, an insurance contract needs to be interpreted and carefully designed so that, all fortuitous losses are covered and insured against.

The most common four basic types of insurance (property, liability, life and health) are generally divided into two broad categories:
1. Property/Liability insurance

2. Life/Health insurance

1. Property insurance provides coverage for property and net income loss exposures. It protects an insured’s assets by paying to repair, or replace property that is damaged, lost, or destroyed or by replacing the net income lost and extra expenses incurred as a result of property loss. Liability insurance covers the liability loss exposures. It provides for payments on behalf of the insured for injury to others or damage to others’ property for which the insured is legally liable.

2. Life and health insurance cover the financial consequence of human (personal) loss exposures. Life insurance replaces the income-earning potential lost through death and also helps to pay expenses related to insured’s death. Health insurance provides additional income security by paying for medical expenses. Disability income as popular in most of the Western countries, replaces as insured’s income if the insured is unable to work because of injury or illness.

DEFINITION OF CONTRACT
An agreement enforceable by law is called a contract. It creates certain rights and obligations for parties agreeing to it. A valid contract is one, which the court enforces.

 Requirements of an insurance contract
 Insurance contracts are also governed by the provisions of the Indian Contract Act, 1872. In general, there are four requirements that are common to all valid contracts. To be legally enforceable, an insurance contract must meet these four requirements:

1. Offer and acceptance
2. Consideration
3. Capacity
4. Legal purpose

1. There must be valid offer and acceptance:
The first requirement of a binding insurance contract is that there must be an offer and an acceptance of its terms. In most cases, the applicant for insurance makes this offer, and the company accepts or rejects the offer. An agent merely solicits or invites the prospective insured to make an offer. A legal offer by an applicant for insurance must be supported by a tender of the premium and it should always be prior to commencement of the ‘coverage’. The agent usually gives the insured a conditional receipt that provides that acceptance takes place when the insurability of the applicant has been determined by the Insurer. In property and liability insurance, the offer and acceptance can be oral or written.

2. Promises must be supported by the exchange of Consideration:
A consideration is the value given to each contracting party. The insured’s consideration is made up of the monetary amount paid in premiums, plus an agreement to abide by the conditions of the insurance contract. The insurer’s consideration is its promise to indemnify upon the occurrence of loss due to certain perils, to defend the insured in legal actions, or to perform other activities such as inspection or collection services, or loss prevention and safety services, or as the contract may specify.

3. Parties must have legal capacity to contract:
This requirement of a valid insurance contract is that each party to a contract must be legally competent. This means the parties must have legal capacity to enter into binding contract. Parties who have no legal capacity to contract include: l Insane persons who cannot understand the nature (obligations and liabilities) of the agreement l Intoxicated persons l Corporations acting outside the scope of their charters, bylaws, or articles of incorporation, or authority l Minor

NOTE:Minors normally are not legally competent to enter into binding insurance contracts; but most states have enacted laws that permit minors, such as a teenager age 15, to enter into valid life or health insurance contract.

4. Agreement must be for legal purpose: For insurance policies, this requirement means that the contract must neither violate the requirements of insurable interest nor protect or encourage illegal ventures. In other words, an insurance policy that encourages or promotes something illegal and immoral is contrary to public interest and cannot be enforced.

EXAMPLE: A street pusher of heroin and other illegal drugs cannot purchase property insurance policy that would cover seizure of the drugs by the police.

Filed Under: Insurance on

Motor insurance: The Loss making portfolio in a regulated set up

Generally the countries with a tariff regime and with a controlled market tend to have higher premium than those of the free market. In India, however the situation is different. The motor premium rates were among the lowest in the world. The average motor premium ranges from 2 to 3 per cent of the value of the vehicle as compared to 8 per cent in western countries. The reason is due to the absence of data in the Indian market to support a justifiable pricing mechanism. The older insurers, who had a market share of more than 80 per cent were unable to generate adequate database to enable scientific calculations for risk assessment and rating of different groups of vehicles. Therefore, underwriting in the transport sector was perceived to be a losing proposition, with claims well over 120 per cent of the gross premium income. The net result was that the administered pricing became flawed in the absence of data. For the same reason, the commercial vehicle operators, users, lobbyists, Government or the Courts could not be convinced to approve increase in rates even in the wake of deterioration of claims experience of the insurers.

 Traditionally, the following lines of business were governed by tariffs prescribed by Tariff Advisory Committee (TAC):

 

                                                                                                                                                    

EVOLUTION OF DE-TAFIRRING CONCEPT

 As discussed earlier, in a competitive market, the products need to be priced equitably based on their individual risk experience which was not practiced due to tariff restrictions. It was alleged that tariffs were rigid based on out-dated statistical data, and that premium rates were not revised in response to the market dynamics. It resulted in heavy cross subsidy of premium for those lines of business which had persistent high claims ratio, for e.g. Motor Third Party. Further, the private players refrained from underwriting the loss making areas such as stand alone liability policy and on the other, they clamoured for detariffing of motor portfolio. They also had in place sophisticated IT set ups and systems capable of statistical analysis of various risk factors over and above the ones prescribed by the motor tariff. The awareness among customers in the wake of liberalization also resulted in a movement towards risk based rating rather than a rigid tariff structure. Representations were received too by the IRDA that insurers were not willing to offer Mandatory Third Party Liability cover and that there were loading the own damage policies. The Authority therefore considered moving to a tariff free regime in a phased manner. It constituted a Committee under the Chairmanship of Justice T.N.C. Rangarajan to examine the various aspects of motor underwriting including de-tariffing and pooling arrangements.

