IC38 Notes

What is insurance?

• Insurance - in simple language, it means transferring risk to someone who is capable of handling it - generally the insurer (insurance company).

Life insurance history and evolution

• The origin of the insurance business started from Lloyd's coffee house in London.
• Amicable Society for a Perpetual Assurance - the 1st life insurance company in the world.
• The Oriental Life Insurance Company Ltd. - the 1st life insurance company to be set up in India.
• Triton Insurance Company Ltd. - the 1st non-life insurance company established in India.
• Bombay Mutual Assurance Society Ltd. - the 1st Indian insurance company, founded in 1870 in Mumbai.
• National Insurance Company Ltd. - the oldest insurance company, founded in 1906.
• 1912 - the Life Insurance Companies Act and the Provident Fund Act were passed to regulate the insurance business.
• The Life Insurance Companies Act, 1912 - made it compulsory that premium rate tables and periodical valuation of companies be certified by an actuary.
• The Insurance Act, 1938 - the first legislation enacted to regulate the conduct of insurance companies in India.
• 1st September 1956 - life insurance business was nationalised by merging 170 insurance companies and 75 provident fund societies, and the Life Insurance Corporation of India (LIC) was formed.
• 1972 - non-life insurance business was nationalised by amalgamating 106 insurers, and the General Insurance Corporation of India (GIC) and its 4 subsidiaries were formed.
• Malhotra Committee and IRDA - the Malhotra Committee was set up in 1993 to explore and recommend changes for the development of the industry, and it submitted its report in 1994.
• IRDAI - the Insurance Regulatory and Development Authority of India was set up by the IRDA Act, 1999 as a statutory regulatory body for both life and non-life insurance.

Life insurance industry today

• Life Insurance Corporation (LIC) of India is a public sector company.
• There are 23 life insurance companies in the private sector.
• The postal department, under the Government of India, also transacts life insurance business via Postal Life Insurance, but is exempt from the purview of the regulator.

How insurance works

There must be an asset which has economic value (car - physical; goodwill - non-physical; eye - personal). These assets may lose value due to an uncertain event. This chance of loss or damage is known as risk, and the cause of risk is known as peril. Persons having similar risks pool (contribute) money (premium) together.

There are 2 types of risk burdens

• Primary burden of risk - losses actually suffered, e.g. a factory catching fire.
• Secondary burden of risk - losses that might happen, e.g. physical / mental stress and strain.

Risk management techniques

The various types of techniques that can be used to manage risk are:

• Risk avoidance - controlling risk by avoiding a loss situation.
• Risk retention - one tries to manage the impact of risk and decides to bear the risk and its effects by oneself.
• Risk reduction and control - a more practical and relevant approach than risk avoidance. It means taking steps to lower the chance of a loss occurring and / or to reduce the severity of its impact if such a loss should occur.
• Insurance - is a risk transfer mechanism.

Insurance as a tool for managing risk

• Don't risk a lot for a little. E.g. there is no need to insure a ball pen as its cost is not high.
• Don't risk more than what you can afford to lose. E.g. you cannot afford not to insure your house as its cost is high.
• Don't insure without considering the likely outcome. E.g. can anyone insure a space satellite?
• Insurance refers to protection against an event that might happen, whereas assurance refers to protection against an event that will happen.

Role of insurance in society

• Insurance benefits society economically and socially.
• It also provides employment.
• The money raised from premiums is invested in the development of infrastructure.
• It removes the fear, worry and anxiety associated with one's future.

Insurance schemes

• Govt. sponsored insurance schemes - Employees' State Insurance Corporation, Crop Insurance Schemes (RKBY), Rural Insurance Schemes.
• Run by insurers and not supported by Govt. - Janata Personal Accident, Jan Arogya.

Customer service

• Customers provide the bread and butter of a business, and no enterprise can afford to treat them indifferently.
• The role of customer service and relationships is far more critical in insurance than in other products, because insurance is a service - an intangible good.
• It is necessary for insurance companies and their personnel, including their agents, to render high quality service and delight the customer.

Customer service and insurance

• The secret of success in insurance sales is commitment to serving customers.
• Customer lifetime value - the sum of economic benefits that can be derived from building a sound relationship with a customer over a long period of time.

