IC-11 Practice of General Insurance PDF

IC 11 PRACTICE OF GENERAL INSURANCE Acknowledgement: This course has been prepared with the assistance of A N. Kaikini, George E. Thomas A.S.Choubal Madhuri Sharma, Nandini Nalkur We also acknowledge GTG, Pune for their contribution in preparing the study material. INSURANCE INSTITUTE OF INDIA G- Block, Plot No. C-46, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051 PRACTICE OF GENERAL INSURANCE IC-11 First Edition – 2011 All Rights Reserved: This course is the copyright of the Insurance Institute of India. In no circumstances may any part of the course be reproduced. The course is purely meant for the purpose of study of the subject by students appearing for the examinations of Insurance Institute of India and is based on prevailing best industry practices. It is not intended to give interpretations or solutions in case of disputes or matters involving legal arguments. Published by Sharad Shrivastva, Secretary- General, Insurance Institute of India, G- Block, Plot No. C-46, Bandra – Kurla Complex, Bandra (E) Mumbai – 400051 and printed at ……. PREFACE Introduction Insurance business in India is primarily considered under two major categories namely life insurance and general insurance (also known as non-life insurance) We live and express ourselves through our possessions. We also derive material value from our homes and other possessions. These things fulfil our needs, act as a source of comfort and satisfaction and also enable us to earn money. However, human life has greater value. We treasure them all for what they are and what they can do for us. In the language of economics we call them assets. These assets can be destroyed or their values affected by various unforeseen events. Life can be ravaged or cut short by disease or death. Our properties can be destroyed by fires or earthquakes or they can simply be taken away by burglars. Even if these events do not occur, the fact remains that we are exposed to the chance of their happening. This situation of uncertainty about the future can make it difficult to plan and conduct any human enterprise. However, while the future is uncertain, it is possible to predict what will happen to a reasonable extent. Fortunately, only a few of us suffer a certain type of loss at the same point of time. These two aspects - that loss affects only a few and that its chance of occurrence can be predicted on the basis of past experience - have enabled mankind to create a wonderful institution called insurance. It provides a mechanism by which the economic losses that one would suffer as a result of an event can be shared by all members of a group exposed to the same event. Just as small streams and rivulets go to make the mighty ocean, the small contributions of numerous individuals in a group get collected and pooled into a common fund. The unfortunate few, who suffer a loss, get compensated from this fund created by the contributions of many. In this book, we shall get introduced to the insurance we will study the markets – both domestic and international, the documentation and processes, individual classes of business, underwriting, rating, claims and insurance accounting. We will have an insight into what it is all about and how it works in various contexts. CONTENTS CHAPTER TITLE PAGE NO. NO. CHAPTER 1 Introduction to General Insurance 1 CHAPTER 2 Policy Documents and Forms 43 CHAPTER 3 Fire and Marine Insurance 69 Motor Insurance and Personal Liability CHAPTER 4 108 Insurance CHAPTER 5 Engineering and other insurance 145 CHAPTER 6 Underwriting 178 CHAPTER 7 Ratings and Premium 208 CHAPTER 8 Claims 233 CHAPTER 9 Insurance Reserves and Accounting 262 1 CHAPTER - 1 INTRODUCTION TO GENERAL INSURANCE Chapter Introduction In this chapter, you will get introduced to general insurance. You will learn about the origin of insurance as well as the insurance market within and outside India. You will also learn about the different roles within the insurance industry. We aim to help you understand the framework of the insurance market place and how all the individual roles fit in it. a) Know about the Indian insurance market. b) Know about the international insurance market. c) Understand the roles in insurance. 2 1. Know about the Indian insurance market. [Learning Outcome a] 1.1 The origin of insurance Insurance, as conceived as a method of sharing of losses, embodying the principle of co-operation existed in the early civilisation. There is evidence that during the Aryan civilisation, loss of profits in crafts industry was insured against by the village co-operatives in India. Similarly, contracts safeguarding risks of transport by sea or land were in existence under the auspices of traders’ guilds and unions. Insurance understood as a technique providing protection against the fortuitous events for a consideration had its origin in the “bottomry bonds” which were issued by the Mediterranean merchants as early as fourth century B.C. A bottomry loan was an advance of money on a ship during the period of voyage. The loan was repayable with the agreed rate of interest, on arrival of the ship safely at destination; if the ship was lost during the voyage, the obligation to repay the loan was extinguished. The interest payable constituted a sort of premium for the risk of total loss. Similar loans were granted on the security of cargo and were called “respondentia bonds”. References to similar practices are also found in “Manab Dharma Shastra” (Code of Manu) which contained rules for “sea-form” contracts which were observed by the traders from Broach and Surat who set sail in Indian-built ships laden with Indian merchandise to Lanka, Egypt and Greece. Another fore-runner of insurance was the marine practice of general average whereby losses voluntarily incurred to save the common maritime venture were shared by contributions from all the interests – ship, freight and cargo – saved by the general average act. This practice dates back to 916 B.C., when the Rhodians practised it in their Mediterranean trade, involving transport of goods in rowing boats. 3 However, the earliest transactions of insurance as practised today can be traced to the beginning of the fourteenth century in Northern Italy. The Italian merchants, who were engaged in the Mediterranean trade with India via Constantinopole and with the European countries by land, originated the practice of breaking up the bottomry bonds into two instruments covering separate transactions – the advance of money which was to be repaid on safe arrival of the ship and a policy of assurance which paid the amount stated, in the event of loss at sea. This, then, was the beginning of marine insurance. 1.2 Indian general insurance market - Historical milestones 1938 Introduction of a comprehensive Act called The Insurance Act, 1938 1939 Insurance Rules were framed for effectuating the Insurance Act 1956 Government of India took over all life insurance companies 1968 The Insurance Act, 1938 was amended to provide for social control, minimum solvency margin & setting-up of Tariff Advisory Committee (TAC) 1971 The General Insurance (Emergency Provisions) Act was passed & Government of India took over management of general insurance business, pending nationalisation 1972 General Insurance Business (Nationalisation) Act was passed 1973 General Insurance Corporation of India (GIC) came into existence as a Government Company. A year later 107 insurers practicing general insurance business were grouped and merged to form four subsidiaries of GIC namely: (1) National Insurance Company Ltd. (2) The New India Assurance Company Ltd., (3) The Oriental Fire & General Insurance Company Ltd (4) United India Fire & General Insurance Company Ltd 1991 Introduction of Public Liability Insurance Act 1991 and Public Liability Insurance Rules 1991 4 1994 The Malhotra Committee (set up by Govt. in 1993 under chairmanship of Shri R. N. Malhotra, former Governor of RBI, to examine potential reforms that could be undertaken in the insurance sector and complement them with reforms initiated in other sectors) submitted its report in January 1994 and recommended establishment of a strong and effective insurance regulatory authority. 1998 Insurance Ombudsman Redressal of Public Grievances Rules 1998, issued. 1999 Based on the Malhotra Committee Report the Insurance Regulatory and Development Authority (IRDA) Act, 1999 was passed in December 1999 and The Insurance Regulatory and Development Authority (IRDA) was established to regulate, promote and ensure orderly growth of the insurance and reinsurance business. 2001 In addition to the existing Government insurance companies, private sector companies were licensed by IRDA to conduct general insurance business, 2002 General Insurance Business (Nationalisation) Amendment Act, 2002.The important amendment was that the subsidiaries of GIC were restructured as independent companies and GIC was converted into a national reinsurer. 2003 This year witnessed the introduction of broker for the first time in Indian insurance market. It is important to stress here that the insurance market is very similar to any other commercial market. The following grid illustrates the point. Makers / Suppliers / Products Buyers Sellers Distributors Consumer Manufacturers Retailers Customers Goods Insurance People Insurance Agents Products & Insurers seeking and Brokers Services protection 5 a) Insured: name given to any person or organisation who buys an insurance policy by paying premium for insurance protection b) Intermediaries: people or organisations who sell insurance for insurers - bringing together those who offer insurance protection and those who want to buy it c) Insurer: organisations that offer and provide the capital for insurance protection Question 1 When did General Insurance Corporation of India (GIC) commence business operations? A. 1970 B. 1971 C. 1972 D. 1973 1.3 The structure of Indian general insurance market Insurance Regulatory & Development Authority (IRDA): Is the Regulatory body established under The Insurance Regulatory & Development Authority Act, 1999 and reports to Ministry of Finance Government Insurance Companies: Also known as Public Sector Insurers. They are 100% owned by the Government of India and work under the Department of Banking and Insurance, Ministry of Finance. They have an association known as General Insurers’ (Public Sector) Association of India (GIPSA), which is headquartered in Delhi. Private Insurance Companies: These can be either 100% Indian Owned Companies or in joint venture with a foreign insurer; the foreign partner’s stake restricted to maximum 26%. Brokers: These can be either Direct Broker, Reinsurance Broker or Composite Broker (doing both Direct and Reinsurance broking). To be licensed by IRDA as per Broking Regulations. 