Life Insurance agent’s role in underwriting

The agent’s role in underwriting

Agents are in direct contact with the proposer and so have an important part to play in the underwriting process and are considered as ‘primary underwriters’.

• The agent has to ensure that the proposal form submitted is completely filled out by the proposer. They also have to make sure that the questions have been answered honestly by the proposer as the proposal form is the basis on which the proposal will be accepted or rejected.

• If the agent is helping to complete the form, they should fill it out honestly and accurately. The answers provided should not be prejudiced in any case. The answers of the respondents should be recorded as objectively as possible and any elements of misinformation or incomplete information need to be avoided.

• Being in direct contact with the proposer, the agent is in a good position to assess why the proposer wants to take out insurance. If they feel that the proposer’s intentions are not genuine, they should mention that in their report. As the agent conducts a personal discussion with the proposer and their family, the agent needs to assess the responses they give. If the proposer supplies information that seems to be contradictory, they need to question them further about it.

• The agent can help the proposer to calculate their human life value (HLV), to determine the amount of life insurance they should take. Taking life insurance as per the HLV calculation amount provides income protection to the family and helps it meet its financial liabilities, even after the income provider’s premature death.

• The agent can speed up the underwriting process by submitting the required documents and the proposal form in a timely manner. Should an additional medical check-up be required, the agent should help the proposer make the necessary appointment with the doctor and ensure the doctor’s report is submitted as quickly as possible.

• If the insurance proposal is accepted, the policy may be sent directly to the insured or given to the agent for delivery. The agent may still have a role to play even if the proposal is rejected. Although the insurance company will send a letter to the proposer explaining why their proposal has been rejected, the agent can get in touch with the proposer personally and explain the reason(s) for the rejection

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Human life value (HLV) In Life Insurance

Human life value (HLV)

The key role of life insurance is to provide protection for the family of the insured, should the insured die unexpectedly. It does this by paying out the sum insured under the policy, should the worst happen. But how much should this sum insured be? How much is the insured’s life worth?

What is human life value?

Ask a person how much their life is worth and without a second thought they will say that human life is priceless and no amount of money can compensate for the value of a human being. But insurance companies and their agents will differ. To arrive at the amount of insurance cover that a person should take out they need to assign a monetary value to human life. This is called human life value (HLV). Like real estate, equities/shares or commodities, a human being is also an asset and has the potential to generate income. Through human life value (HLV) the insurance company tries to measure the economic value of a person or how much the person is worth in monetary terms.

In life insurance, HLV is used as a yardstick to determine how much life insurance cover a person should have. The correct cover will ensure that if the person dies today, there will be no economic loss to their family. Of course, emotional loss cannot be compensated for. The lump sum amount that the person’s family will get from the insurance company will compensate for the future income of the life insured; the income they would have earned had they survived.

How much life insurance should one have?

What many people often do not realise is that, in spite of having a number of insurance policies, if the amount of cover provided by the individual policies is small they can be grossly underinsured. So what then is the correct amount of life insurance cover that a person should have? We can answer this by looking at the different ways of arriving at human life value (HLV). The amount of life insurance cover that a person should have should be equal to their HLV.

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Relevance of premium payment and valid cover in Life Insurarance Policy

Relevance of Premium Payment and Valid Cover

When an insurance policy is purchased, the risk gets transferred from the insured to the insurance company. In consideration for this transfer of risk, the policyholder has to pay a premium to the insurance company. If a proposer never pays any premium, the policy will never come into force. This is because, as we saw in the first part of chapter 3, consideration is needed if a contract is to be valid. If the proposer does not pay the premium, there is no consideration and so no contract. This is why, as we saw in section G3A, the first premium receipt is the evidence that the insurance contract has begun.

As soon as the proposal is accepted and the first premium is paid, the insurance company becomes liable to pay a death claim, subject to the terms and conditions of the policy. However, if the policyholder fails to make subsequent premium payments, the policy will become lapsed and they will no longer be entitled to the benefits of the policy should the worst happen. The best they can hope for is the return of some of their premium. 

You will see from this how important the premium is if a valid insurance contract is to be in place and the proposer is to receive the protection they sought in buying insurance.

Example Case study:

Nitish Sharma has been worrying about his policy and contacts Mr Kumar one last time with some more questions. What if, he asks, he is late with a payment because he is ill and then dies before he can make it? What happens if he is killed while walking back from the post office after posting his premium cheque? Will he still be covered or will Sumedha lose all the protection he has worked so hard to give her should he die?

Mr Kumar patiently answers Nitish’s questions once more.

What happens if the insured dies and the premium has not been paid?

