Fundamentals of Insurance Unit 4 Functions of The Agent

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Fundamentals of Insurance Unit 4 Functions of The Agent

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IRFunctions of The AgentDA

FUNDAMENTALS OF INSURANCE

VERY SHORT TYPES QUESTION & ANSWERS

(A) Multiple choice question and answers:

1. Which of the following is not a function of insurance?

(a) Risk sharing.

(b) Assist in capital formation.

(c) Lending of funds.

(d) None of the above.

Ans: (c) Lending of funds.

2. Under which type of underwriting several conditions are to be followed?

(a) Non-medical underwriting.

(b) Medical underwriting.

(c) Field underwriting.

(d) Financial underwriting. 

Ans: (a) Non-medical underwriting.

3. Under Non-medical underwriting, which is not a condition to be followed?

(a) Female.

(b) Limit in sum insured.

(c) Limit in age.

(d) Limit in income.

Ans: (d) Limit in income.

4. Characteristics of an individual which impact on risk (hazards) is classified into?

(a) Financial and non-financial hazard.

(b) Physical and moral hazard.

(c) Philosophical and metaphysical hazard.

(d) Standard and non-standard hazard.

Ans: (b) Physical and moral hazard.

5. When a death claim is payable?

(a) If a policyholder dies after maturity of a policy.

(b) If a policyholder dies during the term of policy.

(c) If a policyholder dies after surrendering a policy.

(d) If insured dies after Foreclosure of a policy.

Ans: (b) If a policyholder dies during the term of policy.

6. In which of the following cases moral hazard could be suspected?

(a) When the age is advanced.

(b) Large sum insured disproportionate to income.

(c) Both A & B.

(d) None of the three.

Ans: (c) Both A & B.

7. Which of the following is not a moral hazard?

(a) Taking insurance at advanced age.

(b) A proposer with many dependents taking insurance.

(c) When medical exam is done elsewhere.

(d) Proposal on another life without insurable interest.

Ans: (b) A proposer with many dependents taking insurance.

8. _________ can transfer the rights, title and interest in the life insurance policy to the assignee.

(a) Assignee.

(b) assignor.

(c) insurance company.

(d) heirs of the policy holder.

Ans: (b) assignor.

9. Assignment means ___________of rights, title and interest in the property from the assignor to assignee.

(a) purchase.

(b) Sale.

(c) Transfer.

(d) Non of above.

Ans: (c) Transf.

10. Nomination can be done ____________.

(a) at the time of proposal.

(b) at any time during the currency of the policy.

(c) (a) & (b) both.

(d) none of these.

Ans: (c) (a) & (b) both.

(B) Fill in the blanks:

(a) The function of underwriting and pricing in insurance business are closely ____________.

Ans: linked.

(b) Underwriting of group insurance is different from underwriting of individual ____________.

Ans: policies.

(c) The agent establishes the bond between the insurer and the ____________.

Ans: insured.

(d) Under judgement rating method, the underwriter relies on his own knowledge and ____________.

Ans: experience.

(e) The underwriting policy implemented by the insurance company is also called its underwriting ____________.

Ans: philosophy.

(f) No can effect an ____________ unless he is competent to contract.

Ans: assignment.

(g) On death of assignee, the rights pass on to the legal heirs of the ____________.

Ans: assignee.

(h) The right of nomination is conferred only on the holder of the ____________.

Ans: policy.

(i) Nomination need not be supported by ____________.

Ans: consideration.

(j) ____________ must be supported by consideration.

Ans: Assignment.

(k) The procedures in death claim settlement are more complex than in the case of ____________ claims.

Ans: maturity.

(l) Claims which are payable at the time of the maturity of the policy term are known as ____________.

Ans: maturity claim.

(m) Claims that are made after the death of the policyholder are called ____________.

Ans: death claim.

(n) Notice is necessary to decide the priority between ____________.

Ans: assignees.

SHORT TYPE QUESTIONS & ANSWERS

1. What do you mean by primary underwriter?

Ans: Primary underwriter used for insurance agents as they are the primary source of information about the insured.

2. What is underwriting policy?

Ans: Basic philosophy or fundamental principles of underwriting followed by an insurance company.

3. What do you mean by Acceptance letter?

Ans: Letter issued by the insurance company to the proposer formally cómmunicating its acceptance of the proposal.

4. What is a proposal form?

Ans: A proposal form in insurance seeks all the relevant information from you that helps the insurance company in underwriting.

5. What is assignment of policy?

Ans: Assignment of policy implies the transfer the policy in favour of other by the policy holder. After assessment, the policy holder looses all rights; title and interests under the policy contact. 

6. What is nomination?

Ans: Nomination is a process of registering a name of person not policy holder, for the purpose of accepting maturity value of policy after death of the policy holder.

7. Who can be nominated?

Ans: Any person can be appointed as nominee. In case of minor nominee, appointee shall get the policy amount because a minor cannot give valid discharge to the insurer.

8. What do you mean by Nomination?

Ans: Nomination is done at the time of filling the proposal form. Here, the name will appear in the schedule of the policy. The nomination can also be effected after the issue of the policy. The nominee has no legal right. He or she is only entitled to receive the claim amount in the event of death of life assured and to held on behalf of the heirs who have the right to receive the money.

9. What is Moral hazard report?

Ans: Report on hazards or conditions that increase the chances of loss arising from individual moral weaknesses or general, social and economic conditions.

10. What is Physical Hazards of Insurance?

Ans: Physical hazards indicate those dangers of the subject matter of insurance which can be ascertained or identified by mere inspection of the risk. The hazards are apparent in the subject-matter itself. The dan-gers are visible from the very nature, construction and situation of the subject-matter.

11. How insurers deal with physical and moral hazards?

Ans: If a factory is badly organised, with dangerous chemicals left in an unsafe place, and the factory owner also doesn’t care about employee health and safety, you have a clear case of both moral and physical haz-ard. An insurance company is within their rights to charge more for risks like this, or even turn the risk down and refuse to insure it. Physical haz-ards can also be handled by applying an excess, a loading, exclusions or other terms and conditions.

12. Why is Moral Hazard Important?

Ans: A moral hazard is a risk one party takes knowing it is protected by another party. The basic premise is that the protected party has the in-centive to take risks because someone else will pay for the mistakes they make.

13. What are Examples of Moral Hazards?

Ans: Examples of moral hazards include individuals with collision insur-ance who drive aggressively, students who don’t study before an exam but know they’ll pass, and employees who take long smoke breaks.

14. What is the Moral Hazard Problem in Banking?

Ans: The moral hazard problem in banking is the idea that certain corpo-rations, such as banks and automakers, are too big to fail. These compa-nies usually take risks to become more profitable because they know the government will bail them out in the future.

15. What causes Moral Hazard in Insurance?

Ans: Moral hazard occurs in the insurance industry when the insured party takes on additional risks knowing they’ll be compensated by their insurance company. Consider an individual with homeowners’ and fire insurance who smokes in bed. The homeowner engages in the behavior despite the risks because they know the insurer will pay if they file a claim.

16. How does Moral hazard Work?

Ans: When a moral hazard happens, one or the other entity has the opportunity to take advantage of the other. That person can now take unexpected risks or incur costs that they don’t have to pay for, no matter what happens next. This concept of moral hazard applies to all types of insurance.

17. How does Moral Hazard Affect Health Insurance?

Ans: It is easy to misinterpret moral hazard in the health insurance in-dustry. Many argue that health insurance itself is a moral hazard because it reduces the risks of pursuing an unhealthy life-style or other unsafe behavior. This stands valid only if the costs to the customer, like insurance premiums and deductible, are the same for everyone. However, in the competitive market, insurance companies charge higher premiums to riskier customers.