Rangarajan S. committee on motor insurance

The Committee assisted by members representing the insurance companies, automobile manufactures, car owners, truck operators consumers, policyholders, surveyors, an advocate and a representative of the Government of India has studied at length on the issues and difficulties faced by various interests of the industry. Third party liability insurance being the only way of funding social security, worldwide, the system of compulsory vehicle insurance is followed. The report has mentioned the advantages, of, and fears, that were expressed on the projected de-tariffing. The advantages projected were:

- Competition will improve efficiency 

- Efficiency will lead to reduction of premia and benefit policyholders 

- It is part of the reforms towards liberalized economy. The fears apprehended were:

- De-tariffing may make insurance unavailable at reasonable premia 

- Companies may form cartels and jack up the premia 

- Free market may lead to insolvency of companies and loss of protection for policyholders. 

 The problems relating to the own damage portion of the motor tariff were examined by a committee. Suggesting for de-tariffing, the committee stated that liberalization means allow the market to function in the competitive environment. It expressed hope that competition would improve efficiency and consumers will benefit by not only price reduction but also value addition while industry may benefit by introduction of newer technology and innovation. It also added that by de-tariffing, companies would be interested in marketing their products innovatively and with cost cutting may reduce the premia to gather a wider market share. However, de-tariffing requires safeguards for uninsurable vehicle owners. There should be a mechanism for an appeal to an insurance pool which would consider proposals rejected by the companies and grant insurance on premium loaded according to risk perception. At the end of their study, the Committee recommended that the IRDA may:
a) Quarantine the Third Party liability insurance business and its accounting in insurance company’s books;
b) Request the Government of India to review the statutory liability for third party liability for motor vehicle accidents;
c) Set up an independent data bank under TAC and compel the companies to supply the data to the bank, and draw on the bank data to justify proposed tariffs;
d) De-tariff the own damage business of motor portfolio under a competitive premium setting model by a file and use procedure with a time frame for the change over.

Steps taken by IRDA (for motor)
 As the committee after examining various alternatives finally concluded that the initial step in regard to de-tariffing of the premium structure could be undertaken in the case of the own damage portion of the motor insurance, a meeting of all CEOs of the general insurance companies was held in Hyderabad on 6th of May, 2003. The meeting agreed unanimously to usher effective 1st of April, 2005 a system of free pricing on the own damage portion of the motor liability.

As a follow up of the recommendations made in the report of Justice Rangarajan Committee, Authority constituted a committee under the chairmanship of Shri S.V. Mony for preparing a roadmap to detariffing of the premium structure of Own Damage portion of the Motor Insurance.

However, in order to derive the rates in a scientific manner based on market dynamics, it is essential to have accurate data on the different lines of business, which was abysmal in the general insurance industry. The insurers were unable to generate adequate database to enable scientific calculations for risk assessment and rating of different groups of vehicles. For free-pricing of products, data base relating to different

classes of risks had to be collected, compiled, disseminated and analysed which was a time consuming activity. Hence, the detariffing of Motor OD Business could not take off on 1st April, 2005, as proposed earlier and the general insurers expressed that the de-tariffing should take place across the board for all business portfolios instead of Motor (OD).

A small beggining
Pending the issue of de-tariffing of motor (OD) insurance, Tea Crop Insurance (2) Cardamom Insurance (3) Coffee Insurance (4) Rubber Insurance (5) Package policy for exporters under Duty Exemption Scheme were de-tariffed w.e.f. 01/04/04 and all the non-life insurance companies were advised to file the products with IRDA under file and use procedures of Authority.

DE-tariffing of Marine Hull insurance
Continuing the spirit of competition, all general insurers who wish to write marine hull class of business were allowed to go out of the tariff from 1.4.2005. However, it was mandated that they shall follow the existing policy wordings, terms and conditions including clauses such as the Institute clauses till further orders.

Data collection
To fill up the gap of non-availability of accurate data for proper pricing, as a first step, IRDA in consultation with the insurers devised new formats for collection of past data as well as future data in the field of motor and health insurance. New formats were devised taking into account various risk factors hitherto not considered by the rigid tariff structure.

For instance, the salient features of the new format for collection of motor data were the introduction of various code masters. The code masters relate to
i) Insurer
ii) Policy
iii) Class of vehicle
iv) Make of vehicle
v) Zone
vi) Cubic Capacity (CC)/ Passenger Carrying Capacity (PCC)/ Gross Vehicle Weight (GVW)
vii) Nature of loss
viii) Nature of goods
x) Road Type
xi) Driver Type
xii) Driver Age
xiii) Driver experience
xiv) Driver education
xv) Incurred claims experience
xvi) Claims History of the vehicle
xvii) Nature of injury
xviii) Occupation
xix) Reasons for Court Hearing and
xx) Type of Summons These formats covered the details on driver, geographical zone of driving and the vehicle which are indispensable for rate fixing in equitable manner in a detariff regime.

Road map for a tariff free regime

 With the intention to ensure that there is an orderly movement from tariff regime to the future set up, on 23rd September, 2005, IRDA circulated a detailed note to all general insurers outlining the various steps to be taken by insurers for movement to a tariff-free market. Considering the existence of tariffs contrary to free-market forces, the road map has emphasized the need for strengthening internal capabilities of insurers.

