Principles of Insurance

&
Basics of Underwriting
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Contract Act-1872
Insurance is governed by Contract Act 1872
Life Insurance is the contract between the Insured & Insurer
Whereby for a stipulated consideration called the premium. The
Insurer agrees to pay to the Insured or a beneficiary, a defined
amount upon the occurrence of death or the covered event
The principle behind insurance is indemnity which in turn means
financial restoration to a level just before the accident or injury or
illegal act
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Contract Act - 1872
Essentials of Contract Act
Invitation to an Offer
Offer
Acceptance
Legally capable of making a contract
Valid consideration
Agreement must be lawful





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Terms you need to remember
Insured Individual /Group of individuals needing cover to combat
a contingency

Insurer - Individual /Group of individuals/company ready to share
the contingency by payment of a fixed amount at regular interval
called premium

Life assured The person whose life is being insured

Proposer the payor of the policy.

Premium The premium is the amount which each life assured
has to pay for sharing the collective risk of pool.
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Basic of Contract Act
Invitation
Acceptance
Counter Offer Offer
Written
Action
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Insurance
Insured Insurer
Premium
Sum assured
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How does a life insurance policy
work?

Death
Issuance --------------------------------------------- Maturity

Premium payments
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Principles of Insurance
There are 10 basic Principles of Insurance
Principle of Co-operation
Principle of Probability
Principle of Insurable Interest
Principle of Utmost Good Faith Uberrimae Fides
Principle of Warranties
Principle of Causea Proxima
Principle of Indemnity
Principle of Subrogation
Principle of Contribution
Principle of Mitigation of Loss
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Principles Illustrated
Principle of co-operation:
Co-operation is based on
the co-operative principle
one for all , and all for one
Eg. Diabetic with a higher risk
pays more to nullify the impact
on the pool in case of death earlier
than assumed
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Principles Illustrated
Principle of probability:
The rate of premium depends
on the quantum of risk and
probability of risk.
Eg. A smoker, overweight and
hypertensive pays more mortality
charges than just a hypertensive.
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Principles Illustrated
Principle of insurable interest:
The Life to be assured should be more
valuable alive than dead
Eg. Check the insurable interest
59 year old single woman being
proposed by 28 years old son current
employed in a MNC
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Principles Illustrated
Principle of utmost good faith :
The parties to the contract are legally
bound to reveal to each other all
information about the subject matter,
which would influence each others
decision.
Eg. No financials till a Sum Assured
of 15 lacs.
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Principle of Warranties
It ensures that the risk remains the
same through out the policy &
does not increase

Eg The Extra premium rate at
inception will remain same
through out the term


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Principle of Causea Proxima
The cause of loss must be proximate
or immediate and not remote


Eg. The cause of death should be recent
not after policy issuance
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Principle of Indemnity
The insured, in case of loss against the
policy has been issued, shall be paid the
actual amount of loss not exceeding the
amount of the policy. This ensures that
the insured does not make the profit out
of this loss or damage.

E.g.. For a health saver policy if the actual
amount spent for hospitalization is 4L &
plan limit is 3L will get the amount as
per the policy.
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Principle of Subrogation

Applies only to fire & marine insurance.
When an insured has received full
indemnity in respect of his loss, all
rights & remedies which he has against
third person will pass on to the insurer
and will be exercised for his benefit until
the insurer recoups the amount he has
paid under the policy


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Principle of Contribution
Relevant when there are two or more
insurance on one risk. The aim is to
distribute the actual amount of loss
among the different insurers who are
liable for the same risk under different
policies in respect of the same subject
matter.



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Principle of Mitigation of Loss
In the event of mishap to the insured,
the insured must take all necessary
steps to mitigate or minimise loss, just
as any prudent person would do in
those circumstances. If he does not do
so, the insurer can avoid the payment
of loss attributable to his negligence

E.g. Health negligence could be
avoidable with medication due to
negligence led to surgery.
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Classification of Insurance:
Life Insurance Provision for specific events happening to
individual such as death based on concept of Human life value
Non Life Insurance Provision for a specific event, which
affects property ,such as fire, flood, etc.
The need for life insurance :
The familys dependence on you is dual
Emotional
Financial
In case of your untimely/premature death, the emotional loss would
be irreplaceble,but the financial loss can be prevented by Life
Insurance

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Types of Life Insurance:
All the life insurance products are either protection,
saving or combination of both.

Protection plans
Savings plans
Investment plans
Retirement plans

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Summary: Protection v/s Savings
Protection
I
n
v
e
s
t
m
e
n
t

/

S
a
v
i
n
g
s

Investment
Oriented plans
Anticipated Endowment
Endowment
Term & Health Insurance
Whole life
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High risk
Low risk
Life Guard (all variants)
Health Products



ULIP plans
Invest Shield
Save N Protect
Cashbak



ZDB
125 % plans

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Conclusion

The principles are applicable to all the products,
both Life & Non-Life insurance .

These Principles provide the frame work within
which the products and all the contracts of insurance
operate.