18. Who can Assign?

Ans: No person can effect an assignment unless he is competent to contract. Holder of the policy alone can assign. Being a transfer of property, the assignor must have capacity to contract and he should have the authority to transfer. A transferor having no tittle to a property may also T transfer provided he is authorised to do so by virtue of law or express power granted to him by the owner. For instance, an agent acting under power of attorney, the guardian of a minor duly authorised by the Court, manager of a lunatic appointed under Indian Lunacy Act 1912.

19. What is Insurance hazard?

Ans: A hazard is either a condition or situation that makes a loss more likely. Before deciding to provide coverage, an insurer may consider the particular hazards that make one candidate riskier than most others. A hazard may be any action, condition, habit, circumstance, or situation that makes a peril more likely to occur or a loss more likely to be suffered as the result of a peril. The insurance industry commonly divides hazards into three categories: physical, moral, and morale.

20. What do you mean by claims?

Ans: A claim is the demand that the insurer should redeem the promise made in the contract. The insurer has then to perform his part of the contract i.e. settle the claim, after satisfying himself that all conditions and requirements for settlement of claim have been complied with.

21. Who can be Assignee?

Ans: Any living person can be assignee provided he is not subject to legal disqualification e.g. – Sec. 136 of Transfer of Property Act precludes a judge, a legal practitioners or an officer connected with a court from purchasing an actionable claim. These persons are disqualified from being assignees.

22. Who can effect a Nomination?

Ans: The right of nomination is conferred only on the holder of the policy of life insurance on his own life. He can nominate a person or persons to receive the policy moneys in the event of policy becoming a claim by his death. A person who is a holder of a policy on another person’s life does not have the right to effect nomination under the policy.

23. Where Nominee is a Minor?

Ans: In this case the Insurance Act provides a temporary nominee known as appointee. The appointee need not be any relative of the minor nominee. The appointee must affix his signature to the endorsement either in the proposal from or on the text of policy in token of his having consented to act as an appointee. The appointee has the right to receive the policy money only where the policy results in claims by death during the minority of the nominee. Once the nominee attains majority appointment of the appointee gets automatically cancelled.

When the nominee is a minor and there is no appointee, the claim amount under the policy, cannot be paid to the guardian, appointed or natural. It can be paid only to the legal heirs of the deceased life assured.

24. Write a note on Death of Assignee.

Ans: On death of assignee, the right pass on to the legal heirs of the assignee unless the assignment provides for reversion or transfer to someone else on the death of the assignee during the life time of the assured when intimation is received regarding death of the assignee, a note is taken in the register sheet as well as in the policy file.

25. What are the features of Proposal form?

Ans: Features of Proposal form are:

(i) A proposal form is a legal document that seeks relevant information from you so that the insurance company understands you well.

(ii) The proposal form will also ask you about your medical condition and any medical history.

(iii) Proposal form in Insurance form serves as the basis on which an insurance policy is issued.

(iv) Accurate details need to be filled in order to avoid issues later on.

(v) Verification of details entered are necessary to enjoy benefits of policy.

26. Write a note on Proposal Form.

Ans: Insurance Policies are generally taken through authorised agents of the insurance companies. The person who wants to take the policy is required to fill up a prescribed proposal form which is provided by the agents or can be had free of cost from any branch of Insurance companies. This form contains all the information required from the applicant to process the Insurance. The form is in the form of a question containing various questions containing various questions from the applicant proposer. These questions are related to name, Address, and occupation of the proposer, family details and health of the proposer, date of birth and age of the proposer (insured), policy amount, mode of premium payment, type of policy required, name of the nominee etc.

The proposer is expected to furnish true and fair details and correct information in the proposal form because any misstatement will lead to make the contract voidable.

27. What are the Importance of a Proposal Form?

Ans: Once you decide to buy an insurance plan, the first step is to fill out the proposal form. A proposal form is a legal document that seeks relevant information from you so that the insurance company understands you well.

A proposal form in insurance is not just about giving out your details such as your name, age, gender and address. It seeks all the relevant information from you that helps the insurance company in underwriting. Underwriting is a process that financial companies use to assess your eligibility to receive their products.

In case of life insurance, for instance, the proposal form will ask for details including your age, income and occupation. These details are relevant because mentioning your age ascertains the premium you pay, and income ascertains the amount of insurance you can buy. The form will also ask for nominee details which is essential because you need to make sure that the benefit reaches the right hands.

Apart from all this, the proposal form will also ask you about your medical condition and any medical history. Typically, the insurer looks for ailments that may increase their risk. Also, depending on the level of cover you choose, you may be asked to go for medical check-ups.

The proposal form will also ask you about other life insurance policies that you hold and will have details of the policy that you are buying. This is a good time to understand your policy benefits, so we recommend you fill up the form yourself.

28. Write briefly on proposal form and other forms for grant of cover.

Ans: The person who has made up his mind to go in for life insurance has to make an application, in the standard form, which is called the ‘proposal’ for insurance and the person who is proposing for insurance is called the proposer. The proposal form is the first and the most important source of information. The proposer should give correct, complete and comprehensive answers to all the questions in the proposal form because insurance is a contract of utmost food faith. The proposal form is divided into two parts:

(i) Application form.

(ii) Personal Statement.

The contents of the two forms are:

(i) Application form: It includes questions pertaining to name, address, date of birth, term of insurance, sum to be assured, mode of premium payment, object of insurances, name of the nominee etc.

(ii) Personal statement: It includes questions on the family history, personal history, height, weight etc. In case of female prospect, additional questions are asked about her health and family.

29. What do you mean by underwriting?

Ans: Underwriting is the function of evaluating the subject of insurance, which may be a person, property, profession, business or other entity, and determining on the basis of company’s predetermined standards, whether to insure it or not. Underwriting thus, is the insurance function that is responsible for assessing and classifying the degree of risk a proposed insured or group represents and making a decision concerning coverage of that risk. It is the foundation of the process leading to an insurance contract. The success of the insurance business depends on the precision with which the company’s underwriter takés decisions to accept or reject applications and to determine the terms on which the risk to be offered.

Underwriter is the person who reviews and select risks to be insured by the insurance company.

30. Mention the purposes of underwriting function.

Ans: The purposes of underwriting function are as follows:

(i) Underwriting must ensure reasonably accurate estimation of the risk in any insurance proposal. It should be based on cautions investigation of the factors which cause that risk, so that the premium charged is adequate from the point of view of the insurance company and at the same time, affordable to the consumer.

(ii) Another purpose of underwriting is to investigate and determine the factors responsible for any gap between the Consumer’s expectations and company’s analysis affecting the demand for the insurance company’s product. 

(iii) Though underwriters are not directly responsible for the pricing of insurance products, but they make a significant contribution in the determination of insurance prices by appraising the degree of the risk, taking decision whether to accept or reject the risk and then computing the price at which the risk would be acceptable.

31. Write a note on Role of Agents in underwriting.

Ans: The agent plays a significant role in the selection of risks. The agent establishes the bond between the insurer and the insured. He is an agent of an insurer and hence, he has to first and foremost look to the interests of the insurer. On the other hand, he is the guide of the insured who has no or very little knowledge of insurance. From the insurer’s viewpoint, the agent’s contribution in appraising the risk is so crucial that is also called the first line or primary underwriter. The complete knowledge of the insured that is the perquisite to deciding the degree of the risk is made available to the insurer through the field force, in particular, the agent. The agent manages to get all the information about insured as required by the underwriter either through his personal knowledge or through careful enquiries and investigations.