IRDA enunciated the various steps to be taken by insurers in the following areas:
i) Underwriting
ii) Rating of risks
iii) Policy terms and conditions
iv) Corporate governance

 Exposure Draft Guidelines on File & Use procedures
 After notifying the road map, the Exposure draft on File & Use guidelines prepared by IRDA was placed on the website of IRDA seeking comments of insurers and industry for filing of products, to be filed once de-tariffing takes place. The guidelines were discussed at length and the responses were consolidated for finalizing of the guidelines

 Guidelines on file & Use procedures for general insurance products
 Based on the feedback received on the exposure draft guidelines on File & Use procedures, IRDA requirements for consideration and review of products under File & Use guidelines along with underlying logic are as under:
(i) Design and rating of products must always be on sound and prudent underwriting basis. The contingencies insured under the product should be clear and provide transparent cover which is of value to the insured.
(ii) All literature relating to the product should be in simple language and easily understandable to the public at large. As far as possible, a similar sequence of presentation may be followed. All technical terms should be clarified in simple language for the benefit of the insured.
(iii) The product should be a genuine insurance product of an insurable risk with a real risk transfer. Alternate risk transfer or financial guarantee business in any form will not be accepted.
(iv) The insurance product should comply with all the requirements of the Protection of Policyholders Interests Regulations 2002.
(v) Insurers should use as far as possible, similar wordings for describing the same cover or the same requirement across all their products. For example clauses on renewal of insurance, basis of insurance, due diligence, cancellation, arbitration etc., should have similar wordings across all products.
(vi) The pricing of products should be based on appropriate data and with technical justification.
(vii) The terms and conditions of cover shall be fair between the insurer and the insured.
(viii) Margins built into rates shall be consistent with the experience of the insurer in respect of commission, management expenses, contingencies and profit.
(ix) Insurer should take necessary steps in ensuring that competition will not lead to unprincipled rate cutting and other improper underwriting practices.


Final take off

Finally, the IRDA confirmed withdrawal of tariffs effective from 1st January, 2007. It was reiterated that the tariff general regulations, other than those relating to rating viz. terms, conditions, clauses, warranties, policy wordings etc. shall continue to be followed until further orders. In case of the mandatory motor TP, where the insurers have been expressing difficulty to underwrite unless they are permitted to charge the premium that they consider appropriate (which means heavy premium in commensuration with

high claim ratios of motor portfolios) rates are prescribed by regulator. The Authority also issued Order directing insurers that they shall not refuse cover for third party risks. The underlying reason for existence of price regulation is consumer pressure to avoid enhancement of premium and to ensure that insurers shall provide motor third party liability insurance cover to all vehicles. Formation of Motor Third Party Insurance Pool As per Section 34 of the Insurance Act, the IRDA directed that all general insurers registered to carry on general insurance business including motor insurance business or general reinsurance business shall collectively participate in a pooling arrangement with the following provisions to share in all motor third party business written by any of the registered general insurers:

1. Participation in pooling arrangement: Every insurer registered to carry on general insurance business (including motor insurance business) or general reinsurance business shall automatically participate in the pooling arrangement to the extent set out herein.

2. Underwriting insurers: Every underwriting office of every insurer that is authorized to underwrite motor insurance business for the insurer shall also be authorized to underwrite motor third party insurance business that will be shared among all insurers through the pooling arrangement.

3. Pooling mechanism: The pooling of business among all insurers will be achieved through a multi-lateral reinsurance arrangement between the underwriting insurer and all the other registered insurers carrying on general insurance business s (including motor insurance business) and general insurance reinsurers.

4. Participation in motor third party insurance pooled business: The participation of General Insurance Corporation of India (GIC) in the Pooled business shall be such percentage of the motor business that is ceded to it by all insurers as statutory reinsurance cessions under Section 101A of the Insurance Act. The business remaining after such cession to GIC shall be shared among all the registered general insurers writing motor insurance business in proportion to the gross direct general insurance premium in all classes of general insurance underwritten by them in that financial year.

5. Underwriting of business: Underwriting offices of insurers shall follow the underwriting instructions of the General Insurance Council in the matter of procedures for underwriting and documentation and accounting and settlement of balances. The business shall be underwritten at rates and terms and conditions of cover as notified by the Authority from time to time. No vehicle owner shall be denied third party insurance cover in respect of his vehicle which is holding a valid permit for use on public roads except on grounds of attempted fraud.

6. Claims processing and settlement: All claims in respect of third party death or injury or physical damage shall be processed for settlement in a speedy and efficient manner in accordance with the instructions of the General Insurance Council. For this purpose, the Council shall adopt a pro-active claims settlement policy adopting the most efficient claims processing practices possible.

7. Administration of the Pooling arrangement: The GIC shall act as the administrator of the pooling arrangement. It will act under the guidance of the General Insurance Council. For this purpose, the Council may establish such Committees of insurers as are necessary to operate the Pooling arrangement and process and settle claims in the most efficient manner.

8. Remuneration: There will be no agency commission or brokerage payable in respect of motor third party insurance business. The underwriting insurer will be paid a reinsurance commission of 10% on the premium ceded by it to all the other insurers and reinsurers. The GIC as administrator shall be paid a fee of 2.5% of the total premium on motor third party insurance business in respect of the business underwritten for the pooled account. Each insurer shall bear the cost of hardware required to operate the pooling arrangement within its offices. The GIC will bear the cost of hardware necessary to administer the pooling arrangement in its offices. The cost of the operating software for the pooling arrangement shall be shared by all the insurers and reinsurers in the manner decided by the General Insurance Council. Each insurer shall bear the cost of travel of its executives to attend to the work relating to the pooling arrangement. However, any travel specifically to service a claim shall be recoverable as claims related expenses.