As long as the delay in payment falls within the days of grace given by the insurance company, then, the insurance company is liable to pay the full claim to the nominee or legal beneficiary. The insurance company will deduct the unpaid premium from the claim amount.

When is the premium deemed to be paid?

The premium is deemed to be paid only when the insurance company receives the funds. If the payment has been made by cheque, demand draft or money order, then the payment is deemed to be paid when the amount has been deposited in the insurance company account. However, in practice, the premium is deemed to be paid when any form of payment is received.

What if the insured dies while the cheque/demand draft/money order is in transit?

If the life insured dies while the cheque/demand draft/money order is in transit, i.e. the cheque/demand draft/money order has already been issued by the policyholder but the insurance company has not received it, then the insurance company will seek ‘proof of sending these instruments’. The proof can be provided for instruments such as ‘demand drafts’ and ‘money orders’. The insurance company in these cases deems that the premium has been paid on submission of the proof. However, if a cheque was sent in the post, the insurance company will require evidence of posting.

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Nomination and assignment in Life Insurance Policy

Nomination and assignment

Nomination

Nomination is where the life insured proposes the name of the person(s) to which the sum insured should be paid by the insurance company after their death. The life insured can nominate one or more than one person as nominees. Nominees are entitled for valid discharge and have to hold the money as a trustee on behalf of those entitled to it. Nomination can be done either at the time the policy is bought or later. A person having a policy on the life of another cannot make a nomination. Under section 39 of the Insurance Act 1938, the holder of a policy on their own life may nominate the person or persons to whom the money secured by the policy shall be paid in the event of their death.

Important features of nomination:

Nomination can be changed by making another endorsement in the policy. If there is insufficient space, the nomination can be done on a plain piece of paper and attached to the policy document with the signature of the life insured at the edges, where the paper is attached to the policy. Any changes to or cancellation of the nomination can be done by the life insured during the term of the policy.

With a joint life policy, nomination may not be required, as on the death of one of the lives insured the policy monies are payable to the surviving life insured. However, nomination can be made jointly by both the lives insured nominating a person to receive the sum insured, in case both the lives insured die simultaneously.

Nomination only gives the nominee the right to receive the policy monies in the event of the death of the life insured. A nominee does not have any right to the whole (or part) of the claim.

In cases where the nominee is a minor, the policyholder needs to appoint an appointee. The appointee needs to sign the policy document to show their consent to acting as an appointee. The appointee loses their status when the nominee reaches their majority. The life insured can change the appointee at any time. If no appointee is given and the nominee is a minor, then on the death of the life insured, the death claim is paid to the legal heirs of the policyholder.

Where more than one nominee is appointed the death claim will be payable to them jointly, or to the survivor or survivors. No specific share for each nominee can be made. The nomination can also be done in favour of successive nominees such as: ‘Payable to Rashmi Gupta, failing him to Pallav Gupta, failing him Madhav Gupta’.

Nominations made after the commencement of the policy have to be intimated to the insurers to be effective.

Should the nominee die after the death of the life insured, but before the payment of the death claim, then the sum insured would form a part of the estate of the life insured and would be paid to their legal heirs.

Assignment

Assignment refers to the transfer of title, rights and interest in an insurance policy to another.

Once the policy has been assigned, the assignee has ownership of the policy and does not need the consent of the assignor in matters relating to the policy. An assignment once made cannot be cancelled or altered in any form by the assignor. However, the policy can be ‘reassigned’ by the assignee in favour of the assignor.

Section 38 of the Insurance Act specifies the legal provisions relating to the assignment of insurance policies. It states that:

• the assignment can be done by an endorsement on the policy or by a separate deed. When assignment is made by an endorsement on the policy itself, no stamp duty is necessary. Separate deeds have to be stamped;
• it must be signed by the assignor or their duly authorized agent;
• the signature must be attested by a witness;
• the assignment becomes effective on execution;
• the insurance company needs to be informed about the assignment along with a notice;
• the insurance company considers the assignment to be effective only when it receives the notice regarding the assignment; and
• when there is more than one instrument of assignment, the priority of the claims shall be determined by the order in which the notices are delivered to the insurer.

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Documents required at the time of a claim of Inssurance Policy

Documents required at the time of a claim

When an insured loss happens and it is necessary to make a claim the insurance company will require a number of documents from the claimant. For example, for life insurance the insurance company will require proof that the death has actually happened and so will need to see the death certificate. We will look at the documents required at the time of a claim in chapter 11, when we look at the topic of claims.