32. What is Medical Underwriting?

Ans: Before the issuance of a health or life insurance policy, the applicant is evaluated on the basis of his/her medical history in order to set the premium rate for the policy and to decide whether to offer coverage or not. This is known as medical underwriting. It is the process of evaluating an application for health insurance coverage by examining the applicant’s medical history. The price of coverage is determined by the risk factors of the applicant. Depending on the insurance company’s policies and on federal and state regulations, medical underwriting for high-risk candidates may lead to exclusion of coverage for certain conditions, denial of coverage altogether, or coverage offered only at a very high price. Medical underwriting also is practised in determining individual rates for life insurance and disability insurance policies.

33. What are the features of Medical Underwriting?

Ans: Features of Medical Underwriting are:

(i) Medical underwriting involves researching the medical history of an applicant for insurance in order to identify risk factors and price coverage accordingly.

(ii) In recent years, regulations have limited the use of medical underwriting in determining rates.

(iii) Regulations can change, and health care regulation is highly controversial.

(iv) Medical underwriting may be undertaken for an individual or for a small group, such as a company seeking coverage for its employees. Such individual scrutiny would not be feasible when setting rates for a large company.

(v) During the medical underwriting process, insurance companies examine the medical history, demographic profile, lifestyle, and other factors that may relate to a candidate’s current and future medical needs.

34. What is Financial Underwriting?

Ans: Financial underwriting is an important part of the process when applying for financial products including mortgages, loans secured against any property, such as in the case of second charge mortgages and insurance products. Understanding a reasonable degree of the detail behind the underwriting process in the UK, what the aim of carrying out financial underwriting is, why it is necessary at all and how it may or may not affect your application is useful throughout your application. From the outset and even before making an application for a mortgage or any product that entails this decision-making process, it is important to remember that the exact process of underwriting for your chosen product or mortgage will be dependent on the lender that you are taking out the loan or policy with and the product itself. For example, if the product in question is a second charge or other mortgage, the process will to some extent be governed by Financial Conduct Authority (FCA) standards and regulations, whereas other products may not be so.

35. What are the features of Financial Underwriting?

Ans: Features of Financial Underwriting are:

(i) Financial underwriting is the process of assessing whether the proposed sum insured and product are reasonable when considering the possible financial loss to the client.

(ii) The high cost of the protection plus the difficulties in doing financial underwriting for large insurance policies will ensure that the maximum investments are kept in check.

(iii) Financial underwriting is the process of evaluating applicants for insurance and classifying them fairly so the appropriate premium rates may be charged.

(iv) Financial underwriting is the process of assessing whether the proposed sum insured and product are reasonable when considering the possible financial loss to the client.

36. What are the Aims of Financial Underwriting?

Ans: Underwriting is carried out to ensure that the amount that has been agreed to be lent to a borrower is appropriate, affordable and accurate, by assessing their income and levels of cover that the customer has.

It is ultimately a way of helping to make sure that a customer can make their payments as required as well as to also prevent cases of fraud and money laundering. In summary, financial underwriting assesses suitability for the cover (in the case of insurance) or funding (in the case of loans, lines of credit and mortgages) that has been requested, or if new cover is requested in the case of insurance by a customer, whether the reasons for requesting such cover make financial sense. This is also a strong consideration in mortgages, as not all mortgages for all intended purposes will be funded.

Also, it is lenders rather than brokers who carry out the underwriting process. Financial brokers make the introduction and set the ball rolling between the borrower and the lender. Therefore, the responsibility for underwriting and the necessary lending checks and criteria sit with the lender, although you may find some brokers who may carry out a degree of soft credit check.

37. What is material information/material fact?

Ans: A material fact is a piece of information that is vital to evaluating and interpreting a subject matter in legal documents. This means that it is necessary, significant or essential to a reasonable person when deciding whether or not to engage in a particular transaction.

In insurance, material facts are used to determine the amount of coverage and the cost of the premium that will be charged. The information is used to determine the level of risk or class of insurance that the insurance company may be willing to offer. If it is deemed that a material fact was withheld, it may be grounds to terminate the policy or nullify the contract.

38. What are the Facts required to be disclosed?

Ans: Facts required to be disclosed:

(a) A fact which is earlier immaterial but becomes material later on must be disclosed if it has been expressly mentioned in the terms and conditions of the policy. Eg. Fire insurance of ones house. Earlier, vacant plot located nearby. Later on a petrol pump is constructed on such plot.

(b) A fact which increases the risk must be disclosed in all circumstances. E.g. incase of theft insurance, if a person lives alone in an isolated place, the same needs to be compulsorily disclosed as it increases the risk.

(c) Previous losses incurred and claims under previous policies needs to be disclosed. This is mainly in case of double insurance where it needs to be ascertained as to whether the subsequent insurance company is willing to insure and to what extent.

(d) Special terms and conditions under previous policies if any.

(e) Fact of existence of non-indemnity is to be disclosed. This relates to any charge or encumbrance on the policy in the form of a loan security or otherwise.

(f) The description of the subject matter must be stated properly. This is mainly to locate the property if it is immovable and to recognize it if it is movable.

(g)  Facts which suggest any special motive to take the insurance.

(h) Facts which suggest the existence of any moral hazards which relate to the moral integrity of the proposer, etc.

39. What are the Facts which need not to be disclosed?

Ans: Facts which need not to be disclosed:

(a) Fact lessening the risk need not be disclosed.

(b) Public knowledge. E.g. facts regarding govt. policies, taxes, subsidies, etc. which are expected to be known to all.

(c) Fact of law like rules, regulations, etc. which have already been made available to all by way of the notification in the official gazette.

(d) Superfluous facts or such information which is not logical.

(e) Facts which are inferred information.

(f) Fact waived by the insurer himself.

(g) Facts governed by the policy itself.

40. What are the types of Nomination?

Ans: Under the life insurance policy, the policyholder nominates a person who is entitled to receive the benefits in case something happens to the life a the different types of nominees given below:

(i) Beneficial Nominees: As per the law, any immediate family member (like spouse, children or parents) nominated by the policyholder is entitled to receive the monetary benefits and will be the beneficial owner of the claim benefits. It is important to note that only immediate family members can be termed as beneficial Nominees.

(ii) Minor Nominees: Many individuals appoint their children as beneficiaries of their life insurance policies. Minor nominees (who are less than 18 years of age) are not considered eligible to handle claim amounts. For this, the policyholder needs to assign an appointee or custodian. The claim amount is paid to the appointee until the minor turns 18.

(iii) Non-family Nominees: These types of nominees can be distant relatives or even friends as the beneficiary of the life insurance policy.

(iv) Changing Nominees: Policyholders can change their nominees as many times as they want, but the latest nominee should supersede alI previous ones.

41. What do you mean by assignment?

Ans: The policy holder has the right to assign the policy in favour of an assignee. After assignment, the policy holder looses all rights, titles and interests under the policy contract. There after the policy holder cannot do anything with regard to the policy without the express consent of the assignee. The assignee receives the claim money either on maturity of the policy or in the event of death of life assured.

There are two types of assignment.

(a) Conditional Assignment: Under a conditional assignment the rights are vested back to the policy holder when the  specified conditions are fulfilled, which may be that the life assured survives the maturity date or the assignee predeceases the life assured or any other.

(b) Absolute Assignment: In the case of absolute assignment, the rights stay with the assignee until he makes a reassignment to the policy holder. In case of prior death of the assignee, the claim amount would go to the heirs of the assignee.

42. What are the types of claims?

Ans: The contract of life assurance lays down the two contingencies, on the happening of either of which the sum assured is payable:

(i) Death claim.

(ii) Maturity claim.

A policy may become a ‘death claim’ by the death of the life assured before the date of maturity provided the policy is in force on the date of death or has acquired a paid up value. The claim arising on assured’s surviving the date of maturity is called “Maturity claim”.