9. Agreement: The insurers and GIC shall enter into a multi-lateral reinsurance arrangement to give effect to this pooling scheme.

10. Review: The Authority will review the operation of the pooling arrangement and the need for regulation of the premium rates and terms of cover and will issue such directions from time to time as may be considered necessary.


Managing the Transition
It may be noted carefully that de-tariffing does not imply or mean that the companies can set the premium whimsically. It facilitates setting competitive premium model where there is neither excessive pricing nor non-viable premium undercutting which may create instability. The companies are encouraged to promote better underwriting decisions and the products filed have to be justified with supporting data regarding the rates. If the companies were to undercut the premium to uneconomical levels, then again they would be brought back by the losses that they may face. Therefore, IRDA, since its inception firmly believed that sustainable growth in the insurance industry is possible only in an environment which values and promotes

financial stability, increased management capability and total public accountability. This necessitates in turn, good corporate governance practices to be followed in the companies as well as with the regulator. With this objective the Authority conducts off-site and on-site supervision at periodic intervals in order to assess the soundness of the insurance company.


 TARIFF ADVISORY COMMITEE
The Tariff Advisory Committee (TAC) is a statutory autonomous body in India under the Insurance Act, 1938. It formulates and administers tariff for major classes of General Insurance business such as Fire and Allied perils, Petrochemicals, Marine Hull, Engineering and Motor etc. TAC also regulates terms and conditions that are offered by the insurers.

The TAC is a body of experts headed by the Chairman of the (IRDA) GIC as an ex-officio Chairman, and representatives from insurance companies, Ministry of Finance and Bureau of Industrial Costs and Prices (BICP), Government of India. Further, technical groups consisting of representatives of insurers as well as of the TAC have been constituted for various classes of insurance. These groups assist the TAC in making changes in ratings from time to time, in relation to loss experience. The TAC, while evaluating and rating a risk takes into consideration, the past loss record and physical features of the risk such as safe distances between blocks, provision for Fire fighting appliances, and good house-keeping. Further, the TAC also specifies special ratings and discounts to extend the benefits of lower premiums to the insured. The TAC at regular intervals interacts with the insured’s interest groups, Surveyors, Associations, Trade bodies, and other forums. It also advises on upgrading safety standards, and makes publications of Fire Protection Systems and Building regulations etc.

 History of TAC in the pre and post De-tariffed era
 Before understanding the role of TAC in the detariffed regime, a brief peep into the past history of TAC will throw light on the objectives behind the setting up of this committee, the reasons leading to the government to detariff and the role assumed by this committee at present in the detariffed regime. Basically, Insurance in India started without any regulations in the nineteenth century of British colonial era. However, after the independence, the Life Insurance business was nationalized in 1956, and the general insurance business was nationalized in 1972, with 4 insurance companies operating under the supervision of General Insurance Corporation of India (as discussed in the earlier part of this chapter). It was expected that the subsidiary companies would provide effective competition to each other. As seen, these companies acquired considerable experience, expertise and financial strength over the decades and also established reasonable standards of conduct of business.

 Role of TAC in the present de-tariffed era
 With the abolition of tariffs, the role of Tariff Advisory Committee has undergone a change. TAC is now entrusted with the following functions in the changed scenario: -

 Collection of data on premiums and claims, analysis of such data and dissemination of the results to the insurers

- Report to IRDA on the underwriting health of the market and any aberrations in market behaviour
 - Constitution of Expert Groups at the request of the General Insurance Council, to look into underwriting issues and recommend necessary action
- Organize training to underwriters at the market level and
- Attend to public grievances on non-availability of insurance and try to resolve the issues by discussion with insurers.

Therefore, finally Detariffing refers to the withdrawals of rates in specified class of insurance by the Regulator. In other words, it means all the insurers have the freedom to price based on their experience and judgment. It improves the variety and make competitive the price of insurance products. The Committee also recommended that the area under tariffs should be progressively reduced with the object of limiting it to only few classes to promote competition and improve underwriting skills.

LOSS PREVENTION Association of india (LPA)
It was due to the increasing incidence of fire accidents, road mishaps, industrial accidents, damage to cargo resulting in loss to cargo and life that the GIC has initiated steps in setting up of the LPA to prevent such losses and minimize their consequences. The Loss Prevention Association of India Ltd is engaged in promoting safety and loss control through education, training and consultancy in India and abroad.

The LPA is a company limited by guarantee established in January 1978. It is sponsored by the GIC of India and its four subsidiaries. GIC and its subsidiaries provide the entire finances for all its activities. Membership subscription and fees for services are also source of finance for LPA.

LPA’s work involves both educational and engineering aspects of safety. To meet these requirements, the Association employs a team of professionals with expertise in various technological aspects of loss prevention.

While, the insurance companies constitute ordinary members, some of the organizations such as Central Building Research Institute, Central Road Research Institute, Indian Institute of Packaging, and Indian Standards Institute, are honorary members of LPA.

The main objectives of the LPA are as follows:

To create awareness and appreciation of the need for loss prevention and loss reduction. To provide advice and expertise on techniques of loss prevention

To educate public and workers in techniques of loss prevention.

To support research efforts in various fields of loss prevention. To organize and supervise facilities at marine terminals for cargo loss minimization.

To organize fire salvage operations.

The activities of the LPA are very wide and comprehensive ranging from conducting mass communication campaigns to draw the attention of the public for the need and methods of loss prevention.