The key documents associated with insurance will contain many terms that have a particular meaning in insurance. To understand how an insurance policy works it is necessary to understand what these terms mean and so we will look at some of the key terms in the next section.

Key insurance terms

We have already used some of the specialist insurance terms in the previous section and in this section we will explain these and others. We will divide the key terms into categories to help you understand them. These categories are:

• terms associated with the continued existence of the policy: terms such as lapse, paid up value and surrender value. We will also look at revival and renewal in this context;
• terms associated with who receives the policy monies: nomination and assignment; and
• terms associated with borrowing against a policy: loan and foreclosure.

Lapse, paid up value and surrender value

These three terms describe what can happen should the insured find that they are unable to continue to make the premium payments. How they will operate for any particular policy will be described in the terms and conditions of that policy.

A policyholder has three choices if they cannot afford to continue making the premium payments. These are:

Lapse

The policyholder is required to pay the regular premiums on the due dates agreed with the insurance company. Insurance companies do allow some days of grace beyond the due date during which the policyholder can pay the premium and still be considered timely. However, if they do not pay the premium within the ‘days of grace’ it is considered to be a default.

In the event of a default in the payment of the premium, the insurance company is entitled to terminate the contract. This termination is known as a ‘lapse’. No claims can be made on the policy after a lapse, and all premiums are forfeited.

In practice, the Insurance Act does not allow the insurance company to keep all the premiums paid when a policy lapses. The reason is that every policy acquires a reserve for the following two reasons:

• premiums in the early years of the policy are more than are justified (level premiums); and
• the savings element in the premium.

It would not be fair to the policyholder if they were to forfeit this reserve. The policy conditions provide various safeguards to policyholders when there is premium default. These provisions are called non forfeiture provisions. A policy can be made paid up if sufficient premiums have been paid and there is a savings element to the policy. Whilst the policyholder usually requests this, by the nature of the contract it will be made paid up automatically, based on the number of premiums already paid.

Paid up value

If a policyholder fails to pay a premium on a policy that is capable of having a value (e.g. an endowment or savings plan) and the policy lapses, then the insurance company is not liable to pay the full sum insured. Such a lapsed policy can be made a paid up policy. In a paid up policy the sum insured is reduced to an amount based on the amount of premiums already paid.

Insurance companies insist on a minimum amount that must be acquired as a paid up value. If the paid up value works out to be lower than this minimum amount, this non-forfeiture benefit would not apply and the policy would lapse. The policyholder may be able to collect the surrender value (which we will discuss in section H1C).

Normally insurance companies will offer the policyholder the right to convert a normal policy into a paid up policy if they have already paid premiums for a minimum of three years. After this period, if the policyholder is unable to pay the remaining premiums then under the paid up option the policy is not cancelled. Instead, the sum insured is reduced in proportion to the number of premiums paid. If other benefits related to the sum insured are payable, the benefits will now be related to the reduced sum insured, which is the paid up value.

What happens to bonuses if a with-profit policy is made paid up?

When calculating the paid up value of a with-profit policy, there is no change in the bonus already vested or granted. Only the sum insured is reduced in proportion to the premiums paid. The accrued bonus is added to the reduced sum insured to arrive at the paid up value. However, a paid up policy is not entitled to receive further bonuses.

Surrender value

As we have already mentioned, if the policyholder finds that they can no longer meet the premium payments they can cancel the policy by surrendering the policy before it becomes a claim or before it reaches maturity, and have the surrender value paid to them immediately. The policy must be capable of having a value attached to it, e.g. an endowment or savings plan. Policy surrender is the voluntary termination of the contract. Insurance companies stipulate a minimum term of three to seven years before a policy can be surrendered. The ‘surrender value’ or ‘cash value’ is the amount that the insurance company is liable to pay once a policy is surrendered. The surrender value is usually a percentage of the premiums paid or a percentage of the paid up value.

The duration of the policy is the difference between the date of surrender of the policy and date of commencement of the policy.

The law requires insurance companies to mention in the prospectus or policy document, the minimum guaranteed surrender value, which may be described as a percentage of the premiums paid. However, the actual surrender value paid by insurance companies is more than the guaranteed surrender value.

Revival

When a policy lapses it benefits neither the insurer nor the insured. The insured loses the insurance risk cover for the full amount and is exposed to possible adverse circumstances should a claim arise. The insurer also loses. The level premium is based on the assumption that, barring death claims, the policies will run for the full term. The initial expenses incurred on setting up the policy in the first place are high and the insurer can recover them only if the policies remain in force. Generally it is people with bad health who are more likely to keep their policies in force, while some others with good health may lapse or surrender their policies. This will result in adverse selection. This means the insurer’s liability is likely to be greater than it assumed that it would be when fixing the cost of insurance.