43. How Hazard Insurance Works?

Ans: Hazard insurance protects a property owner against damage caused by fires; lightning; hail-, wind-, snow-, or rainstorms; or other natural events. Hazard coverage is usually a subsection of a homeowners insurance policy that protects the main dwelling and other nearby structures, such as a garage. To be prepared for every contingency, homeowners should be sure that specific, common hazards are covered in their insurance policy package. The amount of hazard insurance required depends on what it would cost to replace the home in the event of a total loss. This dollar amount may differ significantly from the property’s value on the current real estate market. Policies are typically written for one year and are renewable.

44. What is a Moral Hazard?

Ans: A moral hazard is an idea that a party protected from risk in some way will act differently than if they didn’t have that protection. We encounter moral hazard every day-tenured professors who become indifferent lecturers, people with theft insurance becoming less vigilant about where they park, salaried employees who take long breaks, and so on.

Moral hazard is usually applied to the insurance industry. Insurance companies worry that by offering payouts to protect against losses from accidents, they may actually encourage risk-taking. This often forces them to pay out more in claims. Insurers fear that a “don’t worry, it’s insured” attitude often leads policyholders with collision insurance to drive recklessly or fire-insured homeowners to smoke in bed.

45. How to Reduce Moral Hazard?

Ans: The root cause of moral hazard is asymmetric information. In the health industry, moral hazard happens when you behave in a way that increases the cost for the insurer.

Individuals who do not have to pay for medical services tend to seek more expensive and even riskier services that they would not require otherwise.

For these reasons, health insurance providers institute copay and deductibles. These require individuals to pay partially for the services they get. Such a policy of deductible amounts is a consideration for the insured to cut down on services and avoid making claims.

You can remove moral hazard by reflecting the price with accurate information. The decision to smoke cigarettes or go paragliding looks different when it means increased premiums.

46. Why is Moral Hazard Important?

Ans: It’s important to understand moral hazard because of its impact on both consumers and the economy. The core problem of moral hazard is one of excessive risk-taking. Individuals may feel that they do not need to take precautions because their insurance policies will cover any damages, even if they are still required to pay their deductible or. coinsurance. Homeowners may decide to cut back on security measures because of their property and fire insurance, and car insurance holders may take less caution on the roads.

The problem is twofold: individuals face a greater risk of injury, loss, and even death, and the cost of their risks will only cause their insurance company to increase deductibles and, in turn, the overall price of insurance plans and health care.

Banks and businesses may indulge in moral risk because they believe the US government will give them a safety net if the financial market experiences a crash due to their risk taking. The result is a win-win for businesses–risk-taking can yield greater profits but is also covered by bailout–but a loss for taxpayers, who foot the bill when these risky investments upend the economy.

47. Difference Between Moral Hazard and Adverse Selection.

Ans: In a moral hazard as well as adverse selection, there is information asymmetry between two parties. The primary difference is when it occurs. In a moral hazard situation, one party listing into the agreement provides deceiving information. This changes their behavior once the deal has been made because they believe that they will not face any consequences for their actions. Adverse selection applies to a situation where sellers have more information than buyers about some aspect of product quality.

LONG TYPE QUESTIONS & ANSWERS

1. Who is an agent? Explain the various functions of an agent?

Ans: An agent is a person who is licensed by the Authority to solicit and procure insurance business including business relating to continuance, renewal or revival of policies of insurance. An insurance agent is a representative who sells the policy on behalf of an insurance company. The agent helps consumers select the right insurance based on their needs, but represents an insurance company. Insurance agents will sell and negotiate different insurance policies.

According to Life Insurance Agents (Regulations) Act, 1972 section 8 an agent has to perform the following functions:

(a) Every agent should solicit and procure new life insurance business, which shall not be less than the minimum prescribed in these regulations and shall endeavour to conserve the business already secured.

(b) In procuring new life insurance business, an agent shall:

(i) Take into consideration the needs of the proposer for life insurance and their capacity to pay premiums.

(ii) Make all reasonable inquiries with regard to the lives to be insured before recommending proposals for acceptance, and bring to the notice of the corporation any circumstances which may adversely affect the risk to be under written

(iii) Take all reasonable steps to ensure that the age of the life assured as admitted at the commencement of the policy and 

(iv) not interfere with any proposal introduced by any other agent.

(c) Every agent shall, with a view to conserving business already secured maintain contact with all persons, who have become policy holders of the corporation through him and shall:

(i) Advice every policyholder to effect nomination or assignment in respect of his policy and offer necessary assistance in this regard.

(ii) Ensure that the policy holder remits every instalment of premium to the corporation within the period of grace. 

(iii) Prevent the lapsing of a policy or its conversion into a paid up policy.

(iv) Render all reasonable assistance to the claimants in filling claim forms.

(v) Render all reasonable assistance to the claimants in settlement of claims.

(d) Nothing contained in these regulations shall be deemed to confer any authority on an agent to collect any money or to accept any risk for or on behalf of the corporation or to bind the corporation in any manner what so ever provided that an agent may be authorised by the corporation to collect and remit renewal premiums under policies on such conditions as may be specified.

(e) Every insurance agent shall:

(i) Conduct its dealing with clients with utmost good faith and integrity at all times.

(ii) act with care and diligence.

(iii) Ensure that the client under stands his relationship and on whose behalf the agent is acting.

(iv) Treat all information supplied by the prospective clients as completely confidential to themselves and to the insurer (s) to which the business is being offered.

(v) Take appropriate steps to maintain the securing of confidential documents in their possession. 

(vi) hold specific authority of client to develop terms.

(vii) Understand the type of client he is dealing with and the extent of the client’s awareness of risk and insurance.

(viii) Obtain written mandate from client to represent the client to the insurer; and confirm cover to the insurer after effecting insurance, and submit relevant insurance acceptance and placement slips.

(f) Every insurance agent shall:

(i) Identify and explain as soon as possible the degree of choice in the products that are on offer.

(ii) Ensure that the client understands the type of service it can offer.

(iii) Ensure that the policy proposed is suitable to the needs of the prospective clients.

(iv) give advice only on those matters in which it is knowledgeable and seek or recommend other specialist for advice when necessary.

(v) not make inaccurate or unfair criticisms of any insurer

(vi) explain why a policy or policies are proposed and provide comparisons in terms of price, cover or service where there is a choice of products

(vii) State the period of cover for which the quotation remains valid of the proposed cover is not effected immediately.

(viii) explain when and how the premium is payable and explain the procedure to be followed in the event of loss.

2. What do you mean by underwriting? Discuss in details the process that involved in underwriting.

Ans: Underwriting is the function of evaluating the subject of insurance, which may be a person, property, profession, business or other entity, and determining on the basis of company’s predetermined standards, whether to insure it or not. Underwriting thus, is the insurance function that is responsible for assessing and classifying the degree of risk a proposed insured or group represents and making a decision concerning coverage of that risk. It is the foundation of the process leading to an insurance contract. The success of the insurance business depends on the precision with which the company’s underwriter takés decisions to accept or reject applications and to determine the terms on which the risk to be offered. Underwriter is the person who reviews and select risks to be insured by the insurance company.

The underwriting process generally involves the following steps:

(i) Receiving Application: The first step in the underwriting process is the appraisal of information by the insurance company’s underwriter. Most of the information required for the purpose is obtainable from the insurance application, collected usually by the agents working for the life insurance company. 

The information is categorised into:

(a) The general information which includes particulars such as name, age, address, date of birth, sex, income etc along with details about the insurance coverage such as type of policy, amount of insurance, name etc.

(b) Personal information, which includes information about family and personal history of the proposed insured.

(c) The medical information i.e. extensive information regarding present health of the insured as well as medical history of his/her family.