6 Agents: To be appointed by Insurers in conformity with training and certification criteria in the IRDA regulations. Loss Assessors: As required under the Insurance Act all losses above INR. 20,000 are to be surveyed by licensed surveyors. Licenses are issued by IRDA, whereas empanelment is done by Insurance Companies. Training: IRDA has accredited institutes for training of Agents. Insurance Institute of India (which was previously known as Federation of Insurance Institutes) conducts insurance diploma examinations on same lines as Chartered Insurance Institute, London. Its College of Insurance conducts a variety of training programmes for personnel from insurance industry and other organisations. National Insurance Academy: Established in 1980 with prime objective of training insurance executives and conducting research and development in insurance industry is governed by LIC and GIC of India. Question 2 Which of the following is the regulator of insurance business in India? A. General Insurance Corporation of India B. Life Insurance Corporation of India C. Insurance Institute of India D. IRDA 1.4 Classification of general insurance companies Apart from their basic classification as Public Sector and Private Sector companies, the Indian General Insurance companies can also be classified into different groups by the lines of business conducted by them: 7 Diagram 1: Non-life insurance segmentation a) Companies conducting all lines of business: these are both within the Public and Private Sector. b) Health insurance companies: this is the first initiative in the direction of specialisation and has been undertaken by the private sector. Health Insurance has always been seen by the Government as crucial, with the original proposition in 1998 being for the market to open only for health insurance. Companies like Max Bupa Health Insurance, Apollo Munich Health Insurance, Star Health and Allied Insurance Company Limited are some of the companies specialise in and do only health insurance business. c) Agriculture insurance company: the Agriculture Insurance Company of India Ltd. (AICL) opened for business in 2003. It was established in 2002 with the aim of promoting crop insurance business and to protect farmers against crop losses suffered due to natural calamities. 8 The share capital is provided by GIC, NABARD and the 4 public sector insurers and is headquartered in New Delhi. d) Credit insurance company: the Export Credit Guarantee Corporation of India Limited (ECGC) commenced business in July 1957 and provides export credit insurance support to Indian exporters. It is owned by the Government of India and is the fifth largest credit insurer in the world in terms of coverage of national exports. ECGC offers overseas investment insurance (OII) to Indian companies various credit risk insurance covers to exporters against loss in exports offers guarantees to banks and financial institutions in respect of exports e) Reinsurance Company: General Insurance Corporation of India (brand name - GIC Re) was originally the holding company of the 4 Public Sector General Insurance Companies. Later in 2000, GIC was approved as an Indian reinsurer with the aim of optimising retention of reinsurance business within the country and developing adequate reinsurance capacity. GIC manages the Indian insurance pools on behalf of the industry. These pools include: Marine Hull Pool Terrorism Pool Indian Motor Third Party Insurance Pool GIC has branch offices in London, Dubai and Kuala Lumpur and continues to participate in the share capital of Kenindia Assurance Company Ltd. (Kenya), India International Insurance Private Limited (Singapore) and LIC (Mauritius) Offshore Limited, a joint venture company promoted by LIC of India in Mauritius. It also has a representative office in Moscow, Russia. As of June, 2011, GIC continues to be the only company licensed by IRDA to conduct reinsurance business. Some foreign reinsurers are interested in operating in India, such as Swiss Re, Munich Re, Scor Re, Hannover Re etc. have been allowed to open some form of liaison /servicing /consulting office within India. 9 f) State Govt. Insurance Departments / Funds: These are the insurance departments of some of the Indian States like Maharashtra, Gujarat, Rajasthan, Kerala. They insure the property and other interests of the respective State Governments. As of June, 2011, 24 General Insurance and one Reinsurance companies have been licensed by IRDA. The full and upto date list of such companies is available on IRDA website www.irda.gov.in 1.5 Salient features of Indian general insurance market 1. IRDA is the sole authority on all aspects of insurance business-both Life & Non-Life. 2. “Composite” Insurance Company conducting Life & Non-Life Insurance not allowed. 3. “Non-Admitted Insurance” not permitted. i.e. any property situated or to be situated in India has to be necessarily insured with an Indian Insurance Company. 4. “Cash and Carry” market i. e. Cover commences only on Payment of Premium. 5. Retail / direct broking is permitted. 6. Brokers to be licensed by IRDA. 7. Agents to be appointed by Insurers in conformity with IRDA regulations. Agents to be trained by IRDA accredited institutes only. 8. Surveyors (Loss Adjusters) to be licensed by IRDA on the basis of professional qualification, training and experience. 9. Survey of losses: Section 64 UM of the Act, provides that no claim in respect of a loss which has occurred in India and requiring to be paid or settled in India equal to or exceeding Rs, 20,000/- on any policy of Insurance shall be admitted for payment or settled by the insurer, unless he has obtained a report on the loss from a person who holds a licence to act as a surveyor or loss assessor. 10. Reinsurance: Reinsurance regulation of IRDA aims at maximising retention within the country and developing adequate capacity. Reinsurance programme of each insurer requires prior approval of IRDA at every anniversary. 11. Insurance premium can be collected in instalments only in respect of “Long Term” policies, which are defined in the Act as “policies for a period of more than 12 months”. 10 12. Third Party Administrators (TPA) to be in conformity with IRDA regulations, for management of claims under medical insurance policies. 13. “Ombudsman” Rules provide redressal mechanism for complaints of the policy holders’ (both Life & Non-Life) relating to settlement of claims. Question 3 Which of the following pools is not managed by GIC? A. Third Party Motor Pool B. Terrorism Pool C. Fire Catastrophe Pool D. Marine Hull Pool 2. Know about the international insurance market [Learning Outcome b] 2.1 Development of insurance in the U.K. U K, by far, is the largest insurance market in the world and the dynamism with which the UK insurance market developed and is followed by the global market, will be interesting to note. The practice of marine insurance gradually spread northwards to the Netherlands and then to London, where in the sixteenth century, it got firmly established in the mercantile transactions of Lombard Street which was a centre for commerce. In 1575 a Chamber of Assurance was established to register policies and settle disputes. This Chamber played an important part during the formative period of marine insurance in London and devised a policy form whose wording is the basis of the modern marine policy. The early history of marine insurance is closely linked up with the origin and rise of Lloyd’s. Shipowners, sea captains and merchants used to congregate in Coffee-houses to deal with their various mercantile transactions and gradually, individual merchants added the business of accepting marine risks to their other lines of activity. 11 One such Coffee-house made memorable in insurance history was started by Edward Lloyd around 1680 and in this Coffee-house the practice of individual underwriting took shape. Eventually, around the middle of the 18th century these individual underwriters formed themselves into an association with a common subscription. In 1871 the Lloyd’s Act was framed to set up the Corporation of Lloyd’s. In 1911 Lloyd’s Underwriters were empowered to transact other classes of insurance, commonly referred to as non-marine business. Today Lloyd’s is regarded as a great international insurance centre. Lloyd’s Underwriters operate with giant insurance companies in a spirit of co-operation and healthy competition. Eventually in 1858 an Association of English and Scottish Fire Offices was formed which came to be known in 1868 as the Fire Offices Committee which, since then, has been the central tariff institution for fire insurance. The beginning of miscellaneous insurance is directly attributable to the conditions created by the Industrial Revolution in the 19th century. The Employers’ Liability Act, 1880 which made employers liable under certain circumstances to pay compensation to workers, who were injured at work created the need for insurance protection, and the Employers’ Liability Assurance Corporation Ltd. was founded to provide the requisite protection. In the early years of the 19th century, there were many explosions of boilers causing heavy damage and bodily injury. Although the Manchester Steam Users Association was formed in 1854 to provide inspection services for boilers, a system of combining insurance protection with inspection service was started by the Steam Boiler Assurance Co. in 1858. The employers’ liability insurances emphasised the need for third party Claims from third parties against manufacturers for death or bodily injuries due to defective products led to the introduction of products liability insurance. The first motor vehicle entered the U.K. from the Continent in 1894 and the Law Accident Insurance Society Ltd. started writing motor insurance business from the year 1898 onwards. Burglary Insurance came to be transacted towards the end of the 20th century. 12 Aviation insurance had its small beginning in 1909-10. The interest in aeronautics was stimulated by World War No.1 and the demand for insurance was felt with the first regular civil aviation service which began in 1919. Aviation business was also transacted by Lloyd’s Underwriters right from the start and today specialist aviation syndicates provide substantial insurance facilities to the world market. The insurance market in the U.K. is highly developed to cater to the international insurance requirements. The market consists of powerful domestic-insurance companies, foreign companies and Lloyd’s Underwriters. The market is regulated and controlled by the State through stringent legislation. 2.2 The market shares In 2008, the global market had a modest increase (3.4%) when compared to the growth rate of the Indian market. The total value of the whole insurance market was US $ 4.3 trillion of which the non-life sector constituted around 40%. This was spread across different regions as follows: North America...........