Because lapsation affects both parties adversely, insurance companies make it possible for lapsed policies to be brought back into full force. This process is called ‘revival’. Insurance companies provide the policyholder with the option of reviving a lapsed policy. Different insurers have different schemes for revival; all with a view to help policyholders revive lapsed policies on easy terms, including instalment revival and loan-cum-revival schemes etc.

To revive a policy, the following will normally be necessary:

Some insurers do not allow a policy revival if it has remained in a lapsed condition for more than five years. For a policy to be revived the requirement of proof of good health varies according to the duration of the lapse and also according to the sum insured.

Renewal

We looked briefly at what renewal is in section F7. At the time of maturity of the policy, the insurance company will send a notice to their policyholder inviting them to renew their policy.

When issuing the notice to renew, the insurance company may take a fresh look at the risk brought to the pool by that policyholder. Consequently, it may choose to offer renewal on different terms or for a higher premium. It will also remind the policyholder that they will need to tell the insurance company of any material fact that has changed since they first took out the policy. The notice will then explain to the policyholder what they need to do to renew the policy.

It is up to the policyholder to then accept or reject this offer. If they accept the offer, they will follow the instructions and a new policy will start. If they reject the offer then the cover will cease.

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What is the ‘free look-in period’ or the ‘cooling-off period’ In Life Insurance?

What is the ‘free look-in period’ or the ‘cooling-off period’?

The issuing of the FPR signifies the conclusion of the contract and is binding on both the parties. However, IRDA regulations provide the proposer with the option to withdraw from the contract within a period of 15 days from the date of receipt of the policy document if they disagree with the terms and conditions of the policy. This period is known as the ‘free look-in period’ or ’cooling-off period’. If the proposer withdraws from the contract, then the insurance company will have to return the premium paid minus some deductions, such as the cost of covering the risk for the short period during which cover was provided, medical examination expenses and stamp duty.

Policy document

Shortly after Nitish Sharma receives the first premium receipt, he receives a copy of the policy document. What can Nitish expect from this document? What will it look like?

The policy document is the most important document associated with insurance. It is the evidence of the contract between the insured and the insurance company. It is not the contract itself: if the policy document is lost by the policyholder, it does not affect the insurance contract. The insurance company will simply issue a duplicate policy without making any changes to the contract. The policy document has to be signed by a competent authority and should be stamped according to the Indian Stamp Act.

A standard policy has the following sections:

The heading of the policy document contains the name and address of the company and its logo.

The preamble of the policy states that the proposal and declaration signed by the proposer form the basis of the contract.

The operative clause lays down the mutual obligations of the parties regarding:

• the payment of premiums by the insured; and
• the payment of the sum insured by the insurance company on the happening of the insured event, subject to the production of age proof and title by the claimant.

The proviso of the policy states the general provisions relating to guaranteed surrender value, nomination, assignment and loans on security of the policy etc.

The schedule gives all the essential particulars of the policy. Insurers also include a printed copy of the proposal form completed by the policyholder in the policy document to remove any ambiguity.

The attestation confirms that the insurers have authenticated the policy document by signature. The attestation can be done by authorised officials of the insurance company.

The terms and conditions will refer to the:

• days of grace for payment of premium;
• consequences of failing to pay the premium; and
• availability of loans.

It is also in this section that information will be given on how to assign the policy, how to surrender the policy or make it paid up (we will look at what these mean in section H) and how to make a claim. This section will also detail any exclusion(s) under the policy.

An exclusion is a statement that a certain risk is not covered by the policy. If the loss is caused by the risk that is excluded from cover, the sum insured will not be paid by the insurance company. An exclusion may be one that is common to all life policies (even those issued by another insurance company). An example of this would be that the policy will not pay out if the life insured commits suicide within one year of purchasing the insurance policy. Other exclusions may be included in the policy by the underwriter because of the risk presented by that particular individual. For example, the underwriter may decide to exclude death resulting from adventure activities like trekking, water rafting or various other water sports etc. which are considered risky or dangerous by the insurer. We will look at why an underwriter might do this in chapter 4, when we consider how an underwriter will sometimes accept a poor risk on modified terms.

In order to make certain changes in the terms and conditions of the original life insurance policy, endorsements can be made on a blank sheet of paper and attached to the original policy document. A life insurance policy can be easily amended by using an endorsement. The endorsement is then part of the policy.