(d) The agent’s report contains information about the proposer, his income and financial status, where the insured is an individual etc.

(ii) Reviewing Application: The application in order to be acceptable must be executed and must also meet the insurance company’s underwriters would also determine whether any supplementary documentation is required and then take steps to procure the required additional information through appropriate sources.

(iii) Assessing the Risk and Taking Underwriting Decision: After collecting the relevant information the underwriters appraise and categorise the risks, so that the premium for the policy is decided on the basis of primary and secondary factors in conjunction with the rates of premium set for a particular risk profile by the actuaries working for the company. 

On the basis of the above factors the underwriter may take any of the following decisions:

(a) Reject an application for insurance when it represents a risk that is unacceptable to the insurance company. A risk is unacceptable when it does not conform to the underwriting standards.

(b) Issue a policy on a standard basis when it involves a risk that is within the normal, acceptable boundaries of the company underwriting standards for that type of policy.

(c) Issue a policy on a substandard basis when it involves a high risk as per the company’s underwriting standards but is still not deemed to be completely outside its underwriting norms for that types to policy.

(d) Issue a policy on a preferred basis when it involves the lowest category of risk as per the company’s underwriting standards. The insurance company offers lowest possible rates of premium, within the limitations of the relevant insurance regulations, for covering such a risk.

(iv) Policy writing: Policy writing is the function of recording details of the policy in a register for further reference in the future. Each accepted proposal is recorded in the register only after it is consecutively numbered and a review slip is prepared. Seperate files are maintained for each proposal in which the review slip and details of other particulars are kept.

(v) Issue of Acceptance letter and first premium receipt: When the underwriters decide to accept the proposal (application) made to the company through a duly executed proposal form, the company must communicate such acceptance of the proposal through the issue of acceptance letter to the proposer. The first premium receipt is issued on the payment of premium by the proposer.

3. Write a note on the purpose of underwriting. Discuss in details about the methods of rate determination of underwriting.

Or

Write a note on the purpose of underwriting. Explain the various functions of underwriting.

Ans: The underlying underwriting policy of the insurance company is the basis of the underwriting decisions involving selection of risks. The underwriting policy implemented by the insurance company is called its underwriting philosophy or in order words, the fundamental principles of underwriting followed by the insurance company. Unfavourable selection and continuity are indeed the basic underwriting principles, in the sense the underwriter should be careful not to make an adverse selection of risks.

In order to avoid losses, the rate of premium charged should be based on a careful evaluation of the basic risks in each case and must be affordable by the consumer otherwise, the consumer may be compelled to surrender the policy or the policy would lapse, causing serious detriment to the company. For the maintenance of insurance business, continuous renewal of the policy is essential.

The function of underwriting and pricing in insurance business are closely linked. The function of underwriting involves the determination of the risks that are acceptable to the insurance business in order to meet market-competition and proposing the appropriate rate of premium for the coverage. The various alternative methods of rate determination include the following:

(i) Judgement rating: Under this method, the underwriter relies on his own knowledge and experience and the advice of the medical referee and actuaries to determine the rate for each applicant. Thus, the effectiveness of this rating method depends on the underwriter’s analytical abilities.

(ii) Manual Rating: Under this predetermined rates located in manuals are used to set rates for each policy. This method of rate determination is more and more commonly applied, particularly in closely regulated lines of insurance. Manual rates may be specified by the state insurance department or developed within the insurance company or by a rating agency.

(iii) Merit Rating: Under this, manual rates are used and then modified based on certain risk attributes. Rates modification may be based on the experience of the insured over a specified period. Rates are modified on the merit of the case, which may be done on any of the following basic:

(a) Experience merit rating: Under this, the applicant is generally asked about pertinent behaviour or occurrences associated with the insurance cancerate over a specified period and rates are determined on the basis of the experience of the insured during the specified period.

(b) Retrospective merit rating: Under this underwriter reviews the loss experience during the policy period and then sets a rate based on that loss experience. Retrospective merit rating is commonly applied in commercial lines of insurance and also in workers compensation insurance.

(c) Scheduled merit rating: This rating is said to be a sophisticated form of manual rating as the base rates used under this method are indeed the manual rates to/from which addition/substraction may be made. This addition/substraction is based on the amounts determined for various risk characteristics. For instance, the standard rate under this type of rating system may be lowered in cases where, fireproof construction materials are used.

4. What do you mean by insurance underwriting? Explain the various/ different types of underwriters.

Or

What do you mean by insurance underwriting? Write short note on Financial and Medical underwriting. 

Ans: Insurance underwriting is the process of evaluating a risk to determine if the insurance company will insure it and, if yes, then pricing it. Underwriting began as a manual process based entirely on developed acumen. Today, that process also involves the use of tools such as data analytics and artificial intelligence.

Most insurance companies, nowadays deal in different types of insurance and issue a variety of policies for each types of insurance.The different types of underwriters are.

(i) Property and casualty underwriters: Property and casualty underwriters normally specialise in a particular types of property or casualty coverage rather than the complete domain there may be fire underwriters, marine underwriters, homeowners underwriters, automobile etc. A good understanding of the risks involved with each line of insurance with each line of insurance underwritten by an underwriter is essential for the efficient discharge of his responsibilities.

(ii) Personal line and Commercial lines: Property and casualty underwriters may further be classified depending on whether they underwrite personal lines or commercial lines. Different risks affect individual and business differently. Accordingly, the insurance needs of an individual are very different from the needs of business. Of course, both need protection in the form of property and liability insurance. Moreover, there are several types of businesses, each involving different types of risks associated with the business. Hence there may be many specialised underwriting functions even within the domain of commercial lines and accordingly a commercial property and casualty underwriter may even specialise in underwriting specific types of business. 

Similarly, where a property and casualty underwriter works with personal lines applicants, the underwriter will have an intense insight of the specific risks facing individuals who may for instance be homeowners or drivers etc. An underwriter working with exceedingly precious personal property of an individual will be aware of the assessment reports and suitable security measures that should be taken to protect the property.

(iii) Life and Health underwriters: Life and health underwriter are yet another domain in which the underwriters may specialise. It is acquainted with the effect of medical history, personal habits, lifestyle and other health related issues on insurability. The health or life underwriter is capable of analysing and comprehends medical reports and information collected from the Medical Information Bureau. Health insurance being closely regulated, health insurance underwriters are also well concernment in regulations governing health coverage.

(iv) Liability Underwriters: It must understand the liability risks affecting commercial business, professionals or individuals. They should be capable of evaluating past losses, judgements and settlements in terms of the probability of re-emergence in order to ascertain relative future risk. They must also have knowledge of the latest trends in court judgements and with liability laws in order to accurately appraise high-risk applicants

(v) Group underwriters: Many types of insurance, including health insurance is different from underwriting of individual policies. In such cases, a common rate, established after due analysis of the characteristics of the whole group, as well as individuals within the group, is applied to the entire group to be insured. However, the allocated rates is generally a discounted rate for the reason that the individual is only a part of the group, accordingly the insurer’s marketing costs are reduced on a per coverage basis.

5. Define material information/facts. Discuss in details about material information/facts.

Ans: Material fact refers to the relevant and important fact that can form the basis of taking a decision. In life insurance, material facts influence the insurer’s decision of insuring a risk and issuing a policy. Non-disclosure of material facts can lead to cancellation of the policy. Material information is that information which enables the insurance company to decide whether to accept or not to accept any risk or if accepted, at what rate of premium and on what terms and conditions. The legal bindings applies particularly to the insured who is in possession of all material facts relating to the subject matter of insurance contract and the insurer does not have any knowledge about all these relevant facts. This legal binding applies not only to materials facts which the proposer known or possesses, but is also extended to all other material facts which he ought to know or possess about the risk to be insured.