$1,346 Billion 13 Europe..........................$1,753 Billion Asia........$933 Billion (The Indian non-life insurance market was around Rupees 36,000 crore i.e around 1% at $ 9 Billion). What is quite interesting is how the above figures have such a large concentration in just 2 markets: 14 Markets Share of global Share of premium population US and Japan 40% 7% Emerging Markets 10% 85% Indian General Insurance Market - Global Relationship Geographically, the major markets that we have experience of in India, include the following: a) London Whilst most tend to think of it as being synonymous with Lloyd’s, there is also a strong non-Lloyd’s international market still operating, from the City of London. This is the major port of call for larger and complex Indian risks such as the IT sector or the Energy Sector or the Aviation Sector risks. The London market provides both - capacity and detailed technical experience. However, for the smaller, one-off risks (facultative reinsurance), the disadvantage of the London market is in its high minimum policy premium requirement, with many insurers requiring at least 15,000–20,000 GBP. b) Singapore The London market’s high minimum premium requirement is a strong incentive for Indian companies to use the Singapore market. The Singapore market has the advantage of being within an Asian mindset and happier to work on the risks that London would see as too small e.g. a typical Indian 5 star hotel requires a 10 million USD Third Party Limit, of which the Indian market can take, say, only 2 million. Singapore’s minimum premium requirements are much lower (in the US$ 1000–2000 region) and at the same time it is home to many reinsurers that might have to be otherwise approached in London or elsewhere in Europe e.g. Allianz, Ace, AXA, Liberty, Lloyd’s etc. c) Europe Europe is also a very strong reinsurance market but without a convenient central location like London. It is a market that the Indian insurer wants to use to provide a competing deal to London. 15 Munich Re and Swiss Re - the two biggest reinsurance companies in the world had supported the Indian market over many years. Allianz, Zurich, Partner Re, Frankona Re, Liberty are some of the big names among European reinsurers. d) New York / US The American insurance market does not have a global presence in proportion to its size. Overall, the American insurers are reluctant to compete on international risks with the European insurers. Besides dealing with the London-based reinsurers, the Indian market uses reinsurers based in Singapore and Hong Kong also. If, however, an Indian risk has a large US component then the American insurers are more likely to be involved. e) Bermuda In the 1970’s, large corporates began to realise that a more economic way of handling their insurance portfolio was to operate a “captive” insurance company i.e. a wholly owned entity. With its attractive tax regime, Bermuda became the home of choice for such corporates. This was followed by a further boost with the excess liability insurance market in the 1980’s and the large capital of the early 1990’s to create catastrophe reinsurance companies. Further, capital came in following the terrorist attacks on September 11, 2001 and the hurricanes Ivan, Katrina, Rita and Wilma in the 2004–2005 period. However, this huge capital comes at a cost and generally the Indian market does not have the size of risks to use Bermuda which tends to look at a minimum attachment point (where the risk starts) of 25 million USD. f) Australia and Hong Kong These are little used by the Indian market. At one time, the Australian market was looking to expand into the Asian region but then suffered a huge setback with the collapse of HIH Insurance Company. Hong Kong is, however, still very much aggressive in the Asian market but Hong Kong’s main insurers are present in Singapore also and if they are to be contacted, the first approach is normally made there. It is a little known fact that the American Insurance Group (AIG) that most people think of, when asked about US Non-life Insurance was not “born” in America. AIG was actually founded in Shanghai. 16 2.3 The major non-life insurers of the world The main insurance buying markets are in Japan and US but the producing markets are a little different, with Europe taking 4 places in the top ten. As at 2009 the worldwide non-life premium distribution across regions was as under: Further, while there are 5 US Insurers in the top ten, two of them, Allstate and State Farm are almost exclusively local to the US (The US has around 4000 insurers, of which around 75% are in the non-life sector). Revenues Rank Company Country (Millions USD) 1 Allianz 142,395 Germany 2 Berkshire Hathaway 107,786 U.S. 3 Munich Re Group 67,515 Germany State Farm Insurance 4 61,343 U.S. Cos. 5 Tokio Marine Holdings 34,870 Japan Zurich Financial 6 32,349 Switzerland Services 17 7 Allstate 29,394 U.S. Liberty Mutual 8 28,855 U.S. Insurance Group 9 Travelers Cos. 24,477 U.S. 10 Mapfre Group 23,186 Spain 2.4 The major non-life insurers reinsurers In some respects, the Reinsurance market follows the primary market, with Europe holding 5 of the top 10 places. However, the significant additions are the 3 Reinsurers from Bermuda and this has been prompted by the liberal tax regime in that country aimed, among others, at attracting Reinsurers. Net reinsurance Rank Company premium written Country (Millions USD) 1 Munich Re Group 30,379.7 Germany 2 Swiss Re Group 23,724.3 Switzerland Berkshire 3 11,441.0 U.S. Hathaway Gen Re 4 Hanover Re Group 10,653.2 Germany 5 Lloyd's of London 8,588.2 U.K. 6 SCOR 8,551.4 France Transatlantic 7 4,108.1 U.S. Holdings Inc. 8 Partner Re Ltd. 3,989.4 Bermuda ACE Tempest 9 3,961.0 Bermuda Reinsurance Ltd. 10 Everest Re Group 3,505.2 Bermuda 18 2.5 Insurance penetration and density These measures help gauge the growth and development potential of insurance markets. 19 Question 4 In terms of revenue which is the biggest non-life insurance company? A. Allianz B. Berkshire Hathaway C. Munich Re Group D. State Farm Insurance 20 3. Understand the roles in insurance [Learning Outcome c] In this section, we will look at the various roles in the insurance industry. The industry is a fast moving one with many major roles and a number of supplementary covers. We will look at the following roles: a) Regulator b) Insurer, including Underwriter Claims technician Risk engineer / surveyor Business developer c) Reinsurer and Retrocessionairre d) Insured, including Corporate Retail – Individual and SME e) Intermediary, including Agent Broker Reinsurance broker TPA Lloyd’s broker f) The ancillary roles, including Valuer Actuary Loss adjuster Insurance lawyer Technical consultant Insurance software specialist Educator 21 3.1 Regulator – Insurance Regulatory and Development Authority (IRDA) Establishment: the Insurance Regulatory and Development Authority (IRDA) was constituted by an Act of Parliament in 1999. Insurance regulator: IRDA is the authority to administer the Insurance Act and to regulate, promote and ensure orderly growth of the insurance industry. Corporate body: IRDA is a corporate body. The Chairman and other members of the IRDA are appointed by the Government of India. Licensing authority: IRDA has the authority to issue licences to insurers as well as to intermediaries like agents, brokers, TPAs etc. Industry watchdog: IRDA has the authority to frame regulations relevant to proper functioning of the industry like adequacy of premium rates, limits on expenses, guidelines on investments, protection of policyholders’ rights, solvency limits etc. Guidelines and directions: IRDA can issue guidelines and directions to insurance companies which are to be followed by them on operational matters. IRDA has been entrusted with a number of responsibilities but the key ones include protection of interests of the policy holders, relating to fair pricing, proper policy wording and claim settlement,. For more information students are advised to refer the IRDA website www.irda.gov.in 3.2 Insurers The insurer has a number of roles and these have gradually changed over the last 300 years, although the primary role of providing and managing capital has remained unchanged. To manage capital at an operational level insurers have two key roles: a) that of the underwriter; and b) that of the claims technician. Failure of either of these tasks can adversely affect results of an insurance company. Underwriter Without the skills of the underwriter, profitable utilisation of capital is not possible. Underwriters decide whether insurance cover is to be granted or not. If cover is to be granted, then the underwriters will decide at what terms, conditions and exceptions it will be granted. 22 Principal functions of underwriters are: 1. to identify and calculate the risk of loss from policyholders: the underwriter decides whether or not to accept a particular risk after securing factual information from/about the applicant, evaluating the information, and deciding on acceptance/declinature. 2. to determine the appropriate price (premium), terms, conditions and exceptions while recording the appropriate classification and rating information. 3. to estimate the potential exposure, check retention and arrange reinsurance where required. 4. to confirm terms, draft the policies to cover the risk and issue the policy. By performing these four functions, the underwriter increases the possibility of securing a safe and profitable distribution of risk. Underwriter The term "underwriter" was developed in the early days of marine insurance. It was a common practice for individuals seeking insurance for a ship and its cargo, to meet with those desiring to write such insurance in coffee houses (e.g. Edward Lloyd’s). A person seeking insurance for his ship and its cargo would bring a piece of paper, describing the ship, its contents, crew, and destination, to the coffee house. The paper would circulate, with each individual who wished to assume some of the obligation, signing his name at the bottom and indicating how much exposure he was willing to assume. An agreed-upon rate and terms were also included in the paper. Since these people signed their names under the description of the risk, they became known as underwriters. Underwriting Examples a) health insurer’s underwriter may consider the following aspects in a proposal before deciding on the risk: age family history lifestyle current health b) property insurer’s underwriter may consider the following aspects in a proposal before deciding on the risk: 23 causes of loss to which property is exposed e.g. flood, fire, earthquake, etc. quality of construction occupation safeguards taken by the applicant Case and portfolio underwriting It is also important to point out that the underwriter works at both ends of the spectrum: individual case underwriting looking at a specific case portfolio underwriting , where he reviews the performance of the total portfolio of a prospect e.g. Fire, Liability, Marine, etc Today’s Debate : Is Underwriting a Science or an Art In relatively recent times, underwriters prided themselves on having very little formalised information, relying on their own experience and “gut feel” – they saw it almost exclusively as an art. However, technology has advanced so much towards end of the last century that underwriting is much closer to a science. There is much greater use of sophisticated computer software and such insurance applications are supplemented with reports from loss-control representatives, medical reports, reports from data vendors and actuarial studies. There is, still, however, a desire to retain some art in a combination of skills, enabling the underwriters to make the best possible judgement. Risk Engineer Risk engineers are also known as risk surveyors, risk consultants, risk control surveyors or risk control advisers. They may work for the general insurance companies or a professional broker. Their main role is to advise about quality of risk, based on technical knowledge and good practice. Risk Engineer: A common definition – or probably more correct description - of the Risk Engineer is that of the “Eyes of the Underwriter”. 