Policy information statement

The IRDA requires that the policy information statement should be issued with every policy. This policy information statement should include the following:

• the facility available for method and frequency of premium payment;
• the person or office to be contacted for any enquiry or service relating to the policy;
• the importance of telling the insurance company of any change of address of the policyholder and nominee;
• what to do in the case of a grievance or complaint; and
• information on the location of the Insurance Ombudsman.

Once the proposal has been accepted by the insurance company and the first premium receipt and policy has been issued to the proposer, the proposer is covered by the insurance. From this point we no longer refer to them as proposers – they are now policyholders, i.e. people who hold insurance policies.

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Documents Required for Insurance policies

Key documents for Insurance Policy

There are many important documents associated with insurance – we have already been introduced to some of them in the previous section. These documents provide information on the insured and on the insurance itself and sometimes provide proof that the insurance exists and, when it comes to making a claim, that a loss has occurred. We will look at what these documents are in this section.

Proposal form

The first thing that Mr Kumar does on hearing that Nitish has seen the advantages of having life insurance and is willing to buy a policy, is to give Nitish a proposal form to complete.

Let us look at how Mr Kumar would answer Nitish’s questions.

The proposal form or application form is the first document that the proposer needs to fill in and submit to the insurance company. In our case study Nitish is the proposer. The proposer should fill in the proposal form themselves in their own handwriting. However, there can be a few exceptions to this, for example where the proposer is illiterate or does not understand the language used in the form. Care therefore needs to be taken to ensure that the proposer is fully aware of and is in agreement with the purchase of the insurance plan.

The proposal form is the main source of the information the underwriter will use to assess the risk the person presents to the pool. Therefore it is important that the information provided by the proposer is correct. You should think back to the importance of utmost good faith and the relevance of material facts.

Declaration in the proposal form

At the end of the proposal form there is a declaration for the proposer to sign. By signing this declaration the proposer states that the information they have provided in the form is correct and that they have fully understood the questions before answering them.

The signing of this declaration is important. By agreeing to this declaration the proposer is recognizing that:

• The insurance company can cancel the contract and keep the premiums if it finds out that any of the information provided is not true; and

• By stating that they have understood the questions, they cannot claim that they were given wrong information or misled in any way, if a dispute happens in the future.

What about Nitish’s question about illiterate proposers – how can they complete a proposal form and sign the declaration? If the proposer is illiterate, then an impression of the left thumb is taken and a third party has to attest the thumb impression. The person (third party) attesting the thumb impression has to declare that they have fully explained the questions to the proposer, in their language, and that they have correctly entered the answers after consulting the proposer. In this case the address of the declaring person may also be taken.

Sometimes the proposer’s language will be different to that of the proposal form. In these cases, where the proposer completes the proposal form and also signs the declaration in their own language, then the proposer has to declare, in their own handwriting above their signature, that all the questions were explained to them and that they answered them only after fully understanding them.

This proposal form and the proposer’s signature of the declaration will form the basis of the insurance contract and so are very important documents legally. This is why it is so important that the proposer understands the questions and answers them truthfully.

Age proof

Age is one of the factors that insurance companies use to determine the risk profile of the proposer and thus the premium amount to be charged. This is why it is important that insurance companies verify the correct age of the proposer.

Documents that can be accepted as valid age proofs can be classified as standard age proof documents and non-standard age proof documents.

Along with proof of their date of birth an individual is required to submit proof of their address, a photograph and a deposit towards the premium. The insurance company may also ask the individual to submit bank  tatements for six months to a year. Apart from cash or cheque, the premium deposit payment can also be made by credit card, a direct debit from the proposer’s bank account or through online payment gateways, electronic clearing system (ECS) etc.

In order to curb money laundering in the insurance sector the IRDA, in recent years, has tightened Anti-Money Laundering (AML)/Combating Financing of Terrorism (CFT) guidelines for insurance companies so that extreme care must be exercised during the Know Your Customer (KYC) process. To prove their identity in accordance with the KYC process, the customer needs to submit:

• an age proof;
• an identity proof;
• an address proof; and
• income proof documents (if required by the insurance company, depending on the insurance amount asked for).

The above documents are to be obtained to establish clearly the identity of the customer and their source of income for the premium being paid.

Premium receipts

In this section we will discuss the two premiums receipts – the first premium receipt and the renewal premium receipt. We will look at the policy document in the next section G4.

First premium receipt (FPR)

As we have just seen in Mr Kumar’s response to Nitish, the insurance company will inform the proposer that their proposal has been accepted and that it has received the premium through issuing the first premium receipt (FPR). The FPR is important as it is the evidence that the insurance contract has begun. The policy document, which is the evidence of the contract, may be issued some time later.