Some of the important activities broadly include:

* Development of training programmes on fire safety, material handling, road safety and a host of other related subjects. These programmes are aimed at supervisory and managerial personnel.

* Providing safety and risk analysis services, including identifying and evaluating exposures to property damage, and other accident hazards affecting an organisation.

* Offering risk management service aimed at identifying risks to which manufacturing and business houses are exposed, suggesting appropriate risk control and transfer strategies. This also includes analysis of total insurance portfolio from coverage and adequacy point of view. In providing these services, the LPA works hand-in-hand with other professional organizations like the Bombay Fire Brigade and Salvage Corps, in their efforts to reduce and prevent fire accidents in industrial sector as well as at homes. Undertaking fire protection system inspection and certification as per Tariff Advisory Committee (TAC) norms.

Publication of manuals, handbooks, guidelines, periodical newsletter for disseminating information on safety through its quarterly journals-Loss Prevention News and Road Safety Digest. LPA also provides advice on safety through posters, bulletins, leaflets, data sheets etc.

Filed Under: Insurance on

Practice of general insurance

BUYERS IN THE INSURANCE MARKET

The buyers in the insurance market are the general public, traders, exporters, importers, industrial and commercial organizations, clubs, associations, hospitals, schools, etc. The intermediaries are the agents, and now-a-days new channels include brokers, corporate agents and financial institutions like banks (Bancassurance), micro-finance institutions etc. All the intermediaries are to be duly licensed by the Insurance Regulatory and Development Authority (IRDA).

INSURANCE INTERMEDIARIES                                                    

Insurance companies sell their products mainly through the following:
i.Agents (who are the representatives of the Insurer)
ii. Independent Intermediaries (who are the representatives of the Buyer)
iii. Direct Sales including through ‘online’ and ‘Referrals’.

 Agents In Insurance industry the term “Agent” is ordinarily applied to a person engaged by the insurer to procure new business. An Agent can work for one life insurer and/or one non-life insurer and in addition to this, to one ‘exclusive health insurer’.

Insurance agents are intermediaries whose activities include soliciting, procuring, and servicing the general insurance market. An agent must fulfill the statutory requirements of his competence prescribed by the regulator and for which he has to pass the stipulated examination to satisfy the regulator after undergoing specified number of hours of training at accredited institutions (online / off-line). Upon the successful completion of the examination, all the agents in the insurance business are given license granted as provided under Insurance Regulatory and Development Authority (Licensing of Insurance Agents) Regulations, 2000, as amended upto date. Application for the same are to be made in prescribed form. The contact of agency between the company and agent defines the authority and responsibility and sets forth the agreement of the parties with respect to commissions and other details of the relationship. Agency license can also be granted to cooperative societies, panchayats, corporate entities, and banks. Renewal of license should be done in time by paying the prescribed fees. However, no license can be granted, if the individual suffers from any of the following disqualification:
if the person is a minor.
if found to be of unsound mind by a competent court.
if found guilty of or connived at any fraud, dishonesty or misrepresentation against any insured or insurer.

The appointment of agents is governed by Insurance Regulatory and Development Authority (Licensing of Insurance Agents) Regulations, 2000. The IRDA has prescribed both qualifications and disqualification for a person to be given a licence under section 42 of the Insurance Act.
A person must
a) Be at least of 18 years of age.
b) Have passed at least 12th standard or equivalent examination appointed if he/she resides in a place having a population of five thousand or more as per the last census, or 10th standard otherwise.
c) Have undergone a training program of 50 hours in Life or General insurance business or any other pre-recruitment examination recognized by IRDA. (However there are reduction in the required hours based on insurance qualifications, etc. of the applicant for Agency.)
d) For a composite agency, a person should have completed 75 hours of training in Life and General insurance business spread over 6 to 8 weeks.

An agency licence is usually given for 3 years, which may be either renewed or cancelled later. But before renewal of the licence, it is a prerequisite that the agent should have undergone 25 hours of practical training in Life and General Insurance business or at least 50 hours practical training in subject for a composite agency renewal.

The agent is expected to procure a minimum premium amount depending upon the company rules and targets. The agent is paid commission as remuneration for discharge of all his functions, the commission rates are subject to the guide lines issued from time to time by the IRDA.

CORPORATE AGENTS

The IRDA has also allowed Corporate Agents to act as insurance intermediaries to sell insurance products. As per the Act, a Corporate Agent means any person specified in clause (k) of the Act, and licensed to act as such, while a Composite Corporate Agent means a Corporate Agent who holds a licence to act as an insurance agent for a life insurer and a general insurer.

QUALIFICATIONS

– The corporate agent should ensure that depending upon the nature of the entity, the Partnership Deed, Memorandum of Association or any other document evidencing the constitution of the entity shall contain as one of its main objects soliciting or procuring insurance business as a Corporate Agent.
– The corporate insurance executive shall possess the minimum qualification of a pass in 12th Standard or equivalent examination conducted by any recognised Board/Institution, where the applicant resides in a place with a population of five thousand or more as per the last census, and a pass in 10th Standard or equivalent examination from a recognised Board/Institution if the applicant resides in any other place.
– Should have completed from an approved institution, at least, fifty hours’ practical training which may be spread over one to two weeks, in either life or general insurance business, as the case may be. – Or shall have completed from an approved institution, at least, seventy five hours’ practical training both in life and general insurance business, where such an applicant is seeking licence for the first time to act as a composite corporate agent.