24 As the Indian market has grown and simultaneously risks have become increasingly complex, there has been a corresponding increase in the requirement that the risk is visited by a Risk Engineer / Surveyor (technical representative) of the insurer. Traditionally, this was common in property insurances but the practice is now spread across many risks and gradually specialists are available in specific areas such as: property/fire and associated risks business interruption health and safety, for employees and customers engineering, structural, electrical installation security in crime risks e.g. burglary, theft, transit of attractive goods liability 25 Diagram 2: Non-life insurance specialisation Specialist engineers / surveyors undertake detailed risk surveys of the property / site to be insured and advise clients and insurance underwriters about appropriate measures to improve quality of the risk. This involves visiting a wide variety of locations and businesses from retail outlets to large-scale petrochemical plants and producing detailed reports, which help inform underwriters about the acceptability and quality of a particular risk. 26 Engineer surveyors specialising in property, assess the risks associated with fire, explosions, storms, flooding and malicious damage to a building and / or contents based on the processes and activities that take place and other features specific to the location. Engineer surveyors specialising in liability, assess the risks to which employers or other individuals are exposed, based on the processes and activities that take place. Internal Claims Technician The claims team members are frequently the unsung heroes of a core insurance operation. The marketers take the glory of increasing premium (albeit now with much greater emphasis on quality of risk) with the underwriters controlling the pricing. However, claims are where the service is most critical. A poor claims performance / service can impact the relationship between the insurers and their clients significantly – one way or the other: 1. Claims handled unfairly and / or slowly can give bad word- of- mouth publicity or even unwelcome press and media attention. 2. Claims overpaid will impact on bottom line (profitability). 3. Omissions to chase recoveries by way of contribution, subrogation, salvage etc. will also adversely affect profitability. 4. Claims handled fairly and efficiently will eventually give a company a solid, dependable reputation. The claims team, particularly in the complex markets of large property or liability, aviation, marine etc. are frequently the most technical constituent of the operations, needing to understand the client’s business and interpret the policy wording accurately. At the same time, the volume / commodity areas are moving into a very slick BPO / KPO operation providing a systematic claims service to commoditised products. The claims role itself has a number of specialisations, which we can identify to a certain extent by following the flow of the claims process. 27 There will be a necessity for the senior claims technicians to be well versed on law so that they are able to discuss with their own lawyers and also deal with the lawyers on the other side. Task Activities Acceptance of initial circumstances, possible Claims declinature in straightforward cases, initial Notification decision on reserve a) Investigating the validity of a claim b) Obtaining information, involving expert advice where suitable c) This can involve visiting the policyholder Investigation or their property, liaising with the police, lawyers and/or other professional investigators. d) Fine-tuning reserve e) Checking for fraud indicators Approve / Review claims Check Decision made on whether claim is covered Advise clients on decision supporting this, Communicate where necessary and Negotiate Negotiation skills likely – particularly in larger claims Settlement and Liaise internally with finance / accounts Payment department Investigate the areas where the insurer may be able to retrieve moneys from other parties e.g. Contribution – Other insurers Recovery Subrogation – Third parties Salvage – Dealers, scrap metal merchants etc. a) Complete claim file b) Ensure statistics are up- to- date Closure c) Ensure final payments recorded; and d) Any outstanding reserves removed Liaison with Ensure underwriters receive all relevant facts internal relating to the risk and / or the portfolio customers 28 Diagram 3: Claim process Loss Adjusters This is claims team’s technical role, usually external, and can also go under the title of ‘loss assessors’ or ‘claims adjusters’. Adjusters support the insurer in investigating technical claims and while they are normally seen as operating for the insured, they have a reputation of being fair, unbiased and ethical. Since the claims they handle, are frequently of a very technical nature, a major loss adjusting firm is likely to employ other professionals, such as accountants, engineers, legal officers and the like, recognising the fact that to provide a professional and top class service, a multi-disciplinary approach to claims handling is needed. 29 The role of the loss adjuster is likely to include the following: Checking whether the insurance company is liable under the insurance policy; whether the loss been caused by any of the insured perils under, say, a fire insurance policy or whether any of the exclusions apply under an all risks policy Checking on whether any other aspects may affect an insurance company’s liability, e.g. operation of conditions, warranties or limits under the insurance policy Damage reclamation services: range from independent technical advice, through expert guidance on loss limitation opportunities, to specific options to recover and restore damaged property, thereby preventing wastage Reporting to the insurers after each and every visit, commenting on the loss reserves and incorporating facts, opinions and recommendations, when appropriate Checking the presented claim for accuracy etc. and, after agreeing on any necessary adjustments with the claimant, present the final report to the insurers, recommending settlement Checking whether someone else may have been responsible for the loss and, if so, he will obtain statements and physical and photographic evidence to use later in negotiations, when recovery of the insurers’ outlay from a third party is sought. Negotiate with product / service providers on time for cost of repairs, for the purpose of making an offer of settlement to the insured Satisfy himself that the policyholder has an insurable interest Check whether there are any other policies, which may be brought into the apportionment of loss and what they should be. Question 5 The risk engineer is known as which of the below? A. The eyes of the insurer B. The eyes of the underwriter C. The arm of the underwriter D. The arm of the claims expert 30 3.3 Reinsurer The reinsurer is the next line of defence for the insurance company, wishing to protect its balance sheet. In simple terms, it is insurance of insurance. Through reinsurance; the insurance company taking it, becomes an insured, known in the context of reinsurance, a reinsured or the cedant. No insurer likes to turn down good business but there are times when the capacity of the insurer would not cope with a major loss. Therefore, rather than declining the business, the insurer will accept it in full and then pass on a portion thereof to another company (reinsurer) – either a share of the risk by way of percentage or as an amount over and above what the insured wishes to retain. Usually, the insurer will receive an amount of commission for passing this business if done direct, otherwise this will be earned by/shared with the reinsurance broker. The commission is to effectively recompense the insurer for his business development / acquisition and servicing costs. With the exception of the GIC – the national reinsurer, all other reinsurers are based outside India. Insurers Beware A critical point is that the contractual relationship is between the insurer and the reinsurer. The insured has NO legal relationship with the reinsurer. If the reinsurer fails, for whatever reason, to support the insurer’s claim payment (and this could range from violation of the reinsurance agreement by the insurer to bankruptcy of the reinsurer) then the insurer is responsible for the FULL claim. Retrocessionaire Retrocession is reinsuring of reinsurance. The retrocessionaire is the reinsurer of the reinsurance company and the ceding reinsurer is known as the retrocedent. Retrocession is a separate contract and document from the original reinsurance agreement between a primary insurance insurer (as the reinsured) and the original reinsurer. It has no legal relationship with the insurer whatsoever. 31 Diagram 4: Retrocessionnaire and retrocedants In the above diagram, reinsurance companies 1, 2, 3 & 4 are all retrocedants. A reinsurance company that sells reinsurance is a "retrocessionaire". A reinsurance company that buys reinsurance is a "retrocedent". 