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                  MODULE – II


         Supplementary Study Material

                      Released by
        Committee on Insurance and Pension
The Institute of Chartered Accountants of India
                    New Delhi

                                    MODULE - II

                                    CHAPTER – 1


                                     SECTION - A

1. The term ‘underwriting’ for an insurance company implies

   a.   cash flow income
   b.   asset generation
   c.   assumption of liabilities
   d.   generating reserves
   e.   none of the above

2. Personnel engaged in the underwriting department are called as
   a. underwriters
   b. auditors
   c. sales executives
   d. actuaries
   e. none of the above

3. ‘Producers’ of insurance business are
   a. agents
   b. accountants
   c. auditors
   d. directors
   e. none of the above

4. Underwriting involves the
   a. selection of the policyholders
   b. classification of hazards
   c. selection of agents
   d. classification of policies
   e. none of the above

5. The objectives of good underwriting policy aims at achieving
   a. expansion of market
   b. ensuring a profitable book of business
   c. diversification
   d. investment in shares
   e. none of the above

6. Which of the following statements describe the principles of
   i. selection and classification of policyholders
   ii. charging equitable prices

   a.   I only
   b.   II only
   c.   Both I&II
   d.   Neither I&II

7. The process of underwriting involves essentially

   i. Acceptance of ‘risk’ at standard rates/ loaded rates
   ii. Rejection the risk

   a.   I only
   b.   II only
   c.   Both I&II
   d.   Neither I&II

8. Sources of information for underwriters for risk evaluation include

  a.    proposal form
  b.    newspapers
  c.    census records
  d.    financial records
  e.    none of the above

9.Stringent underwriting standards are a safeguard for

   a.   Adverse selection
   b.   Selective selection
   c.   Preferred selection
   d.   Group selection
   e.   none of the above

10.Implementation of the underwriting guidelines is done on a daily basis by the
    a. Staff underwriters
    b. Line underwriters
    c. Group underwriters
    d. Board underwriters
    e. None of the above

11.The corporate policy that defines the objectives of the management concerning
the composition of the book of business is
   a. Investment policy
   b. Underwriting policy
   c. Sales policy
   d. Advertisement policy
   e. None of the above

12.Insurance pricing is generally referred as
    a. rate making
    b. underwriting
    c. undertaking
    d. documenting
    e. none of the above

13.Underwriting guides are issued by the staff underwriters to line underwriters
       i. Uniformity in pricing
       ii. Serve as ready reckoner

   a.   I only
   b.   II only
   c.   Both I&II*
   d.   Neither I&II

14.Underwriting results are represented by the
   a. solvency ratio
   b. combined loss and expense ratio
   c. liquidity ratio
   d. profitability ratio
   e. none of the above

15.Underwriting results of property and liability insurance business is influenced
   i. premium volumes
   ii. reserves created for IBNR losses

   a.   I only
   b.   II only
   c.   Both I&II
   d.   Neither I&II

16.The renewal business performance of an insurer is reflected in the
   a. Success ratio
   b. Retention ratio
   c. Loss ratio
   d. Incurred claims ratio
   e. None of the above

17.In general insurance business reporting a considerable amount of imprecision
   exists in the estimate of final loss costs due to the following factors
    i. loss development delays
    ii. stringent underwriting standards

   a.   I only
   b.   II only
   c.   Both I&II
   d.   Neither I&II

18. The underwriting practices necessary for implementing the underwriting
    policy are described by means of
     a. Underwriting guides
     b. Underwriting process
     c. Ratemaking policies
     d. Underwriters

19.Individual underwriters or groups of underwriters for specialty lines operate
    a. Decentralized underwriting authority
    b. Relatively centralized underwriting authority
    c. Standardized underwriting authority
    d. Centralized underwriting authority

20.Which of the following affects the underwriting and pricing of an insurance

   a.   Binding authority of the producer
   b.   Reserve policy issuance of the company
   c.   Contingency commission agreement
   d.   Underwriting guides