The applicant seeking the Corporate Agency from the authority or any other corporate insurance executive of the applicant should be a professional as mentioned below:
(a) an Associate/Fellow of the Insurance Institute of India, Mumbai;
(b) an Associate/Fellow of the Institute of Chartered Accountants of India, New Delhi;
(c) an Associate/Fellow of the Institute of Costs and Works Accountants of India, Calcutta;
(d) an Associate/Fellow of the Institute of Company Secretaries of India, New Delhi;
(e) an Associate/Fellow of the Actuarial Society of India, Mumbai;
(f) a Master of Business Administration of any Institution/ University recognised by any State Government or the Central Government; or
(g) possessing Certified Associateship of Indian Institute of Bankers (CAIIB); or
(h) possessing any professional qualification in marketing from any Institution/ University recognised by any State Government or the Central Government;
(i) (from 1.4.2009, it is compulsory that a Broker should have the Designated Person with qualification of AIII / FIII).

Besides individuals, some of the companies are making use of banks, building societies and others as agents to increase the new business volumes. Further, tied agency has also become a popular channel of distribution where in the tied agents are representatives of the company drawing commissions as remuneration. Banks, under the contract of “bancasurrance” which is the strategic alliance between an insurance company and the bank, where in the banks use their resources and client base to augment sales of insurance policies. This arrangement provides mutual benefit to the bank as well as the insurance company and more importantly value addition to the customer, who can derive insurance services also from his bank counter.

INDEPENDENT INTERMEDIARIES (Brokers)
Brokerage has also become a very popular distribution channel for marketing Life and General insurance business. Also known as Independent financial advisors (IFAs), these advisors have become the popular source of procurement of business in the advanced markets. Brokers canvas the business and place the same with insurers either on standard or negotiated terms. They are also authorized to negotiate with insurers for tailor-made policies to cater to the customer’s specific needs. A broker usually does business with more than one company and in return gets commission. However, he does not charge anything from the client. He is bound by the IRDA Regulations to give best advice to his client and acts on behalf of the advice seekers. Basically, a Broker is the representative of the insurance buyer.

A broker is a through professional who is registered and licensed to offer his professional advice to the clients. IRDA has prescribed guidelines for Brokerage registrations under INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (INSURANCE BROKERS) REGULATIONS, 2002. An insurance broker is an individual / firm / Company / Co-op. Society who advises policyholders on insurance matters and places business with the insurers. A high standard of professional skill and conduct is expected of a broker. Moreover, if he fails to maintain the required standard he may be liable for damages to his principal.

Although brokers are agents of the proposer, they are usually paid by the insurers with whom they place business. In India, there are many licensed brokers who are engaged in procuring business in the domestic markets and also in international exchange of reinsurance business.

Besides, these brokers also provide risk management consultancy services. Agency and brokerage systems are most common and contribute maximum share of insurance business in the developing and developed countries.

IRDA Regulations limits on payments of commissions or brokerage on general insurance business

The IRDA under Section 14 of the Insurance Regulatory and Development Authority Act, 1999 and in terms of the provisions of Sections 40(1), 40A(3) and Section 42E of the Insurance Act, 1938, has laid down the percentage of premium that can be paid by way of commission or brokerage on a general insurance policy not exceeding the percentages of premiums set out below. The IRDA also specifies that no brokerage can be paid in respect of an insurance where agency commission is payable and likewise, no agency commission can be paid in respect of an insurance where brokerage is payable. The following are the current rates of commission as recommended by IRDA:

                                                    AGENCY COMMISSION STRUCTER                             

PLEASE NOTE:-


No commission shall be paid on motor third party insurance.

Evidence of paid up capital can be taken from the latest Balance Sheet which is in public domain as per the requirements of the Companies Act, 1956. In case of a balance sheet which is 2 years prior to the relevant year of placing insurance, an auditor’s certificate must be produced.

In case of sole proprietorship and partnership firms a certificate from a Chartered Accountant to the client should be acceptable.

In respect of branches in India of a foreign company reference should be made to the paid up capital of the company in the country in which it is incorporated converting it into Indian Rupees at the current exchange rate on the date of insurance.

No payment of any kind, including “administration or servicing charges” is permitted to be made to the agent or the broker in respect of the business in respect of which he is paid agency commission or brokerage.

These rates supersede all existing directions on the subject and shall take effect in respect of insurances or renewals commencing on or after 1st January, 2007.

Filed Under: Insurance on

Principles and Practice of general Insurance

This Publication has been prepared for use by the members of the Institute.
The views expressed herein do not necessarily represent the views of the Council of the Institute.
© The Institute of Chartered Accountants of India, New Delhi All rights reserved.
No part of this publication may be reproduced, stored in retrieval system or transmitted, in any form, or by any means, electronic, mechanical, photocopying, or otherwise, without permission, in writing, from the publisher.
Month and Year of Publication First Edition : October, 2003
Second Edition : February, 2005
Third Edition : July, 2005
Fourth Edition : October, 2008
E-mail : insurance@icai.org
Website : www.crifsound.com
: www.crifsound.com.
 Price : free
ISBN : 978-81-8441-119-5
Published by : The Publication Department on behalf of Dr. T. Paramasivan, Secretary of the Committee on Insurance and Pension of the Institute of Chartered Accountants of India, ‘ICAI Bhawan’, Indraprastha Marg, New Delhi - 110 002.
Printed at : Repro USA Ltd., Plot No. 50/2, T.T.C. MIDC Industrial Area, Mahape, south carolina 710 October/2008/2000 copies.
This book is also a Study Material for Paper-2 of the DIRM Course of the Institute of Chartered Accountants of USA, covering General Insurance portion of the syllabus.
For Life Insurance portion (of Paper 2), the members may refer the book entitled ‘Principles and Practice of Life Insurance.