3.4 Insured Without the insured there will, of course, be no insurance. We have seen that the insured has been relatively easily identifiable in the past – perhaps a merchant who wants marine insurance or a person who wants his family to be looked after in the event of death. In modern marketing, this is being taken even further into recognisable groups. The aim is to identify niche customers and approach them with the products / solutions relevant to them. In fact, some insurers restrict themselves solely to particular niches – the best examples in India being the health insurers. But in other markets, this could be as specialist as Classic Cars, Bloodstock (Racehorses), Fine Arts, etc. 32 Let us look at three broad categories of insureds: Diagram 4: Categories of insured a) Retail: Individual / Personal Here we are talking of the individuals in their personal capacity. The major products bought by individuals include: Personal Accident, Motor: Third Party Cover is a compulsory insurance in most countries Health: this will vary from hospitalisation treatment costs to full medical reimbursement Building and Contents: not so common in India yet, compared to other parts of the world, but fast catching up In the past, these have been purchased either directly from the insurer or via the agency network. However, as in many parts of the industry, technology is making great inroads into the individual market, and one strong belief is that the Indian market will follow examples such as UK, where the individual market is almost totally served remotely by Call Centres or Web selling. 33 b) Retail: Small and Medium Enterprises (SME) Much of it again, is seen as a commoditised market – frequently via a Packaged Product, where risks can be grouped into relatively simple underwriting sectors such as – small shops offices restaurants and cafes hotels Many insurers are also expanding this into small manufacturing sectors but excluding obvious heavy risks. Underwriting is simplified and terms and conditions are common across most covers. c) Corporate The third general sector is the corporate market (ex SMEs). This is almost exclusively the province of the professional insurance brokers in major markets such as US, Europe, Australia, etc. It can be sub-divided on the basis of sector (for example specialisation in sectors like energy, finance, leisure markets, etc.) or size (for example, mid-size companies, companies having national footprint, MNCs etc.) Here the classes are big enough to require and warrant individual underwriting and pricing. 3.5 Intermediaries The Indian market, prior to liberalisation, offered only two areas of intermediation - a) Development Officer of the insurance company; or b) Insurance Agent. However, the situation has changed and now we have insurance brokers, bancassurance and web broking, all at different stages of making their presence felt in the Indian market. 34 Insurance Broker This term had been unknown in the Indian market until the relevant regulations – Insurance Regulatory and Development Authority (Insurance Brokers) Regulations, 2002 – came into force and the broking market effectively began to grow from 2003. At the end of 2010, there were over 300 registered brokers licensed by IRDA. The regulations allow three types of insurance brokers in India: 1. Direct Acting as an intermediary between the insured and the insurer 2. Reinsurance Acting as an intermediary between the insurer and the reinsurer 3. Composite Combination of the above two Reinsurance Broker The public sector companies have always needed support from reinsurers abroad and so, there always have been some reinsurance brokers in this market. They have been assisting the insurers in placing their risks abroad through the Facultative and Treaty routes. Most of them have since got themselves registered and obtained licenses from IRDA. There have also been several new entrants. At the last count (end of 2010) there were, besides a number of Direct Brokers: 6 Reinsurance Brokers 35 Composite Brokers Agent The insurance agent was the mainstay of the Indian market up to the end of the last century. Since then, with the growth of the private insurance industry; the other intermediaries have been fast catching up and making their presence felt. This phenomena can be attributed in different degrees to: An agent is tied up with only one insurer but a broker can work with any insurer in the market other intermediaries are better equipped to use improved technology 35 growth of other intermediation areas e.g. bancassurance which has the benefit of established networks Brokerage and Agency Commissions in India: IRDA decides the Brokerage and Agency Commission structure, which is currently as below: Agency Brokerage Commission 1. Fire, IAR and engineering insurances i. General 10% 12.5% ii. Risks treated as large risks 5% 6.25% under para 19(v) of File & Use Guidelines 2. Motor insurance business (OD 10% 10% portion), WC/EL & statutory Public Liability Insurance 3. Motor Third Party Insurance Nil Nil 4. Marine Hull Insurance 10% 12.5% 5. Marine Cargo Business 15% 17.5% 6. All other businesses 15% 17.5% (Students are advised to visit IRDA’s official website www.irda.gov.in for the latest scale at any given point of time.) It is worth noting as to who pays remuneration to the agents and brokers: Agent – Employed and paid by insurance company, Direct Broker – Employed by insured but paid by the insurer, Reinsurance Broker – Engaged by insurer and paid by reinsurer, Composite Broker – As above for the direct or reinsurance broking activities. Third Party Administrators (TPA) Third Party Administrators, referred to as TPAs, have come into the insurance market as intermediaries since 2000. 36 Insurers appoint TPAs to interact on their behalf with the hospitals. The TPAs negotiate with the hospitals and get them included in the approved list of hospitals into which the policyholder may seek admission. TPAs are required to be companies with a share capital of at least Rs.1 crore. At least one of the directors must be a qualified medical practitioner. One of its officers has to undergo prescribed training and pass a prescribed examination, before it can obtain licence from the IRDA to be a TPA. TPAs get paid by the insurers. Lloyd’s Broker A further unusual characteristic of the Lloyd’s market is that ONLY accredited Lloyd's brokers can place risks in the Lloyd's market on behalf of insureds. There are 176 broking firms working at Lloyd's, many of whom specialise in particular risk categories. Lloyd's operates an accreditation process for brokers seeking access to the Lloyd's market. Lloyd's performs a careful assessment of all applicant brokers, assessing their reputation and financial standing and investigating the character and suitability of their officers and employees, before making the decision to accredit them. All brokers must satisfy all relevant training and regulatory requirements. Firms receive provisional accreditation for three years before becoming entitled to use the term "Lloyd's Broker". Even an accredited Lloyd’s Broker is required to have a formal agreement with a particular syndicate, to be able to place business with that syndicate. Actuaries Until recently, actuaries tended to be restricted to the life insurance industry and were very few in numbers. However, as the practice of non-life insurance is continuously evolving, the role of actuaries is growing, with the result that several students now go for courses dedicated to this line. The actuary is, effectively, a high level mathematician who: performs actuarial analysis of correlation between the claims and pricing structures at macro level, going down to the micro level of particular trade / risk classifications is experienced in reviewing and analysing insurance operations, claims reserving, underwriting procedures and reinsurance programmes 37 provides technical assistance regarding actuarial matters to policy examiners and other technical staff He or she is involved in the areas of pricing, product design, financial management and corporate planning. In the Indian market, they also have certain regulatory duties including - rendering actuarial advice to the management of the insurer, in particular, in the areas of product design and pricing, insurance contract wording, investments and reinsurance; ensuring the solvency of the insurer at all times. According to the regulations, the actuary is a professional, who has passed the examination conducted by the Institute of Actuaries of India and who is a Fellow of the Institute of Actuaries. He must also possess a certificate of practice, issued by the Institute of Actuaries of India. 3.6 Ancillary roles One existing aspect of the Indian market is the growth of the ancillary market. Examples of these include (but are not exhaustive) the following: Professional Valuers: these can be in many areas; with the modern insurance markets using them for valuing buildings, specialised plants, classic cars, works of art etc. Insurance Lawyers: in the past the Indian market has not had (or needed) specialist insurance lawyers in a big way; however, in developed insurance markets there are not only insurance lawyers but there are lawyers specialising in certain areas such as marine, professional indemnity, IT, etc. Technical Consultants: presently these form only a small group in the country; but are sure to grow significantly. It comprises technical experts who are not involved in sales. In a growing market, they work on short term technical projects. Insurance Software Specialists: the Indian information technology (IT) market has been very quick to see the potential here, although much of their work is related to serving international markets. 38 Many of the major Indian operators, such as Wipro, TCS, L&T Infotech and Infosys have insurance verticals and there are also a number of international insurance majors who use India as a technical support hub e.g. Alliance, Willis, Aviva, etc. Educational Institutes: Down the ages, India has been a renowned centre of learning. Takshashila and Nalanda bear testimony to that. That tradition continues to this day and Insurance Education is a shining example. At the highest level, there is the Insurance Institute of India (III) in Mumbai that provides a number of professional courses for qualifications from Licentiate through Associateship to Fellowship, embracing the two main streams of insurance -.Life and Non-life. The National Insurance Academy (NIA) at Pune offers training in a wide range of subjects. It also offers a two- year post graduate diploma course in insurance. Institute of Actuaries of India conducts examinations for actuarial sciences. It offers diplomas at the Fellowship Level. There are also a number of educational institutes in different parts of the country, offering insurance courses. There are also a number of Agency Training Institutes spread across India. Question 6 A reinsurance company that buys reinsurance is known as a __________ A. Retrocedant B. Retrocessionaire C. None of the above two, as reinsurance companies are not allowed to bye reinsurance Summary The origin of insurance can be traced back to the fourth century B.C. in the “bottomry bonds” which were issued by the Mediterranean merchants 39 In India, nationalisation of life insurance companies took place in 1956 and that of the general insurance companies in 1972. But in 2000 reforms were initiated by the Government and the insurance sector was liberalised and opened up to private and foreign players. During the nationalisation era the non-life insurance landscape was dominated by the four public sector insurers with GIC as their holding company. In 2000, GIC’s role was changed to national re-insurer and its four subsidiaries were restructured as independent companies. As on June, 2011, there were 24 non-life insurance companies transacting business in India. The insurance market comprises a number of role-players like insured, intermediary, insurer, reinsurer, etc., as also the lawyers, consultants, surveyors, etc. Reinsurance companies themselves also purchase reinsurance, a practice known as retrocession. Insured segment can be further segmented into retail individual, retail SME and corporates. Insurance Regulatory and Development Authority (IRDA) is the regulatory body for insurance sector in India. Some important terms / definitions you have learnt in this chapter a) Insured, insurer and intermediary b) Direct, reinsurance, composite intermediaries c) Retail, SME, corporate d) Bancassurance e) Actuary Answers to Test Yourself Answer to TY 1 The correct option is D General Insurane Corporation (GIC) commenced business operations in 1973. 