Renewal premium receipt (RPR)

After the issue of the FPR the insurance company will issue subsequent premium receipts when it receives further premiums from the proposer. These receipts are known as renewal premium receipts (RPRs). The RPRs act as proof of payment in the event of any disputes related to premium payment, and so are important. The RPRs should be kept in a safe place along with the FPR and the policy document so that they can be produced easily when required.


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How insurance policies are bought and written

How insurance policies are bought and written

We have already established in earlier chapters why an individual should have insurance, what insurance is and the principles behind it. So, how does an individual go about buying an insurance policy? Well, first of all they will need to have heard that insurance is available.

Source of preliminary information

Insurance companies spread awareness of, and generate interest in, their products through mass media advertisements. As we will see later (section G5C), the IRDA has issued specific guidelines on what prospectuses and advertisements issued by insurance companies should say. An individual may conclude from this information that they need insurance and approach the company or one of its agents. We will look at prospectuses in more detail in section G5C.

Alternatively, an individual may be approached by a life insurance agent who will introduce them to the products of the life company they represent.

Purpose of buying insurance

Insurance should be bought by a person based on their needs. There are many insurance products available in the market, and which to buy should be decided after careful consideration. Based on their requirements, an individual may choose to purchase a whole life insurance policy, an endowment policy, a money-back policy, a child plan or a retirement plan etc. We shall look at these products in detail in later chapters.

How life insurance is written

Most policies are written on what is known as a single life basis, with only one life insured. Usually, but not always, the person taking out the policy and the life insured are one and the same person. This is known as an own life policy. Policies can also be taken out jointly by two insureds – for example a husband and wife can take out one policy, with both being the policyholder and the life insured. This is known as a joint life policy.

Proposal form

Advertisements and the prospectus are the means by which insurance companies invite proposals. The person seeking insurance is called the proposer – they are proposing themselves for life (or indeed any kind of) insurance. The proposer will complete the proposal form and submit it to the insurance company. The information in the proposal form is evaluated by underwriters who will then choose to accept or reject the proposal, or to accept it on modified terms. We will look at what the proposal form looks like and its importance in section G1.

Quotations

A quotation is simply that – a quotation as to how much the policy will cost and on what terms. It will often be held open for a set period, during which the proposer can choose to take the policy or decide that it is not for them. If the proposer accepts the quotation, then the insurance company is bound to the terms and price that were offered in it. However, if a material fact relating to the proposer changes during the period of the quotation, then the insurance company is not bound to it.

Insurance contract

An insurance contract commences from the date on which the insurance company issues the first premium receipt (see section G3A). The policy document can be sent later (see section G4). If a person dies before the issue of the policy document, but after the issue of first premium receipt, the insurance company is liable to pay the death claim.

Renewals

Life insurance policies are long-term policies, running for a set period of often many years. Health insurance policies on the other hand, issued by non-life companies, are short-term policies that run for only one year. At the end of the year the policyholder is advised to renew the policy so that they do not lose the benefit of the protection that the insurance provides, and also because the insurance company will not want to lose the customer. The insurance company will therefore invite the policyholder to renew their policy. We will look at renewal in a little more detail later in the chapter.

Summary

Now that we have set the scene by giving an overview of how insurance is bought, we can build on this knowledge by looking at the documents that are necessary in insurance and at some of the technical terms used in them. To put all this into a practical context we will follow the case study of Nitish Sharma and his life insurance agent, Mr Kumar.

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Life insurance principles

Principles of Life Insurance

An insurance policy is a legal contract between the insurance company and the insured person and it must satisfy certain conditions to ensure that it is a valid contract.

In this chapter we will learn what the essential features of a valid contract are, including some unique principles that apply only to contracts of insurance.

Essentials of a valid contract of insurance

An insurance contract is an agreement, enforceable by law, between the insurance company and the insured

person; the insured person agrees to pay a premium to the insurance company and the insurance company agrees to pay a sum of money, on the happening of a specified event, to the insured person.

How do both parties enter into this legally binding agreement and what conditions must be satisfied by both parties to ensure that the contract is a valid one?

To answer these questions, we will first look at the essential features of a valid contract, and then we will move on to see how an insurance contract differs from other contracts.

Features of a valid contract

The following features are essential if a legal contract is to be valid:

Offer and acceptance

A contract comes into existence when one party makes an offer which the other party accepts unconditionally. It is easier to see how unconditional acceptance works by looking at an example. Let’s consider the following conversation:

Example:

ABC insurance company: ‘On the basis of your proposal form we can offer you cover, with a sum insured of Rs. XXXXX.’