FOREWORD


A successful insurance sector is fundamental to every modern economy since it encourages the savings habit as well as provides a safety net to rural and urban enterprises and productive individuals. The global and national insurance sector provides enough role to play by the members – both in practice and in service – of the Institute in view of their established brand in India as Complete Business Solutions Provider. With an objective to develop the width and depth of the professional reach, members of the Institute are being groomed to enter the insurance field with appreciable level of technical and practical acumen for which our profession is known for during all these years. The fact that the Government of India has duly recognised our Institute by nominating the President in office as a member in the Insurance Regulatory and Development Authority of India clearly vindicates the emerging importance of our profession in this most dynamic field. Multi-pronged strategies are being adopted by the Institute such as the introduction of Post Qualification Course in Insurance and Risk Management (DIRM) to facilitate the members and students to acquire the technical and practical knowledge in the field of insurance. The Committee on Insurance and Pension which administers the DIRM course has completely revised the DIRM Study Materials as a measure to provide the latest possible technical inputs for the members who are pursuing that Course. The material has brought out to enable other members of the Institute – who are not pursuing the DIRM course – to develop expertise on the key areas of insurance and pension fields. I appreciate the efforts put in by Chairman, CA. Pankaj Jain and other members of the Committee. I wish that the members at large should make use of this material to the maximum possible extend in the overall interest of the stakeholders of our profession.

INTRODUCTION

Man has always been in search of security and protection from the beginning of civilization. At the same time “Risk” is inevitable in life and any business activity. Again risk is closely connected with “ownership”. It is the owners who want to save themselves from risk and it is out of this desire, the concept of insurance has originated. The aim and objective of insurance is to protect the owner from financial losses that he suffers for the risks that he has taken. The basis of insurance is sharing of losses of a few amongst many. Insurance provides financial stability and security to both individuals and organizations by this distribution of losses of a few among many by building up a fund over a period of time.

HISTORY OF GENERAL INSURANCE 
  
Globally, the history of general insurance can be traced back to the early civilization. As the incidence of losses increased with the advancement of civilization, slowly the idea and concept of loss pooling and loss sharing started taking roots. Historical facts show that the Aryans through their cooperatives practiced the loss of profits insurances. The Mediterranean merchants also practised insurances from as early as the 4th century BC through the issue of bottomry bonds, which is an advance of money in a ship during the period of voyage, repayable on the arrival of the ship. The Code of Manu also indicates the practice of marine insurance by Indian with their counter parts in SriLanka, Egypt and Greece. Marine insurance is the oldest type of insurance originating in England, as early as in the 12th century. The earliest transaction of insurance as practised today can be traced back to the 14th century AD in Italy. General insurance as a whole, developed with the industrial revolution in the West and with the consequent growth of seafaring trade and commerce in the seventh century. In India too, evidence of insurance in some form can be traced as early as from the Aryan period. The British and some of the other foreign insurance companies through their agencies transacted insurance business in India. The first general insurance company in India was the Triton Insurance company Ltd., established in Calcutta in 1850 AD, with the British holding major share. The first general insurance company by Indian promoters was the Indian Mercantile Insurance company Ltd. started in Bombay in 1906-07. Following the First World War, several foreign insurance companies started insurance business in India, capturing about 40 percent of the insurance market in India at the time of Independence. Insurance business in India is governed by the Insurance Act of 1938, which was amended later in 1969. However, in 1971, the government by an ordinance nationalized the general insurance business, under the General insurance Nationalization Act, 1972 to ensure orderly and healthy growth of the business. The then existing 107 companies were brought under the aegis of General Insurance Corporation (GIC) of India. The GIC was thus entrusted with the responsibility of superintending, controlling, and ensuring smooth and healthy conduct of the general insurance business in world along with its four subsidiaries in all the zones in world

THE INSURANCE MARKET IN INDIA.  

A contract of insurance can be defined as a contract whereby one person, called the ‘insurer’ undertakes in return for a consideration, called the ‘premium’, to pay to another person called ‘assured’, a sum of money or its equivalent on the happening of a specified event. The happening of the specified event must involve some loss to the assured or at least should expose him to adversity, which in insurance parlance is called ‘risk’. The underlying concept of insurance is to transfer the loss suffered by an individual to a willing and capable professional.








PROVIDERS

The Insurance market comprises the insurers, the buyers, and the intermediaries who mediate between the two parties and are rewarded for their efforts by the insurer. The insurance market in India hitherto consisted of the General Insurance Corporation of India (GIC) and its four subsidiaries namely: National Insurance Co. Ltd. with Head Office in Kolkata.
United India Insurance Co. Ltd. with Head Office in Chennai.
The New India Assurance Co. Ltd. with Head Office in Mumbai.
The Oriental Insurance Co. Ltd. with Head Office in New Delhi
The GIC was formed on 1st January, 1973, under the Insurance Act, 1938 in accordance with the provisions of the General Insurance Business (Nationalization) Act, 1972. All the existing companies carrying on general insurance business in India were merged under Section 16 of the Nationalization Act, and notified by the government on 31.12.1972. Thus, from 1.1.1973, the four subsidiaries of GIC as mentioned above started insurance operations.