40 Answer to TY 2 The correct option is D IRDA Answer to TY 3 The correct option is C The Fire Catastrophe Pool does not exist Answer to TY 4 The correct option is A In terms of revenue Allianz is the biggest non-life insurance company. Answer to TY 5 The correct option is B The risk engineer is known as ‘the eyes of the underwriter’ Answer to TY 6 The correct option is A A reinsurance company that buys reinsurance is known as a retrocedent. Self-Examination Questions Question 1 Which of the below cannot be an intermediary? A. Insurer B. Insurance Broker C. Agent D. Bank 41 Question 2 Which is the correct statement? A. 107 insurers were amalgamated into 4 PSUs B. 57 insurers were amalgamated into 4 PSUs C. 145 insurers were amalgamated into 4 PSUs D. 70 insurers were amalgamated into Question 3 Which of the following RBI Governors examined the insurance market and made recommendations for reforms? A. Dr. Manmohan Singh B. Bimal Jalan C. R. N. Malhotra D. C Rangarajan Question 4 Who does the pricing of insurance products? A. Surveyor B. Loss Assessor C. Risk Engineer D. Actuary Question 5 Which of the below companies is a specialist in health insurance? A. Max Bupa B. ICICI Lombard C. Bajaj Allianz D. HDFC Ergo 42 Answer to Self-Examination Questions Answer to SEQ 1 The correct option is A. An insurer cannot be an intermediary. Banks can be intermediaries through Bancassurance / Corporate Agency Answer to SEQ 2 The correct answer is A. 107 insurers were amalgamated into 4 PSUs Answer to SEQ 3 The correct answer is C. R N Malhotra examined the insurance market and made recommendations for reforms. Answer to SEQ 4 The correct answer is D. Actuaries do the pricing of insurance products. Answer to SEQ 5 The correct answer is A. Max Bupa is a specialist in health insurance 43 CHAPTER 2 POLICY DOCUMENTS AND FORMS Chapter Introduction A critical thing that that needs to be remembered is that an insurance document is a legal document. Many of the words and phrases used in an insurance policy document have been tested over the years in the courts of law. While we should now be looking towards plain English form of wording and getting rid of complex words like heretofore, it is important that we try to understand these terms. In this chapter, we propose to look through the major documents used in the insurance industry, like the policy document, the proposal forms and some other documents. First, we will review the concept of contract before looking at the policy document. a) Understand the insurance contract. b) Understand the structure of an insurance policy c) Learn how to interpret a policy d) Learn about insurance proposal forms and certificates 44 1. Understand the insurance contract. [Learning Outcome a] 1.1 Insurance Contract A contract of insurance is an agreement whereby a. one party – the insurer, b. in return for a consideration – the premium, c. undertakes to pay to the other party – the insured, d. a sum of money (or its equivalent) – the claim upon the happening of certain specified events. 1.2 Elements of a contract of insurance The usual rules of contract law govern the contracts of insurance. Specific elements of insurance contract are: 1. Offer and acceptance 2. Consideration 3. Legality (illegal contracts are void) and being capable of performance 4. Agreement (the consent of the parties is necessary for a contract to be enforceable) 5. Contractual capacity (certain persons e.g. minors, cannot be party to a contract) 6. An intention to create a legal relationship 7. No intention to commit fraud The absence of one or more of these will make the contract void, voidable or unenforceable. Utmost Good Faith: It is important to remember that contracts of insurance differ from normal commercial contracts, as they are governed by the principle of utmost good faith. Insurance contracts are different from normal contracts because: 1. here, we are not dealing with a physical sale / purchase; and 2. the true facts of the risk are better known to the proposer than to the insurer ; the insurer is relying on the proposer to disclose all material facts about the proposed risk. 45 Failure on the insured’s part to reveal all material facts may make the policy void (i.e. totally ineffective) from inception. However, to activate such avoidance of liability on grounds of non-disclosure, the onus is on the insurer to prove that the: undisclosed facts were material. facts were within the actual or presumed knowledge of the insured facts were not communicated to the insurer Furthermore, on discovering the non-disclosure, the insurer must exercise the right to repudiate the contract within a reasonable time, for example, if after discovering the non-disclosure, the insurer continues to accept the premium, the insurer would be deemed to have waived the right to repudiate and the contract will be binding, as if there was no non-disclosure. Also, Section 45 of the Insurance Act, pertaining to the indisputability clause, mentions that an insurer cannot dispute a policy claim after 2 years of the existence of the policy, subject to certain conditions. Question 1 The contractual term for the premium is known as __________ A. Contribution B. Consideration C. Commitment D. Consolidation 2. Understand the structure of an insurance policy [Learning Outcome b] Components of an insurance policy Over the last decade or so, policy wordings have changed significantly in looks – particularly in the personal insurances market i.e. Motor Insurance, Householders Insurance, etc. where plain English wordings have begun to take precedence. However, the basic seven components of an insurance policy are still recognisable. These are as follows: 46 Policy Components 1. Heading 2. Preamble 3. Signature 4. Operative Clause 5. Exceptions 6. Conditions 7. Policy Schedule 2.1 Heading Every policy document has a heading that includes the name of the insurer and usually their logo / address, together with other contact details e.g. phone numbers, website, etc. 2.2 Preamble This is generally similar throughout the market. It consists of four main points: 1) The proposal form and any questionnaire are part of the contract and are incorporated within it. Therefore, the insured must be particularly careful when completing these, 2) The Sum Insured. 3) The premium is mentioned. 4) The preamble states that the insurer will provide the cover as agreed. 5) Names of the different parties to the contract – the insured person and the company providing the insurance. 2.3 Signature Under the preamble or close to it, will be printed the signature of an authorised official of the company. Years ago, this would have been the actual signature. But nowadays, due to increased volumes, even a printed copy is accepted by the courts in cases of dispute. 47 2.4 Operative Clause This is a key part of the policy where the actual cover provided is outlined. It is also called the ‘insuring clause’ and includes the phrase ‘the Company will….’ 2.5 Exceptions This section details what the insurer will not pay for. Whilst ideally the policy holder would like a policy that covers all eventualities, this is impractical in terms of premium, reinsurer agreement, insurer solvency etc. One alternative would be to define only what is covered – however, this also has impracticalities in that the wording would be too long. The solution is, therefore, to give widest cover possible e.g. if any of the property insured be accidentally physically lost, destroyed or damaged, other than by an excluded cause…….. It places the onus on the insurer to be very sure of what to exclude – if it’s not excluded, then by definition, it’s covered. In plain English format the policy words are often simply mentioned as “we will not pay for........” Example of “War” exclusion: this policy does not cover loss, destruction or damage, caused by war, invasion, act of foreign enemy, hostilities or warlike operations (whether war be declared or not), civil war, mutiny, civil commotion assuming the proportions of or amounting to a popular rising military rising, rebellion, revolution, insurrection or military or usurped power. Question 2 The operative clause is also known by which other name? A. Insuring clause B. Preamble C. Signature clause D. Policy condition 48 2.6 Conditions These are as critical to the understanding of the cover, as are the exceptions. They describe to the insured what he or she must do or must not do. Traditionally, conditions appear towards the end of the policy. Some of the common conditions are as follows: Condition Comment Terms The insured must comply with the terms of the policy. Alteration to the The insured must notify the insurer should there be risk a change to the risk.. Claims procedure This will vary from cover to cover. Fraud The benefit of the policy will be forfeited should it be discovered that the claim is in any way fraudulent. Reasonable care Insured is to take reasonable care to prevent/minimise loss. Contribution Applies if other policies are also in force, covering the same loss. Cancellation Will outline the terms to be applied and procedures to be followed, should the company choose to exercise its right to cancel the policy. Estimates / This will detail the procedures to be followed, Declarations should the policy premium be based on an estimated figure (e.g. wages / profit). Express or Implied Conditions: the points mentioned above are known as express conditions, i.e. they are specifically stated as opposed to implied conditions. Implied conditions are those, which are applicable and accepted without being mentioned i.e. being part of the principles of insurance e.g. insurable interest, utmost good faith, etc. Conditions subsequent to the contract: this is a condition that refers to an act or event that cancels a contractual right e.g. any act of fraud within the claim process on the part of the insured, would immediately cancel the insurer’s obligation to continue with the claim. 