21.Which of the following practices help to check adherence of the insurers to the
   rating plans and pricing that they have filed?

   a.   Financial audit
   b.   Field audit
   c.   Underwriting audit
   d.   Market conduct examination

22.Which of the following is not the responsibility of the line underwriters?
   a. Classifying risks
   b. Selecting insured
   c. Supervising the rate making process
   d. Determining proper coverage

                             SECTION – A ANSWERS

(1) c (2) a (3) a (4) a (5) b (6) c (7) c (8) a (9) a (10) b (11) b (12) b (13) c (14) b
(15) c (16) b (17) a (18) a (19) b (20) b (21) c (22) b

                                    SECTION - B

1. ‘Underwriting is the heart of insurance operations’. Elucidate.

Ans: Underwriting is the process of evaluation and classification of ‘risk’. It is
this core function of the company that determines the financial soundness of the
company. It is rightly termed as “assumption of liability”. With the issuance of
every policy the insurer makes a future promise and is therefore undertaking a

Underwriting essentially involves the selection of policyholders after thoroughly
evaluating all hazards, establishing prices and then determining the terms and
conditions of the insurance policy. The underwriters aim to generate profits and

minimize losses through a well-balanced underwriting policy. The objectives of
underwriting include producing a large volume of premium income that is
sufficient to maintain and enlarge the insurance company’s operations and to
achieve a better spread of the risk portfolio earning a reasonable amount of profit
on insurance operations.

2. Enumerate some of the rating methods by general insurers.
Ans: Rate making or insurance pricing, involves the selection of classes of
exposure units on which statistics can be collected regarding the possibility of
loss. The rates charged must be enough to pay for any expenses or losses
incurred, must not be too high and must not be inequitable. The system of rating
must be simple, stable and provide the insured with a strong incentive to adopt
loss control. Lastly the rates must increase when loss exposure increases. The
various rating methods adapted by property and liability insurers follow a
number of methods to calculate premiums such as:
•    Judgment rating method
     Under this each exposure is individually evaluated and the rate determined
     by the underwriter’s judgment. This method is frequently used in ocean
     marine insurance because the vessels, ports, waters and cargoes carried are
     very diverse.
•    Class rating method
     Under this method, exposures with similar characteristics are grouped
     together and charged the same rate. Some of the major factors in life
     insurance are age, health, gender etc. This method is also called manual
     rating because the rates are published in a rating manual. There are two
     ways of determining the class rates:
         * The pure premium method: pure premium is that part of the gross
          rate, which is utilized to pay losses and adjustment expenses.

          * The loss ratio method: under this method, the actual loss ratio –
          which is the ratio of incurred losses and loss-adjustment expenses to
          the earned premiums - is compared to the loss ratio that was expected
          and the rate is adjusted accordingly.
•    Merit Rating method:
     Merit rating is a rating plan by which class rates (manual rates) are adjusted
     upward or downward based on individual loss experience. Some of the
     merit rating plans include

          * Schedule rating: under this plan, each exposure is individually rated.
          A basis rate is fixed for each exposure and this is then modified by
          debits or credits for undesirable or desirable physical features.
          * Experience rating: under this rating plan, the class or manual rate is
          adjusted upward or downward based on past loss experience. The
          insured’s past loss experience is the basis for fixing the premium for
          the next policy period.
          * Retrospective rating: in retrospective rating, the insured’s loss
          experience during the current policy period determines the actual
          premium paid for that period.