Ganesh, the proposer (the person who wants to take out the insurance): ‘I accept.’

In this example, Ganesh’s acceptance does not alter any of the terms of ABC’s offer and the acceptance is said to be unconditional. A contract is formed, subject to the other essential elements being present.

Now, consider an alternative response by Ganesh:

Example:

ABC insurance company: ‘On the basis of your proposal form we can offer you cover, with a sum insured of Rs. XXXXX.’

Ganesh, the proposer (the person who wants to take out the insurance): ‘I accept, but I would like to increase the sum insured to Rs. YYYYY.’

In this case, a contract has not been formed as Ganesh has not unconditionally accepted the offer. Not until ABC accepts Ganesh’s counter-offer, without further conditions, is a contract formed.

Consideration

A contract must be supported by consideration in order to be valid. Consideration may be described as each person’s side of the bargain which supports the contract. Consideration in contract law is merely something of value that is provided and which acts as the inducement to enter into the agreement. The payment of money is a common form of consideration, although not the only form. In terms of insurance policies, we refer to the premium as the insured’s consideration.

Capacity to contract

Persons entering into contracts should be competent to do so. An individual is said to be competent to enter into a contract if they are:

• of the age of majority (age 18);

• of sound mind; and

• not disqualified, by law, from entering into contracts

According to this provision therefore, minors (those under the age of 18) cannot enter into insurance agreements. In addition, people who are legally considered to be of unsound mind and any person who has been barred by law cannot enter into an insurance contract. Any contracts entered into by the above people will be null and void.

Consensus ad idem

In simple terms this means both the parties to the contract must understand and agree upon the same thing, in the same sense. The proposer should have understood the features of the insurance policy in the same sense (manner) in which it was explained to them by the agent.

Legality of object or purpose

The objective of both the parties to the contract should be to create a legal relationship. The purpose of the contract should also be legal.

Example:

It is illegal for a husband to insure his wife’s life, and then to kill her and present it as a case of accidental death in order to benefit from the claim amount that he will receive as the legal beneficiary. Insurance cannot be used for illegal purposes or to derive monetary benefits from it.

Another example of an illegal act is a person who is heavily in debt, taking out life insurance for a large amount and then committing suicide so that their family can benefit from the claim money. Claims for death due to suicide in the first year are excluded by most life insurance companies.

Capability of performance

The contract must be capable of being performed by both the parties. For example, a person requesting life insurance for a very high amount should be capable of paying the premium required.

The agreement and its term must be certain and capable of performance and in a form that complies with the requirements of the laws of the land.

The policy document

In order that both the insured person and the insurance company are clear as to the terms that have been agreed between them, a policy is issued. The policy contains all the details of cover, period of cover, exceptions, conditions, the premium and other relevant information. The policy is not the contract of insurance in itself; rather, it is evidence of the contract.

The contract of insurance comes into effect once the insurance company has accepted the insurance proposal, terms have been agreed and the premium has been paid or agreed to be paid. Thus, the contract exists irrespective of the existence of an actual policy document. The absence or loss of the policy does not invalidate the contract, but the policy is useful as proof in the event of a dispute over the terms agreed. We will examine the structure and contents of the policy in detail in Part 2 of this chapter.

The role of insurance agents in insurance contracts

In the eyes of the law, anyone who acts on behalf of another person is an ‘agent’. If we allow someone to act for us, we probably have to accept responsibility for whatever is done by them on our behalf within the terms of the arrangement. This is true in insurance, and whenever there is the involvement of an intermediary, legal relationships are set up.

We saw in chapter 1 that there are different types of intermediaries involved in the insurance industry and that the term ‘agent’ is applied to a licensed intermediary hired by an insurance company to sell that company’s products on its behalf. In doing so the intermediary becomes the legal ‘agent’ and is deemed to be acting on behalf of the ‘principal’ (in this case, the insurance company). They are authorised by the principal to bring the principal into a contractual relationship with a third party (in this case the proposer/

person wanting to take out insurance).