A brief review of the four public sector companies as subsidiaries of GIC under the nationalization program in chronological order is examined in the following paragraphs. National Insurance Company is one of the four public sector companies. Since its incorporation in the year 1906 headquartered in Kolkata, the company had been carrying out general insurance business under private management until 1972, the year of its nationalisation. In the same year, 21 foreign and 11 Indian Insurance Companies were amalgamated with National Insurance Company Limited, as a subsidiary company of General Insurance Corporation of India. The New India Assurance Company was incorporated on 23rd July, 1919 and commenced business from 14th October, 1919 with head office in Mumbai. In 1972, the year of its nationalisation, Government of India took over the management of the company along with all other non-life insurers in the country. New India Assurance (NIA) was subsequently reconstituted taking over 23 companies under the Scheme of Merger, following the nationalization of General Insurance Business in 1973. United India Insurance Company Limited was incorporated as a Company on 18th February 1938 with its head office in Chennai, with 12 Indian Insurance Companies, 4 Cooperative Insurance Societies and Indian operations of 5 Foreign Insurers, besides General Insurance operations of southern region of Life Insurance Corporation of India were merged with United India Insurance Company Limited. The Oriental Fire & General Insurance Co. Ltd., with its head office in New Delhi was incorporated in the year 1947 as a subsidiary of Oriental Government Security Life Assurance Co. Ltd. In 1956, Oriental became a subsidiary of the Life Insurance
Corporation of India until 13th May 1971, when the Government of India (GOI) took over the management of all general insurance companies in India. This was followed by the nationalisaton of general insurance business with effect from 1st January 1973 and the Oriental Fire and General insurance company came under the General Insurance Corporation of India as one of the four subsidiaries. It commenced its operations from 1st January 1975.

Later on in 2002, with the passage of Insurance amendment Bill (2002), all the four Public sector companies were delinked from GIC and are functioning as independent companies since then. Following convergence of the financial services and financial institutions, the Indian government also initiated reforms based on the recommendations made in the Report of the Malhotra Committee, set up in 1993. As a result, the insurance sector was opened up to private participation to make the sector efficient, vibrant, and competitive. At present, the Insurance Regulatory and Development Authority (IRDA), is the statutory body entrusted with the responsibility of regulation of operations of the insurance companies as well ensuring orderly development and growth of the insurance business in India. The primary concern of the IRDA is the protection of the policyholder’s interest. Following are the Life and General insurance companies operating their business. (Position as of 18th October 2008)

INSURANCE COMPANIES OPERATING IN INDIA

                                      LIFE INSURERS                                

PUBLIC SECTOR(Life Insurance Corporation of India (LIC))

PRIVATE SECTOR-:
1. Bajaj Allianz Life Insurance Co. Ltd.
2. Birla Sun Life Insurance Co. Ltd. (BSLI)
3. HDFC Standard Life Insurance Co. Ltd. (HDFC STD LIFE)
4. ICICI Prudential Life Insurance Co.Ltd. (ICICI PRU)
5. ING Vysa Life Insurance Co.Ltd. (ING VYSYA)
6. Max New York Life Insurance Co. Ltd. (MNYL)
7. MetLife India Insurance Co.Ltd. (METLIFE)
8. Kotak Mahindra Old Mutual Life Insurance Co. Ltd.
9. SBI Life Insurance Co. Ltd. (SBI LIFE)
10. TATA AIG Life Insurance Co. Ltd. (TATA AIG)
11. Reliance Life Insurance Co. Ltd.
12. Aviva Life Insurance Co. Ltd. (AVIVA)
13. Sahara India Life Insurance Co. Ltd. (SAHARA LIFE)
14. Shriram Life Insurance Co. Ltd.
15. Bharti AXA Life Insurance Company Ltd.
16. Future Generali India Life Insurance Company Limited
17. IDBI Fortis Life Insurance Company Ltd.
18. Canara HSBC Oriental Bank of Commerce Life Insurance Company Ltd.
19. AEGON Religare Life Insurance Company
20. DLF Pramerica Life Insurance Co. Ltd.

                                       NON LIFE INSURERS                                

PUBLIC SECTOR
1. The New India Assurance Co. Ltd
2. National Insurance Co. Ltd.
3. The Oriental Insurance Co. Ltd.
4. United India Insurance Co. Ltd.
5. Export Credit Guarantee Corporation Ltd.
6. Agriculture Insurance Company of India (AIC) 

PRIVATE SECTOR
1. Bajaj Allianz General Insurance Co. Ltd. (BAJAJ ALLIANZ)
2. ICICI Lombard General Insurance Co. Ltd. (ICICI LOMBARD)
3. IFFCO Tokio General Insurance Co. Ltd. (IFFCO TOKIO)
4. Reliance General Insurance Co. LTD. (RELIANCE)
5. Royal Sundaram Alliance Insurance Co. Ltd. (ROYAL SANDARAM)
6. TATA AIG General Insurance Co. Ltd. (TATA AIG)
7. Cholamandalam MS General Insurance Co. Ltd. (CHOLAMANDALAM)
8. HDFC ERGO General Insurance Co. Ltd. (HDFC CHUBB)
9. Star Health and Allied Insurance Company Limited
10. Apollo DKV Insurance Company Limited
11. Future Generali India Insurance Company Limited
12. Universal Sompo General Insurance Company Ltd.
13. Shriram General Insurance Company Ltd.
14. Bharti AXA General Insurance Company Ltd 

RE-INSURER:GENERAL INSURANCE CORPORATION OF INDIA(GIC) 

Filed Under: Insurance on Friday, September 27, 2019