3. Discuss the various hazards encountered in the process of underwriting.

Ans: The process of underwriting is inherently has the danger of adverse
selection and hazards. These are –
•      Physical hazards
•      Moral hazards and
•      Morale hazards.
Physical hazards: include hazards that affect the physical characteristics of
whatever is being insured. Any harm to the tangible qualities of the subject
matter of insurance can be called a physical hazard, e.g. a building made of wood
represents a higher level of physical hazard than one made of brick, an untrained
driver, faulty fire- safety equipment are both examples of a physical hazard.
Moral hazards: these hazards refer to the defects that exist in a person’s
character that may increase the frequency or the severity of loss. Such a character
may tend to increase the loss for the company, e.g. a weak financial condition
that may lead certain people to wilfully cause loss and secure insurance money.
Morale hazards: includes a situation of a wilful carelessness on the part of the
policyholder because of the existence of insurance, then it is a case of Morale
Hazard. By such negligence and indifference the possibility of loss is increased,
e.g. careless acts like keeping the door of one’s house open and going out,
thereby increasing the possibility of a burglary, or leaving the car keys in the car
and increasing the risk of theft are instances of morale hazard.

4. Outline the underwriting process.
Ans: The underwriting process essentially involves a series of stages, at the end
of which the status of a risk is decided. It is only after the risk has been weighed
and all possible alternatives evaluated that the final underwriting is done. When
a proposal for insurance is received, the underwriter has four possible courses of
•    Accept the risk at standard rates
•    Charge extra premium depending on the risk factor
•    Impose special conditions
•    Reject the risk.
The underwriting process involves the following steps when evaluating a
potential risk. These are as follows:
* Assimilating information about the applicant from a wide variety of sources
such as application or the proposal form, the agent’s* report, government
records, physical inspection report of the surveyor, in case of property
underwriting and in the case of life insurance, a physician’s report on the
applicant’s blood pressure, heart condition, urinary system etc, are considered,
claim files.
* Evaluating and making a decision, whether to accept a proposal, reject it or
accept it with certain modifications, such as changing rating plans and policy
* Executing the decision after perusing all the alternatives and making a decision.
If the proposal is accepted then the applicant should be briefed about the
decision along with all the modifications made. If rejected, the underwriter must
convey this decision to the agent with clear, valid and sound reasons explaining
why the particular application has been rejected.
* Preparing the documents which includes the work sheet to be sent to the policy
  writing department and also issue of certificates of insurance.
* Recording information about the applicant and the policy for accounting,
  statistical and monitoring purposes specially the details like the location,
  coverages, limits, risk features.
* Monitoring the activities as to any changes in the loss exposures of the
  insureds, through regular premium audits and audit reports.
*. Maintaining the records of business which involves evaluating the profitability
of all the business written during a particular period of time, covering a specific
territory and for a certain type of insurance.

5. Define the principles of underwriting.
Ans: The principles that guide an underwriter before accepting a risk are:
•   Selecting insureds as per the company’s underwriting standards
•   Striking proper balance within each rate classification, so that the average
    rate in the group is enough to pay for all claims and expenses. Therefore,
    units with similar loss- producing features are placed in the same class and
    charged the same rate, ensuring that a below average insured is
    compensated for by an above average insured.
•   Charging equitable rates based on the risk factors, that is charging less for
    younger persons and more for older people.

                                 SECTION – C
                                CASE STUDIES

1. A top equestrian, Vijay Mallay, insured his prize show horse, Karishma, for Rs.
2.5 lakhs. After a series of lack luster performances, Karisma died suddenly from
what appeared to be colic, a common killer disease of horses. However, the
underwriters settled the claim of Rs.2.5 lakhs although many observers felt that
the settlement was more than the horse was worth alive due to its poor
performance just prior to its death.

During the same time, the CBI was involved in an investigation regarding horse
killings and related insurance fraud. They arrested one Mr. Abu Salim, who said
that he was paid to kill horses so that their owners could collect any insurance
proceeds. Further Abu Salim also revealed the names of his clients where in the
Vijay Mallay’s name was also mentioned. During the trial, the owner testified
that Karishma had not died out of natural cause, but instead died of electrocution
which can be easily be disguised as colic.

From the information provided answer the following questions.

1. As a responsible underwriter how would you evaluate the risk factors while
   issuance of such a policy?
2. Is moral hazard present in the case?
3. Can the company call back the insurance settlement for Rs.2.5 lakhs?
4. Identify the damage compensation liability of the owner.