The material facts/information that should be disclose in respect of Life Insurance as given below:

(i) Name, address and occupation of the insured person.

(ii) Date of Birth, age, height and weight etc.

(iii) facts about life and habits.

(iv) Family history (especially with regard to the health of each member) of the proposer.

(v) Information about the health of the proposer.

(vi) Quantum and nature of income of the proposer.

The material facts/ information that should be disclose in respect of Marine Insurance are stated below:

(i) Method of packaging i.e. Whether in single gunny bags or in double gunny bags, whether in container or in special mode of packaging etc.

(ii) Nature of the goods.

(iii) The particulars of the ship carrying the goods.

(iv) The part of shipment and destination along with route of journey. 

The material facts/information that should be disclose in respect of Fire Insurance are stated below:

(i) Construction and description of building.

(ii) Situation of the building.

(iii) Particulars of previous losses suffered,

(iv) Particulars of occupier, whether office, residence, shop, godown, manufacturing unit, service undertaking etc.

(v) Nature of the goods or material i.e. normal, hazardous, non- hazardous, extra-hazardous etc.

(vi) Previously lodged claims and their settlement etc.

6. Who can be assignee. Write a note on minor Assignee.

Or

Who can be assignee. Can minor become Assignee.

Or

Who can be assignee. Where Assignee is a Minor?

Ans: An “assignee” is the person to whom the policy rights have been transferred, i.e. the person to whom the policy has been assigned. In the event rights are transferred from an Assignor to an Assignee, the rights of the policyholder are cancelled, and the Assignee becomes the owner of the insurance policy. 

If the assignment is in the favour of a minor, in the event of a claim, policy money cannot be paid to him as he cannot give a valid discharge. However, a natural guardian is alive, policy money can be paid to him, if there is no natural guardian, policy moneys can be paid to testamentary guardian appointed under the guardians and words Act.

Therefore if the assignment is in favour of a minor, while registering the assignment appointment of a guardian should be suggested. The appointment of a guardian can be done by a separate instrument or on the back of a policy.

The following points should be noted regarding appointment of a guardian:

(a) The appointment relates to the entire property of the minor and not a part of minor’s property.

(b) The guardian must affix his signature to the appointment deed in presence of at least two independent witnesses who must also sign in the presence of each other.

(c) The guardian can be appointed only by the father of the minor, so that whatever the proposer is not the father of the minor, the appointment will have to be made by the father of the minor.

(d) No stamp fee is required on the document of appointment of guardian.

(e) No assignment will be allowed if a prohibitory order of the court has been served on the corporation in respect of the policy.

7. Distinguish between Nomination and Assignment.

Ans: The differences between nomination and assignment are given below:

SI. No.Assignment Nomination
(i)Once an assignment is made cannot be cancelled at the option of the assignor.Nomination does not deprive the life assured of his rights, privileges, options and benefits under the policy,including the right to alter the nominee.
(ii)Must be supported by consideration.Need not be supported by consideration.
(iii)Assignment of the policy confers upon the assignee the benefits under the policy and he is the only person who is entitled to such benefit.A nominee is not entitled to any benefit. His only right is to receive the money in the event of death of the life assured.
(iv)Even if the assignor is alive, benefit of the policy goes to assignee only If the policyholder is alive nominee has not any right to receive the policy moneys.
(v)Notice is required to determine priority between other assignees.Notice is required to be given to the insurer.
(vi)Where assignee is minor, guardian is to be appointed Where nominee is a minor appointment of an appointment by the life assured only is required.
(vii)Guardian cannot be appointed in the working of assignment Appointee can be appointed in working of nomination.
(viii)Must be witnessed May be witnesses.
(ix)If the assignee dies at any time the policy money would be payable to the heirs of the assignee If the nominee dies after the life assured and before settlement of the claim, the policy moneys would be payable to the heirs of the life assured.
(x) Creditors of life assured cannot attach the policy moneys unless the assignment is shown to have been made to defraud the creditors.Creditors of life assured can attach the policy moneys.

8. When does Assignment become effective?Explain the various types of Assignment.

Ans: It is effective immediately on execution. But in order to get recognition from the insurer, the assignor or assignee must serve notice of assignment on the corporation. So, a written notice of assignment as required by the Insurance Act has to be submitted to the office along with the assignment in original or a copy there of certified to be correct by both assignor and assignee for registration of assignment in their books. Normally notice should be served by the assignor. Only when the assignor refuses or is unable to do so, the assignee or his agent can serve the notice of assignment on the insurer.

To decide whether the notice is valid or not, the office will see that:

(a) It is in writing.

(b) It sufficiently identifies the assignment in respect of which notice is given.

(c) It is dated on the same date or on a date assignee or a lawyer action on behalf of the assignor or assignee.

Significance of the Notice:

(a) If several notices of the several assignments are received date of receipt of notice shall regulate priority.

(b) Until notice is served on the corporation any payment made by the corporation, bonafide to the earlier holder cannot be questioned by the assignee.

(c) Once notice is served on the corporation, the corporation is bound to recognize the assignee as the owner or holder of the policy.

An Assignment can be of two kinds:

(a) Absolute.

(b) Conditional.

(a) Absolute Assignment: It is an assignment where all rights, title and interest of the assignor in the policy pass to the assignee. Under this the policy vests absolutely in the assignee and forms part of his estate on his death. He can deal with the policy in any way he likes without the consent of the assignor. So here transfer of rights is absolute and the assignor losses control completely until the policy is reassigned to him.

(b) Conditional Assignment: Under this, the rights revert back to the policy holder when the specified conditions are fulfilled, which may be that the life assured survives the maturity date or the assignee predeceases the life assured. So, in this the assignee takes immediate vested interest but assignment will become either inoperative or rights can get transferred to someone else, on the happening of a specified event during the life time of the assignor.

9. What do you mean by claims? Write a short note on maturity claims.

Or

What do you mean by claims? What are the documents required for maturity claims?

Or

What do you mean by claims? What is the procedure of settlement of maturity claims?

Ans: An insurance claim is a formal request by a policyholder to an insurance company for coverage or compensation for a covered loss or policy event. The insurance company validates the claim and, once approved, issues payment to the insured or an approved interested party on behalf of the insured.

Under endowment types of policies, sum assured is to be paid when the term of the policy is over. The date on which the term is complete, is the date of maturity and the settlement of the sum assured on that date is the maturity claims. The amount payable will be adjusted towards any debts like loan, interest or outstanding premiums. To this, bonuses if any would be added, if it is a with profit policy.

Before making payment, insurer has to satisfy that:

(a) the age stands admitted.

(b) the premiums are all paid.

(c) the life assured is the holder of the policy and his identity is proved.

(d) there are no assignments.

(e) the original policy is handed in

(f) the discharge voucher is duly completed.

The following documents will be called for by the insurer, well before the date of maturity:

(a) Policy document, if not available, it may have been deposited elsewhere as a security for a loan.

(b) Age proof, if the age is not already admitted.

(c) Deed of assignment if any. In case of absolute assignment, the payment will be made to the assignee. If the assignment is conditional, reverting to the policy holder on maturity, payment can be made to the policyholder himself. It will be prudent to check that the assignee has no outstanding claims.

(d) Discharge form issued by the office:

Settlement Procedure of maturity claim is described below:

Procedure is very simple in this type of claims. After receipt of the completed and stamped discharge voucher from the person entitled to the policy moneys, along with the policy documents, post dated cheques are normally sent.

If the assured or the person to sign the discharge is known to be mentally retarded, a certificate from court of law under Indian Lunacy Act appointing a person to act as a guardiarn to manage the properties of the lunatic should be called.