49 Conditions precedent to the contract: these are contractual obligations that require one party to the contract, to do something, before the other party to the contract is required to do something, to fulfill its contractual obligation. For example, if thieves break into the insured’s house and steal his or her TV set and laptop then the insured must immediately inform the insurer of the loss as also give them details of the stolen property within a defined number of days of the loss. 2.7 Policy Schedule The previous components which we have looked at are all pre-printed and so, are not customised / unique to individual insureds. The schedule, however, is the part of the policy document that is specific / unique to each insured person, who has bought the policy. The information that is contained in the Schedule, includes, but is not restricted to: Insured’s title Insured’s address Nature of the business Period of insurance Premiums Limits of liability Policy number Any special exclusions / conditions or aspects of cover Having established that a contract has been entered into, the next task is to determine what it means. The starting point is always to construe the contract in accordance with the ordinary meaning of the words used. The approach is no different when trying to work out the meaning of a contract of insurance. Getting the meaning right is, therefore, of vital importance to insurers, as they need to be confident that they know what risks are to be covered the wording adequately reflects that intention In the context of consumer contracts, the use of plain lucid English is recommended, since the commercial advantage of allowing the policy to clearly set out, what is being covered, is obvious. 50 However, our history has resulted in the retention of too many complex words like ‘heretofore’, ‘wherewithal’ and ‘notwithstanding’ – fortunately, this is changing. The structure of the policy itself can also play a large part in helping to set out clearly, what cover is provided by the policy, and on what conditions. Most insurance policies are in a printed form, prepared by the insurer. A policy customarily identifies the following: 1. parties, by names 2. subject matter of insurance 3. sum insured or limit of indemnity and 4. policy duration the premium payable 5. contingencies insured against 6. conditions 7. exceptions It should also contain provision for a signature or attestation on behalf of the insurer. Details that vary from policy to policy are often grouped in a schedule. The policy may expressly incorporate the proposal form, as completed by the insured. Endorsements: with the consent of both parties, the policy may be amended from time to time. The insurer then prepares an endorsement for attachment to the policy. Endorsements are normally used when the terms of an insurance contract are to be varied. Endorsements are attached to the policy document and the two together constitute the evidence of the insurance contract. Endorsements may be issued during the currency of the policy, e.g., when alterations in the risks are to be recorded. They could also be issued at the time of the issue of the policy to provide specific exclusion from the cover or specific extension to include an additional peril. Endorsements are issued on standard forms, or are separately typed, or are written on the policy itself. The alterations normally required under a policy relate to - Variations in sum insured (increase / decrease) - Change of insurable interest by way of sale, mortgage, etc. - Extension of insurance to cover additional perils. 51 - Change of risk, e.g. change of construction, or occupancy of the building etc. - Transfer of property to another location. - Cancellation of insurance etc. The insured should make it a point to carefully examine the policy document to confirm that it provides the cover required and take note of any conditions that he must observe. Policies should be stored in a safe place ensuring that they are available when required. Question 3 Which of the following is a true statement? Fraud is a ______________. A. Implied Condition B. Assumed Condition C. Condition Precedent D. Condition Subsequent 3. Learn how to interpret a policy [Learning Outcome c] 3.1 Legal Document Whatever be the cover provided by the policy – a Householders Insurance policy covering Rs. 10 Lakhs of Household Goods or a Professional Indemnity Policy covering an IT major for USD 40 million – one must always remember that we are dealing with a legal document, which should be enforceable in a court of law. In the event of any dispute between the policyholder and the insurer, the policy will be interpreted by the court. 52 3.2 Insurers’ Responsibility As with any contract, it is for the parties to a contract of insurance to make their intentions clear in their contract. The courts will not be able to enforce a contract one way or the other, the terms of which are uncertain. Most courts would now see this responsibility being in the hands of the insurer. If the policy does not correctly represent the agreement, either party may apply to the court to have it rectified. If the parties are not of the same mind i.e. one party intends one thing and the other something else, then there has been no agreement and the policy is ineffective. 3.3 Principles of Construction The principles of construction in insurance contracts are the same as in the case of other contracts: 1. The construction of a policy of insurance is a matter to be decided by the Court. 2. Where the Court has already decided the meaning of words used on a policy of insurance, the doctrine of precedent will be applied. 3. This means that the same interpretation will be given, should the meaning of the same words be in dispute in a later case. However, when the words have not been previously interpreted, the Court is guided by certain principles of general application. 3.4 Written Words v/s Printed Words The written words will be given more effect than the printed words. Most policy wordings are in standardised printed formats for consistency and efficiency. The insurance policy sets out the terms and conditions of the contract in a standard printed form. However, following a change in risk and / or endorsement, the insurer may have added further words and clauses, either in handwriting or in typescript – which take precedent. Ruling: 1. both the pre-printed and the handwritten words must be taken into consideration. 2. when there is a conflict between the printed and the handwritten clauses, greater consideration will be paid to the handwritten clauses. 53 The logic is that the written words reflect the latest language and terms selected by the insurer (and accepted by the insured) for expressing the intentions. The pre-printed words, on the other hand, are, broadly speaking, adapted equally to the specific case as also to all other insureds with that type of policy. The policy must be construed in accordance with the ordinary laws of grammar. The general rule is that the grammatical meaning of the words used in the policy will be adopted. This may not always be possible e.g. in connection with a policy of marine insurance, the meaning of certain phrases has been understood for many years among shipowners and merchants in a specific sense. Examples of this would include such terms as General Average, Any One Bottom etc. In case of ambiguity the contra proferentem rule will be applied. Contra proferentum rule: this rule (which effectively says against the offering party) states that where contractual language is capable of two alternative interpretations, it will be construed against the insurer who drafted the contract and in favour of the insured, who accepts the wording. This is because the insurer will have chosen the language used and should not be able to benefit from any ambiguity contained within it. 3.5 Policy v/s Proposal: Where there is an inconsistency between the wording of the policy and that in the proposal or other earlier document/s, the policy is to be regarded as the true intention of the parties, in the absence of valid evidence to the contrary. Question 4 Which of the following statements is true? A. Printed word takes precedence over the written word. B. Written word takes precedence over the printed word. C. Printed and Written words are treated on the same footing. D. Printed word takes precedence over the typed word. 54 3.6 The principal rules of construction are as follows: One example of bad drafting seen is where a word conveying a broad definition is followed by words of limitation or definition, which introduce words of narrower significance e.g. insurance on a grain dealer’s “stock-in-trade consisting of corn, seed, hay, straw, fixtures and utensils in business” does not cover hops for malting. Unless there is a strong underwriting reason for excluding the hops etc. this may result in a badly handled claim, dissatisfied insured and, possibly, poor reputation for the insurer. Similarly, where a clause framed in general terms and capable of a wider significance (e.g. a declaration that the answers to questions are correct and true, which declaration, together with the proposal, is to be the basis of the contract) is followed by another clause of narrower significance (e.g. a provision avoiding the policy in the event of any fraudulent concealment or untrue statement in the proposal), the second clause is to be regarded as explanatory of the first and limiting its application accordingly. Shot Gun Death In Gray v. Barr, 1971 the insured threatened another man with a loaded shotgun and fired into the ceiling to frighten him, and the gun went off a second time in a struggle which ensued. It was held that the death of the other man was not “caused by accident” i.e. a death may be “accidental” in the sense that it is unforeseen and unexpected. But unless it is further caused by accidental means, it does not fall within the scope of a Public Liability policy covering the insured in respect of any sum he may be liable to pay as damages for bodily injury to any person “caused by accident”. 