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Pricing of Products
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Premiums
The premium is the amount which each life
assured has to pay for the sharing of the
collective risk pool

It differs due to plan, age, term

It can be paid in several modes

It should be enough to run the business & pay for
the claims that arise

The company should also be in a position to fulfill
the aspirations of its shareholders

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Calculation of premiums
Premiums depend on

1. Mortality

2. Expenses

3. Contingency factor

4. Returns promised

5. Profit Margin

6. Income on Investment


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Premiums- Mortality
The probability of the Insured dying in any given year

Rate of Mortality at a given age is merely the probable
proportion of persons who would die in that year of age

Mortality tables are the important base for premium tables.
This is why we need age proofs.

Current Life Premiums are based on LIC Mortality tables of
94-96

Health Premiums are based on the Reinsurance Morbidity
data
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Premiums-Mortality
Example

Standard Mortality : At age 30, if 1,000 people are insured
for a year for Rs 1,00,000/- each and if the expected number
of deaths are 13, the Insurance company will pay out Rs
13,00,000 as claims .
Here the contribution will be 13,00,000/1000= Rs 1300

This is the premium paid by each life to be insured.

The mortality is in turn based on Age.

Other factors are also priced in mortality, viz. Disease
prevalence, habits, family history etc

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Premiums - Expenses
There are various expenses incurred in obtaining
business including
Field costs
Administrative expenses- staff, building
Policy costs e.g.stamp duty
Claims

All these have to be paid from the premium
collected and this factor is loaded in the premium
being charged, these being high in the first years

Therefore paid up value after 3 years

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Premiums - Contingency Factor
In addition a small loading for covering contingencies and
fluctuations is also included in the premiums.

The assumptions made in pricing will be conservative
and will include a charge for contingencies.

A margin is kept so that the company can continue to
meet the reasonable expectations of policyholder when
experience is worse, than expected.

An example of this could be the Catastrophe Insurance

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Differential Pricing
All the components that go into pricing are not
present in all products

Therefore the premiums for various products
differ

For example in Term & Health products the
premiums collected are for pure protection and
not investment

Risk is therefore high for Term & Health products

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Basics of Underwriting
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Underwriting What is it?

It is the term used to describe the consideration given
to an application for insurance, to determine whether
or not a policy applied for should be issued. Basically,
underwriting is the selection of risks and an effective
underwriting means a profitable business.

It is said that underwriting is rather an art than a
science and that it requires an underwriter to be wise
and determined in making proper decisions of issuing
policies, which are equitable to the clients,
deliverable by agents, and profitable to the company

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The Objective of underwriting
The objective of underwriting is to ensure that the risk accepted by
the company is corresponding to that assumed in the rating
structure.
Underwriting Policies at ICICI Prudential involves laying down
underwriting guidelines by making use of universally accepted
underwriting principle, past experience of the company,
feedback from Claims, Actuaries & Reinsurance.
The broader objectives of underwriting policies at ICICI Prudential
are as follows:
To keep actual experience within the mortality assumption used
in calculating the premium rates
To offer insurance cover at competitive terms.
To maintain equity between policyholders.
To guard against anti-selection.
To offer cover to as wide a group of lives as possible.

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Why underwriting is needed?
The function of underwriting is to select lives. Good underwriting
enables company to meet the actuarys mortality assumption
and it helps the company to remain competitive, to maintain
equity between policyholders (impaired / sub standard lives are
charged an extra premium based on extra mortality) and to help
identify individuals who wish to defraud the company (the
underwriter guards against anti-selection).

A good underwriting is the ability to bring together all aspects of
the case, building up as full a picture of the life applied as
possible. For example, similar medical histories can be viewed
quite differently against the background of the individuals
occupation, pursuits, avocations, life style, financial status and
the general environment in which he/she lives.

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RISK SELECTION
The underwriting process must be vigilant enough to
ensure that an impaired life is not offered assurance
at the standard premium rate. It would be easier for
the underwriter to go through his/her work when
he/she takes into account all necessary, relevant
factors of and tools for risk selection

Underwriters are the risk managers of
the organization
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Factors of risk selection
Age
Gender
Occupation & Hobbies
Habits
Build
Physical condition
Medical history
Family History
Residence
Moral Hazard

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Risk Classification
Standard Classes (Normal Premium rates)

Substandard Classes (increased Premium rates)

Decline Classes (Unacceptable risk)

People with similar levels of risk are placed in
common rating classes and charged the same
premium.

The lower the risk , lower the premium

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Underwriting is based on Underwriting Tools:
Proposal Form

Sales Report
Agents Confidential Report;
Client Confidential Report

Age Proof

Income Document

Medical Reports

Questionnaires-
Medical, Occupation, NRI, Key man, Partnership etc


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Please Remember
THE ADVISOR IS THE PRIMARY UNDERWRITER

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ACR/CCR- Important Information
Application Sourcing
Source of Lead
Relationship and Duration
Occupation Details
Specify the exact Business
Years in the business
Financial Status and Surrogate markers
Income and documents verified
Health status
Visible Indicators: Overweight, Underweight, Physical
Deformities and habits.

If Material information is not disclosed, kindly get back to the
risk function with the details.
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Client Confidential Reports :
Underwriter should call for CCR if :
1. The insurable interest does not exist.
2. The cover Sum Assured Proposed does not
commensurate with the income of the proponent.
3. Seeking large amount of insurance for the first time at
advanced age.
4. Non-disclosure of previous insurance history
regarding declinature or extra charged.
5. Non-disclosure of any facts related to health, habits
or income of the life proposed or the proposer.

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Thank You