Anand Khemka
+91-9910936925
+91-8287041341

Insurance companies active in India (January 2011)

Life insurance companies in India

1. HDFC Standard Life Insurance Co. Ltd.
2. Max New York Life Insurance Co. Ltd.
3. ICICI Prudential Life Insurance Co. Ltd.
4. Kotak Mahindra Old Mutual Life Insurance Co. Ltd.
5. Birla Sun Life Insurance Co. Ltd.
6. Tata AIG Life Insurance Co. Ltd.
7. SBI Life Insurance Co. Ltd.
8. ING Vysya Life Insurance Co. Ltd.
9. Bajaj Allianz Life Insurance Co. Ltd.
10. Met Life India Insurance Co. Ltd.
11. Reliance Life Insurance Co. Ltd. (Earlier AMP Sanmar Life Insurance Company from 3 January 2002 to 29 September 2005)
12. Aviva Life Insurance Company India Limited
13. Sahara India Life Insurance Co. Ltd.
14. Shriram Life Insurance Co. Ltd.
15. Bharti AXA Life Insurance Co. Ltd.
16. Future Generali India Life Insurance Company Ltd.
17. IDBI Federal Life Insurance Company Ltd.
18. Canara HSBC OBC Life Insurance Company Ltd.
19. Aegon Religare Life Insurance Company Ltd.
20. DLF Pramerica Life Insurance Co. Ltd.
21. Life Insurance Corporation of India
22. Star Union Dai-ichi Life Insurance Co. Ltd
23. IndiaFirst Life Insurance Company Limited

General insurance companies in India

1. Bajaj Allianz General Insurance Company Limited
2. IFFCO Tokio General Insurance Company Limited
3. HDFC ERGO General Insurance Company Limited
4. ICICI Lombard General Insurance Company Limited
5. The New India Assurance Company Limited
6. The Oriental Insurance Company Limited
7. Max Bupa Health Insurance Company Limited
8. Royal Sundaram Alliance Insurance Company Limited
9. United India Insurance Company Limited
10. SBI General Insurance Company Limited
11. Tata AIG General Insurance Company Limited
12. Reliance General Insurance Company Limited
13. Cholamandalam MS General Insurance Company Limited
14. National Insurance Company Limited
15. Shriram General Insurance Company Limited
16. Bharti Axa General Insurance Company Limited
17. Future Generali India Insurance Company Limited
18. Agriculture Insurance Company of India
19. Star Health and Allied Insurance Company Limited
20. Apollo Munich Health Insurance Company Limited
21. Universal Sampo General Insurance Company Limited
22. Export Credit and Guarantee Corporation of India Limited
23. Raheja QBE General Insurance Company Limited
24. L&T General Insurance Company Limited

Reinsurance companies in India

1. General Insurance Corporation (GIC)

Anand Khemka
+91-9910936925
+91-8287041341

Role and Duties of an Insurance Agent

Role and functions of an agent 

Becoming an agent

There are a number of steps that you as an individual need to take and a number of criteria that you will need to fulfil if you wish to become a life insurance agent. The Insurance Act requires that an insurance agent must have a licence, and the IRDA deals with all issues of licences and other matters relating to agents. There are regulations which must be complied with at all stages in the process. Full details of these regulations and requirements will be covered later in the study text. In this introductory chapter we shall just outline the process of becoming an agent and explain what an agent does.

Role of an agent

As stated in section F2, agents are hired by insurance companies and they act as the main link between the insurance company and the insured. Their role is to recommend to clients the right products that address the clients’ needs. At the same time they must act in the interests of the insurance company by using their unique position of knowing their clients well enough to protect the insurance company from any undue adverse product selection.

This makes the role of the agent in the entire insurance business very crucial.

Agents facilitate the smooth sale of insurance products by assisting their clients with completing the paperwork involved, and after the policy is sold the agent should ensure it is serviced properly until maturity or in the event of a claim. At the time of a claim, the agent should also assist the client to complete the required formalities to ensure quick settlement.

In India, life insurance agents deal with a range of insurances which are generally considered under the following headings:

• basic life insurance products, such as term insurance and whole life plans;
• savings products; and
• other financial products, such as health insurances and accidental death plans.

All these products will be looked at in later chapters.

Once licensed and appointed, the agent is an independent professional. At the heart of this is the need for agents to put the interests of their clients above all else.

Code of Conduct for agents

In supporting agents to carry out their role in a professional manner, every licensed agent must adhere to the Code of Conduct specified by the IRDA in the Insurance Regulatory and Development Authority (Licensing of Insurance Agents) Regulations 2000 as per Regulation 8. In the Code of Conduct the IRDA gives details as to what an agent shall and shall not do. For instance, the agent should disclose all information relating to the insurance company that they represent and the products they are recommending. They should act in the best interests of the client while at the same time making sure that there is no adverse selection against the insurance company (we will discuss adverse selection further in chapter 4).

In addition, the insurance agent needs to take steps to keep the business they have secured for their company. To do this they need to make every attempt – both orally and in writing – to ensure that the policyholder pays the premium within the required time.

We will return to the Code of Conduct for agents later.


Anand Khemka
+91-9910936925
+91-8287041341