Insurance agent's role in providing great customer service

• Point of sale - the 1st point of service is the point of sale. The agent should understand the customer's needs and suggest products whose benefits and features suit them best. The role of an agent is like a personal financial planner and advisor.
• Proposal stage - the agent has to help customers fill in the proposal form. It is important that the agent explains and clarifies the proposer's doubts while filling in the form.
• Acceptance stage - the agent's promptness in handing over the FPR (First Premium Receipt) builds confidence in the customer's mind. Delivery of the policy bond is another major opportunity.
• Premium payment - agents can stay in continuous touch with customers through reminder calls for premium dues, to avoid lapsation of the policy.
• Claim settlement - agents play a crucial role during claim settlement by providing the policyholder details required at the investigation stage.
• Communication skills - one of the most important sets of skills an agent needs for effective performance is soft skills - the ability to interact effectively with co-workers and customers. A good relationship is built on the TRUST you generate in your customer's mind through attraction, being present and communication.
  • Communication can take place in several forms - oral, written, non-verbal and body language.
• Elements of effective listening - paying attention, providing feedback, responding appropriately, empathetic listening and not being judgemental.

Non-verbal communication

A) Making a great first impression

• Always be on time.
• Present yourself appropriately.
• A warm, confident and winning smile.
• Be open, confident and positive.
• Show interest in the other person.

B) Body language

Body language refers to movements, gestures and facial expressions - the way we talk, walk, sit and stand.

• Listening skills
• Active listening

Active listening

Active listening is where we consciously try to hear not only the words but also, more importantly, try to understand the complete message being sent by the other person.

• Paying attention
• Demonstrating that you are listening - the use of body language plays an important role here.
• Providing feedback
• Not being judgemental - a judgemental approach can make the listener unwilling to allow the speaker to continue speaking, considering it a waste of time.
• Responding appropriately
• Empathetic listening - being empathetic literally means putting yourself in the other person's place and feeling his or her experience as he or she would feel it.

Grievance redressal mechanism

IRDA has various regulations to address consumers' grievances / complaints, which come under the Protection of Policyholders' Interests Regulations, 2002.

• Integrated Grievance Management System (IGMS) - launched by IRDA, it acts as a central repository of insurance grievance data and as a tool for monitoring grievances in the industry. Policyholders can register on this system with their policy details, and complaints are then forwarded to the respective insurance company.
• The Consumer Protection Act, 1986 - the act was passed "to provide for better protection of the interests of consumers and to make provision for the establishment of consumer councils and other authorities for the settlement of consumer disputes".

Important definitions

• Service - any provision made available to potential users, such as banking, financing, transport, insurance etc.
• Consumer - any person who buys any goods for a consideration, or hires or avails of any services for a consideration.
• Defect - any fault, imperfection, shortcoming or inadequacy in the quality, nature, manner or performance of any service taken by the customer.
• Complaint - any allegation given in writing regarding any unfair trade practice, defect in goods, deficiency in services hired or availed, or excess pricing.
• Consumer dispute - a dispute where the person against whom the complaint is made denies and disputes the allegations made against him.

Ombudsman

• Total offices of the Ombudsman in India - 12.
• The Ombudsman's power is restricted to a value not exceeding Rs. 20 lakhs.
• Recommendations should be made within 1 month of receipt of a complaint.
• The complainant has to accept the recommendation in writing within 15 days of receipt of such recommendation.
• Insurance companies are required to honour the AWARDS passed by the Ombudsman within 15 days.
• If the dispute is not settled, the Ombudsman will pass an award to the insured within 3 months / 90 days from the date of receipt of the complaint.
• The insured should acknowledge within 1 month of receipt of such award.

Complaints can be made to the Ombudsman if:

The complainant had made a previous written representation to the insurance company and:

• The insurance company had rejected the complaint.
• The complainant had not received any reply from the insurer within one month.
• The complainant is not satisfied with the reply given by the insurer.
• The complaint is made within one year from the date of rejection by the insurance company.
• The complaint is not pending in any court or consumer forum.

Judicial channels

National Commission

• Established by the Central Government by notification.
• Complaints with a claim value exceeding Rs. 1 crore, and appeals against the orders of any State Commission.

State Commission

• Established by the State Government by notification.
• Complaints with a claim value exceeding Rs. 20 lakhs but not exceeding Rs. 1 crore, and appeals against the orders of any District Forum within the state.

District Forum

• Established by the State Government in each district.
• Complaints with a claim value up to Rs. 20 lakhs.