3.7 Policy Endorsement During the period of insurance, there are likely to be times when certain policy details have to be amended. These can arise from a number of incidents including such changes as the following: 55 Personal details – title, address, etc. Policy details – change in renewal date, amendment in cover, etc. Coverage details – increase / decrease in sum insured, addition / deletion of items, etc. Cancellation of cover Such amendments will be effected by means of a policy endorsement , which may call for additional or return premium or in some cases, neither. Such amendments will, of course, only be completed after the underwriting and rating of the changes has been completed. It must be remembered that the policy is a legal document and the endorsement forms part of this. Now, whilst some of the changes will be straightforward; others could be quite complicated and care needs to be taken over the wording. 3.8 Renewal Documents Marketing adage: It is much more expensive to obtain a new customer than retain an existing one. In the past, during the nationalised era, there was a lot less fear over competition and issues such as proactive renewal of a policy was taken much less seriously. However, with a very aggressive public and private insurance market, the development teams are very much aware of the need to ensure policy renewal. With the smaller clients, the renewals will be automated and a standard increase or decrease will be implemented by the system. It may be that a reporting mechanism will advise the concerned business team of significant changes. What is important, though, is to ensure that the client is geared to renewing his or her policy with little effort. The renewal document is likely therefore, to include promotional / marketing items to give a positive feel and be very clear in what the insured is expected to pay and what he is receiving for that premium. At the same time, despatch of the renewal notice must be done in such time as to enable the insured to pay promptly. Renewal Document The renewal document is likely to consist of the following: 56 With a corporate client, this should also include all subsidiaries, which are crucial to Name and address get the interest correct and may raise further questions as to the business. Policy number This will remain the same Contact information of the insurer Contact information of the Agent / Broker Address of client Correspondence addresses Period of For the forthcoming year insurance This may include details of the relevant Renewal premium commission paid to the agent or broker Declaration A reminder that the insured must give details reminder of any amended information A reminder that the insurance will not be 64 VB reminder effective unless the premium is paid before cover is to commence 4. Learn about insurance proposal forms and certificates [Learning Outcome d] As mentioned earlier, principle of Utmost Good Faith is critical as far as insurance is concerned. The insurer must have maximum possible information for the relevant insurance proposal to be able to take a fair decision. To make this as simple and easy for the insured as possible, the insurer has developed proposal forms for virtually all the major classes. Discussed below are the contents of a typical insurance proposal form. 57 4.1 Insurance proposal form (a) Generic questions These are questions, common to all insurance proposal forms: Name With a corporate client, this should also include all subsidiaries, which are crucial to get the interest correct and may raise further questions as to the business Website This will give additional amount of information about the client Contact information Address This should include, not just the address of the head office, but also the addresses of major business units of the insured Business This should be descriptive of the clients’ business with words such as “engineering”, “consultant”, etc. requiring expansion, so that true occupation can be identified. Certain trades may also require expansion as to the processes involved. Also, certain covers such as liability, are likely to request details of activities and / or processes Period of insurance Insurance This will ask who they were insured with earlier and history whether they have been declined insurance in the past Claims This will normally be for the last 3 years – if possible, experience maybe even for last 5 years. Question will also be asked whether there have been incidents that did not lead to a claim. Convictions This may give lead into moral hazard. Declaration A signed declaration to confirm that all answers are true and correct 58 (b) Insurance-specific questions This section will have questions related to the insurance cover required. Exposure The insurer will want to understand more details about the risk to be covered. Property insurance: this will be a description of the subject matter; some details will be high level e.g. buildings (situated at.........) and some details will be very specific e.g. Lenovo X61s laptop serial number........... Liability insurance: this will be the turnover of the business, if products liability then it will be turnover of the relevant product line Motor insurance: details of the vehicles and the drivers Policy Limits This will relate to the limits the insured wishes to insure up to Property insurance: this will be the sum insured, with modern covers, it is usually the reinstatement value Liability covers: this will be the limit of indemnity required Specific Liability insurance : may ask whether hazardous Questions chemicals are handled or whether heat is involved Motor insurance: may ask questions relating to the garaging of the vehicle or whether the vehicle has been modified. (c) Specific Questionnaires With a number of covers, there will be a requirement for an additional questionnaire to be completed as the proposal itself will not have the detailed questionnaires (and it is not sensible for the questions to be included on a standard proposal) Examples of these specific covers relating to individual areas could include the following: Contractor’s All Risks Tunnelling Bridges and Dams 59 Liability covers relating to areas such as Heat Work Precautions Work in High Hazard Environments Crime covers relating to areas such as Armoured car / cash carryings Marine covers relating to areas such as Ship details 4.2 Insurance Certificates The most common certificate issued within the insurance world is that relating to the existence of the motor insurance. Motor insurance is, without doubt, the major compulsory insurance throughout the world, with all the developed and developing countries requiring some form of Third Party Insurance for Liability for bodily injury to other persons. Such compulsory insurance is accompanied by an insistence that a certificate is issued, proving the existence of the cover and policy of insurance. This is required by a number of authorities including the registration authorities and the police. 4.3 Motor Vehicles Act, 1988 In India, the Motor Vehicles Act, 1988 with Chapter XI - Insurance of Motor Vehicles against Third Party Risks section is the relevant one relating to the certificate. The certificate itself is straightforward with the following being the principal headings: 60 Identification of the Policy number and certificate number certificate Effective date of the Usually the annual period of the insurance insurance cover Details of the insured Name and address Details of who can drive Usually the insured and any other driver as the vehicle long as they have a licence and are not disqualified Details of the vehicle Registration number, year of manufacture, identification details such as engine number Purposes as to use Usually excludes hire or reward, carriage of goods, racing etc. If the certificate cannot be issued immediately, then a Cover Note should be issued for the interim time period – this will be an abbreviated version containing much of the information detailed above but with the Policy Number. The cover note is restricted to a 60 day period and will be accepted by the relevant authorities as a temporary replacement for the certificate of insurance 4.4 Marine Insurance Within marine insurance, the certificate can effectively take over the role of the insurance policy. Further, bearing in mind the principle of insurable interest and the fact that the rights under a certificate can be assigned by the seller to the buyer, it is important that there exists only signed ORIGINAL of each document and that the Certificate is TYPED. Duplicate policies should be boldly printed or stamped as COPY. However, occasionally, Letters of Credit call for a signed DUPLICATE Certificate. A duplicate would stand in law, in place of the original document, in all respects. While one should resist issuing duplicates, in case it becomes unavoidable, it should be stamped in the following manner: “This policy (or certificate) is issued in original and duplicate, one of which being accomplished, the other to stand null and void.” 61 It is also important that marine certificates are completed accurate, to ensure that any claims can be handled in an efficient manner with the minimum delay. The details required are: Certificate This is normally computer generated number Date issued This is the date when the certificate is completed Open policy This will be given in the policy schedule and must be number mentioned in all the certificates issued. The number does not change during the policy period. Premium Ensure mention is made of the Gross Cargo and War & SRCC premium, Stamp Duty and Service Charges. Special Discount, if any, in lieu of Agency Commission too could be shown here. Similarly, if Customs Duty is insured, then Duty premium too should be mentioned. Assured The name of the company should be inserted. Where a bank or similar organisation requests their interest to be shown, this can be completed in the field. e.g. “The ABC Company & / or the XYZ Bank.” Sum Insured The insured value should be calculated in accordance with the agreed basis of valuation in the policy, unless agreed otherwise, with the company. Insured value should not exceed the limit of liability any one vessel, aircraft, road or rail conveyance or postal sending. The value should be shown in figures and words, stating the currency e.g. ‘Rs 150,000’ “One Lakh and Fifty Thousand Rupees.” Voyage from / to Show the name of the overseas vessel (where and via known); otherwise show the means of transport, for example: ‘Vessel’, ‘Aircraft’, ‘Road Conveyance’, ‘Rail Conveyance’, ‘Post’. From Show place of origin, for example ‘Warehouse – Birmingham, UK’ 62 To Show the final destination, for example ‘Warehouse – New York, USA’ Via If known, this should be completed. This is of particular importance if transhipment is involved. Bill of Lading If not known write “sailing on or around……… date (date)” Interest (i.e., Complete with full description of subject matter subject matter insured and all shipping marks, including type of insured) & packing and numbers of packages plus any other mark

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