If the assured has been adjusted insolvent by a court of law before the policy has matured for payment and if a notice is received from the official assignee of a court along with a certified copy of the courts order declaring assured as insolvent and also on order appointment official assignee as the assignee of the insolvent’s estate the official assignee should be informed about the date of maturity and other details.

If the life assured is reported to have died before the maturity date, the claim has to be treated as a death claim and proceed accordingly.

10. Write a note of Death claim. What are the types of claims?

Or

What are the documents required for death claim? What are the types of claims?

Or

What is the procedure of settlement of death claims? What are the types of claims? 

Ans: The procedure in death claim settlement are more complex than in the case of maturity claims. The reason is that the facts relating to death have to be studied and the identities of the claimants have to be established.

The following documents will be necessary before a death claim can be settled:

(a) Policy document.

(b) Deed of assignments/reassignments.

(c) Certificate of death.

(d) Proof of age, if not already submitted,

(e) Legal evidence of title, if policy is not assigned or nominated. 

(f) Form of discharge executed and witnessed.

If the claim has occurred within 3 years from the commencement of policy or from a revival following additional requirements may be called for in order to remove any suspicion of suppression of material facts at the time of proposal. 

(a) Statement from the last medical attendant giving details of last illness and treatment.

(b) Statement from the hospital if the deceased had been admitted to a hospital.

(c) Statement from the employer, if the deceased was employed, showing details of leave.

(d) Statement from the person, who had attended last funeral rites & had seen the dead body.

If the life assured had an unnatural death, such as accident, suicide or unknown cause, policy inquest report, panchanama, etc, would also be looked into.

Settlement Procedure for Death claims:

(i) Notice of death: The beneficiary of the policy must send a notice of death of the insured to the company. The death date, the cause of death and policy number must be mentioned.

(ii) Death certificate: On receiving the notice of death, the insurance company will send a claim form. The claimant should fill the form carefully and then submit it. The following documents should be attached to the form,

(a) Death certificate.

(b) Police report in case of unnatural death.

(c) Original policy.

(d) Identity certificate.

(iii) Proof of life: In case the policy is not nominated in the name of the claimant, he will have to obtain a certificate of title of property of the deceased from a court of law.

(iv) Payment: When all the legal formalities are completed, the insurance company will send a discharge form to the claimant. The from should be duly filled in, duly stamped and returned to the insurance company. After the scrutiny of the discharge form, the insurance company will send the cheque to the claimant through registered post.

The contract of life assurance lays down the two contingencies, on the happening of either of which the sum assured is payable:

(i) Death claim: In insurance, a death claim refers to the process by which the beneficiaries or nominees of an insurance policy receive the sum assured or death benefit from the insurance company upon the death of the policyholder.

(ii) Maturity claim: The claim for which a policyholder/life insured can apply for after surviving the complete policy term is called maturity claim. 

11. Discuss in details about Filing a Life Insurance Claim.

Ans: Claim settlement is one of the most important services that an insurance company can provide to its customers. Insurance companies have an obligation to settle claims promptly You will need to fill a claim form and contact the financial advisor from whom you bought your policy. Submit all relevant documents such as original death certificate and policy bond to your insurer to support your claim. Most claims are settled by issuing a cheque within 7 days from the time they receive the documents. However, if your insurer is unable to deal with all or any part of your claim, you will be notified in writing.

Types of claims:

(i) Maturity Claim- On the date of maturity life insured is required to send maturity claim / discharge form and original policy bond well before maturity date to enable timely settlement of claim on or before due dates. Most companies offer/issue post dated cheques and/ or make payment through ECS credit on the maturity date. In case of delay in settlement kindly refer to grievance redressal.

(ii) Death Claim (including rider claim) – In case of death claim or rider claim the following procedure should be followed.

Follow these four simple steps to file a claim:

(a) Claim intimation/notification: The claimant must submit the written intimation as soon as possible to enable the insurance company to initiate the claim processing. The claim intimation should consist of basic information such as policy number, name of the insured, date of death, cause of death, place of death, name of the claimant. The claimant can also get a claim intimation/notification form from the nearest local branch office of the insurance company or their insurance advisor/agent. Alternatively, some insurance companies also provide the facility of downloading the form from their website.

(b) Documents required for claim processing: The claimant will be required to provide a claimant’s statement, original policy document, death certificate, police FIR and post mortuam exam report (for accidental death), certificate and records from the treating doctor/hospital (for death due to illness) and advance discharge form for claim processing. Based on the sum at risk, cause of death and policy duration, insurance companies may also request some additional documents.

(c) Submission of required documents for claim processing: For faster claim processing, it is essential that the claimant submits complete documentation as early as possible. A life insurer will not be able to take a decision until all the requirements are complete. Once all relevant documents, records and forms have been submitted, the life insurer can take a decision about the claim.

(d) Settlement of claim: As per the regulation 14 (2)(i) of the IRDAI (Policy holder’s Interest) Regulations, 2017, the insurer is required to settle a claim within 30 days of receipt of all documents including clarification sought by the insurer. However, the insurance company can set a practice of settling the claim even earlier. If the claim requires further investigation, the insurer has to complete its procedures expeditiously, in any case not later than 90 days from the date of receipt of claim intimation and claim shall be settled within 30 days thereafter.

12. What do you mean by physical hazards? Give some Examples of Physical Hazard of Insurance. 

Ans: Physical Hazards are physical conditions that increase the possibility of a loss. They indicate the dangers of the subject of insurance which can be identified by inspection of the risk.Physical hazards are actions, behaviours, or conditions that cause or contribute to peril. Smoking is considered a physical hazard because it increases the chance of a fire occurring. It also is considered a physical hazard in regard to health insurance because it increases the probability of severe illness.

Some examples in the various branches of insurance will make the position further clear:

(A) Marine Insurance:

(i) The nature of the cargo, whether these are more susceptible to damage, e.g., fragile nature of the cargo like fish, egg etc. or glass items which are more prone to breakage.

(ii) Quality of packing of the goods. Bad quality packing creates more losses.

(iii) The voyage itself may be hazardous particularly during the monsoon period in our country.

(iv) Nature, construction, age, classification, and condition of a vessel. For example, an over-aged vessel or a vessel in a bad shape or a vessel in an unseaworthy condition presents higher risks and is more affiliated with accidents.

(B) Fire Insurance:

(i) Nature and construction of the building. Materials used in the construction and whether such materials are of combustible or noncombustible nature.

(ii) The system of lighting and heating of the premises. Whether the electrical wirings are in good shape or worn-out.

(iii) Whether the premises are kept clear. Rubbishes scattered here and there help the fire to spread.

(iv) Indiscriminate smoking throughout the premises, particularly if it is a factory where inflammable materials are required to be kept, is in itself an example of physical hazard.

(v) Whether the risk is situated near the fire brigade, and whether internal firefighting facilities are there on the premises.

(vi) Nature of occupation of the premises, e.g., if it is a petroleum or kerosene or chemical trade the hazard will be more.

(vii) Nature, construction, the occupation of the adjoining premises because fire may travel from the adjoining premises to the insured premises.

(C) Life Insurance:

(i) Age and condition of health of the proposer.

(ii) The family history of any hereditary disease, e. g., cancer, tuberculosis, blood pressure, heart disease etc.

(iii) History of any illness of the proposer.

(iv) The occupation of the proposer, for example, publicans, factory workers, mine workers etc. are more hazardous from life insurance point of view.

(D) Accident Insurance: Examples will vary depending on the type of insurance;

(i) In motor insurance, the age, make, condition previous accidents, are all examples of physical hazard.