Important days

• 10 days - the insurer has to reply to the policyholder on any enquiry.
• 15 days - the customer can cancel the contract within 15 days of receiving the policy (free look period / cooling off period).
• 15 days - the insurer has to inform the proposer about acceptance or rejection of the proposal.
• 15 days - in case of a claim, the insurer can ask for additional documents within 15 days of receiving the claim documents.
• 15 days - the insurer has to honour the award passed by the Ombudsman within 15 days.
• 15 days - grace period for the monthly mode of premium payment.
• 31 days or one month - grace period for the quarterly / half-yearly / annual modes.
• 30 days - the Ombudsman has to pass a recommendation.
• 30 days - the insurer has to settle the claim within 30 days of receiving the claim documents.
• 90 days - the Ombudsman has to pass an award within 90 days.
• 180 days - maximum time in case of disputed claims.

Regulations of insurance agents

• The Appointment of Insurance Agents Regulations came into force with effect from 1st April 2016.
• A letter of appointment is issued by an insurer to any person to act as an insurance agent.
• Insurance Agent - an individual appointed by an insurer for the purpose of soliciting or procuring insurance business, including business relating to the continuance, renewal or revival of policies of insurance.
• Composite Insurance Agent - an individual who is appointed as an insurance agent by two or more insurers, subject to the condition that he / she shall not act as insurance agent for more than one life insurer, one general insurer, one health insurer and one each of the mono-line insurers.
• Centralised List of Agents - a list of agents maintained by the Authority, which contains all details of agents appointed by all insurers.
• Designated Official - an officer authorised by the insurer to make the appointment of an individual as an insurance agent.
• An applicant seeking appointment as an insurance agent of an insurer shall submit an application in Form I-A to the Designated Official of the insurer.
• The Designated Official shall communicate the reasons for refusal of appointment as agent to the applicant in writing, within 21 days of receipt of the application.

Appointment of composite insurance agent by the insurer

An applicant seeking appointment as a Composite Insurance Agent shall make an application to the Designated Official of the respective life, general, health or mono-line insurer.

• Composite agency application - Form I-B.
• Insurance Agency Examination - an applicant shall pass the Insurance Agency Examination conducted by the Examination Body in the subjects of Life, General or Health Insurance.
• Disqualification to act as an insurance agent - the conditions for disqualification shall be as stipulated under Section 42 (3) of the Act.

Insurance contract

An insurance policy is a contract between 2 parties - the insurer (insurance company) and the insured (policyholder) - as per the Indian Contract Act, 1872.

For any contract to be a valid contract, the following elements should be there:

• Offer and acceptance - of the 2 parties, one should make an offer and the other should accept it. Usually the offer is made by the proposer (policyholder) and acceptance is made by the insurer.
• Consideration - the premium paid by the policyholder and the promise to indemnify by the insurer is known as consideration.
• Agreement between parties - both parties should agree to the same thing.
• Free consent - there should be no pressure on the proposer while taking the policy. Consent is free when the policy is taken without coercion, undue influence, fraud, misrepresentation or mistake.
• Capacity of the parties - the proposer should be legally competent, i.e. of sound mind, not disqualified by law and not a minor.
• Legality - the object of the contract must be legal.

Special features of an insurance contract

• Uberrima Fides (utmost good faith) - every party to the contract must disclose all material facts relating to the subject matter of insurance, whether asked or not.
• Material facts / information - the proposer's family history, medical history, financial details, occupational details, illness if any, habits etc. are known as material facts.

Breach of utmost good faith

• Non-disclosure - not informing certain details.
• Concealment - intentionally not giving details.

Misrepresentation

• Innocent - giving wrong information by mistake.
• Fraudulent - intentionally giving wrong information.

Other important principles

• Insurable interest - the financial interest the proposer has in his belongings, i.e. self, spouse, parents, house, car etc.
  • In life insurance - insurable interest should be present at the start of the policy.
  • In non-life insurance - insurable interest should be present both at the start and at the time of claim.
  • In marine insurance - insurable interest should be present at the time of claim.
• Proximate cause - the main, effective reason behind the chain of events that results in a loss.
• Free look period (cooling off period) - if the proposer, after taking a policy, wants to cancel or reject it, he or she can do so within 15 days of receiving the policy.
• Indemnity - the policyholder who suffers a loss is compensated so as to be put in the same financial position as he or she was in before the loss event occurred.
• Subrogation - the process an insurance company uses to recover claim amounts paid to a policyholder from a negligent third party.