(ii) In burglary insurance, the construction of the house, condition of doors and windows, existence or otherwise of burglar alarms, nature of contents, reputation or otherwise of the area are all examples of physical hazard.

(iii) In personal accident insurance, physical hazard relates to age, occupation, health, physical condition etc, of the proposer.

(iv) In liability insurance, the natural construction, occupation of the premises and history of past liability are all instances of physical hazard.

(v) In property insurance, the concept follows the pattern of fire insurance.

13. Define moral hazard? How do you manage moral hazard? Give some Examples of Moral Hazard.

Ans: A moral hazard in insurance occurs when the borrower knows that someone else [Insurer] will pay for the mistakes he makes. This, in turn, gives him the spur to act in a riskier way. This economic concept is known as a moral hazard. Moral hazard is a situation in which one party engages in risky behaviour or fails to act in good faith because it knows the other party bears the economic consequences of their behaviour. Any time two parties come into an agreement with one another, moral hazard can occur.

There are a few ways to minimise moral hazards The first is to encourage the risk-taking party to act more responsibly by offering them incentives. The second is to institute policies that discourage immoral behaviour by making it a punishable offence. Finally, regular monitoring allows the at-risk party to remain aware of whether or not the other party is taking advantage of them.

Moral hazard exists in many different fields. Here are a few examples:

(i) The global financial crisis: The 2007-2008 global financial crisis was a textbook example of moral hazard in banking. Lower interest rates sent borrowers after cheap loans that lenders provided to banks that then sold them to investors. But when the Federal Reserve, or, Fed, raised interest rates, the housing market crashed. Homeowners defaulted on their subprime mortgages, sending investors and banks into bankruptcy.

The government’s attempt to lessen the damage caused a loss of trillions of dollars from the global economy.

(ii) Employees in the workplace: Individuals may create moral hazards in job environments. Employees may take less care of office technology like laptops or even incentives like company cars because their employer will pay for them if damaged.

(iii) Insurance coverage: Insurance coverage can lead to moral hazard when policyholders engage in risky behavior in the belief that insurance companies will foot the bill in the case of injury or property damage.

(iv) Carelessness: It is an implied condition of all insurance contracts that the insured must take all reasonable precaution in averting or minimising a loss. Carelessness is the cause of most of the accidents and when the insured behaves carelessly, an unsatisfactory moral hazard is created.

(v) Difficult Insured: An insured may be always uncompromising and litigation-minded. He may refuse to accept the amount offered by insurers and press for an unreasonable amount.

(vi) Fraud: A very unsatisfactory moral hazard exists when a person wants to take out a policy with the intent to make a profit.

(vii) Over insurance: Excessive over insurance is apparently an instance of bad moral hazard.

14. Mention the duties of agents towards principal. Discuss the rights of agent towards his principal.

Ans: Duties of Agent to Principal:

(i) The primary duty of an agent is to carry out the work undertaken according to directions of principal.

(ii) He must perform the work with proper care, skill and diligence.

(iii) It is his duty to pay to his principal all money received on his account. The agent is however, entitled to deduct his lawful charges.

(iv) It is the duty of an agent, in case of difficulty to use all reasonable diligence in communicating with his principal and obtain his instructions.

(v) It is the duty of an agent to render accounts to the principal  when the principal demands. 

(vi) He should not use any information obtained by him in the cause of the agency against his principal. 

(vii) Agent must not place himself in such a position that his duty and his interest will conflict.

(viii)  The agent must not delegate his work to another which has been delegated to him by his principal. 

An agent possess the following rights against the principal:

(i) Right to Receive Remuneration: The agent is entitled to receive the agreed remuneration but in the absence of any contract or agreement, he receives reasonable remuneration.

(ii) Right of Retainer: The agent has the right to retain all money due to him in respect of the remuneration, out of any sum received on account of the principal in the business of the agency.

(iii) Right of lien: An agent can retain goods, papers and other property, whether movable or immovable, until the principal pays him the amount due for commission disbursement and services rendered.

(iv) Right of Indemnification: An agent can claim indemnity only in respect of lawful acts done by him in exercise of the authority in the course of agency business.

(v) Right of Compensation: The agent has a right to be compensated for injuries sustained by him by the negligence of the principal or any loss due to principal’s want to skill.

(vi) Right to stoppage in Transit: The agent has the right to stop the goods in transit, in case if he does not receive the money due from the principal.

15. Write notes on:

(a) Agents compensation.

Ans: Agents compensation: The method of remunerating agents varies according to the plans & policies of the insurance and term of the Policies. A life insurance agent works on commission which is a stated percentage of premium. In general insurance sector, commission structure varies from time to time. Company pays the commission as per the profitability of the individual insurance products the rates of commission ranges from 5 to 15% of the premium and if the company is in loss, in that case the company can avoid to pay the commission on that.

The method of remunerating agents are specified below:

(i) The premium differs between first year premium and subsequent premium as in endowment policies, the commission payable is 25% of the first years premium, 7.5% of the second and third years renewal premium and 5% of subsequent renewal premium.

(ii) When the business exceeds specified levels, the first year’s premium can increase by 10% making it 35% instead of 25%.

(iii) In money back 15% in the first year’s premium, 10% of the second and third years premium and 6% of the subsequent premium.

(iv) When the business exceeds by specified levels, the first year’s commission goes up by another 6% making it 21% instead of 15%.

(b) Insurance Intermediaries.

Ans: Insurance Intermediaries: Under IRDA, only insurance agents are allowed to carry insurance business and act accordingly. These agents are authorised and hold responsible for the job of licensed insurance agents. There are differente kinds of agents recognised under the contract act. Agency and brokerage systems are most common and contribute their maximum share in the field of insurance business, specially life insurance. These brokers deal with exchange of reinsurance business on international basis. These brokers are also allowed to work for non-life insurance business, with more than one company. He can charge commission in this regard from the insurance company. He cannot charge the prospects for any such commission.

Again for instance, in the airline industry, there is a system of general agent, who has the authority to act on behalf of the principal on all matters but within a specific limit. This type of agent system also exists in the shipping business where the general agents represent foreign shipping companies to deal with local authorities like the ports or the stevedores etc.

In advanced countries like U.K. the broker has to register himself with the Insurance Broker Registration Council and a high standard of professional skill and conduct is expected from such brokers.

16. Write short notes on Agents regulation.

Ans: For becoming an insurance agent a licence is required under section 42 of the Insurance Act, 1938 which is regulated by the Insurance Regulatory and Development Authority. (IRDA), constituted by the IRDA Act of 1999. The IRDA has issued the IRDA (Licensing of Insurance Agents) Regulations, 2000.

The Insurance Act, 1938 prescribes that no licence shall be granted to the person if he suffer from any of the following disqualifications:

(i) That a person is a minor.

(ii) That he is found to be of unsound mind by a court of competent jurisdiction.

(iii) That he had been found guilty of criminal misappropriation or criminal breach of trust or cheating or forgery or an abetment of or attempt to commit any such offence.

(iv) That he is found guilty of or knowingly participating in on conniving at any fraud, dishonesty or misrepresentation against an insurer or an insured.

(v) That he is not possessing the requisite qualification required as per law.

(vi) That he has not passed such examinations as are specified by the Regulations.

(vii) If he is found violating the code of conduct.

In the case of a firm or company desirous of becoming an insurance agent, all the partners or directors must fulfil all the requisite conditions. Applications for grant of licence can be made in the prescribed form along with Rs. 250 as application fee. Secondly, he must have gone for 100 hours training from a recognised Institute of Insurance Regulatory Development Authority (IRDA). After that he has to appear in a written test and if he qualifies the test, in that case licence is issued. Licence once issued shall be valid for 3 years. This licence can be cancelled, if the agent acquires any of the disqualifications.

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