Ans: 1. As a prudent underwriter, at the time of issuance of the policy, besides
       the cost of the horse, the character of the owner, his past loss record are
       some of the factors to be considered.
2. The moral hazard in the present case is evident in the fact that the owner killed
    the horse to get the insurance benefits.
3. The insurer has every right to order the restitution of the Rs. 2.5 lakhs
    insurance settlement and also to pay for the cost of his incarceration.
4. The owner can be convicted for a clear case of fraud, with a liability of fine
    and imprisonment as per the rules of the criminal code procedure. Further he
    is also guilty of manipulating the cause of death with a willful intention to
    cheat the company.

                                 CHAPTER – 2
                               FIRE INSURANCE

                                   SECTION - A

1. A fire Policy is a
   a. valued policy
   b. unvalued policy
   c. indemnity policy
   d. agreed value policy
   e. none of the above

2. Insurable interest in a FIP must be present
   a. at the inception of the policy
   b. during the continuance of the policy
   c. on the date of loss
   d. at the time of loss
   e. all of the above

3. Cause of fire generally in case of a loss is
  a. material
  b. immaterial
  c. intentional
  d. unintentional
  e. none of the above

4. the doctrine of subrogation and contribution is
  a. applicable in a fire policy
  b. not applicable in a fire policy
  c. applicable only in case of floater policies
  d. not applicable in floater fire policy
  e. none of the above

5. To which of the following assets a reinstatement policy is not applicable?
   a. building
   b. land
   c. furniture
   d. plant & machinery
   e. none of the above

6. Excess in a fire policy implies
   a. a discount
   b. a malus
   c. a deductible
   d. a bonus

7.Fire floater and declaration policies are issued to those companies whose
turnover is
  a. very high
  b. very low
  c. huge and fluctuating values
  d. permanent values

                            SECTION – A ANSWERS

   1.   c
   2.   e
   3.   b
   4.   a
   5.   b
   6.   c
   7.   c

                                     SECTION – B

1. What is the meaning of ‘Fire’?

Ans: To constitute fire, there must be combustion and ignition. The meaning
however does not extend to chemical actions which do not result in actual
ignition though they correspond in their effects to fire. Thus, lightening may be a
form of fire, but loss occasioned by lightening unaccompanied by ignition, is not,
in the ordinary meaning a loss caused by fire. However, where lightening results
in ignition, a loss occasioned by such ignition is a loss by fire. To start a fire, there
are three essential factors: -

a) There must be a flammable gas and vapour.
b) There must be oxygen present.
c) There must be source of heat e.g. flame or a spark.

2. Define Fire Insurance.

Ans: Fire Insurance is a contract of insurance by which the insurer agrees for
consideration to indemnify the assured upto a certain extent and subject to
certain terms and condition against loss or damage by fire which may happen to
the property of the assured during a specified. There is said to be fire within the
meaning of fire insurance when:
a) There is actual ignition.
b) The fire is purely accidental or fortuitous in origin so far as the insured is
c) The fire has burnt/ damaged the property of the insured.

3. Enumerate the essential characteristic features of a Fire Insurance Contract.

Ans : A contract of fire insurance is a species of a contract of insurance and it
exhibits all the following characteristics, namely:

  a) This is a contract of indemnity
  b) It is a contract uberrima fides
  c) It must be distinguished from wagering contract and a contract of
  d) It is a personal contract and
  e) The cause of fire is immaterial generally.

4. What is the difference between subject- matter of insurance from the subject
- matter of a contract of insurance?

Ans: The main object of the contract of insurance is to indemnify the assured
from the loss caused by damage or destruction by fire of the property of the
assured. This physical object is called the subject matter of insurance. On the
other hand the subject- matter of contract of insurance is not the physical object
or property of the assured but is money and money alone. It must be noted that
what is insured is not the physical property of the assured but only loss of it by
fire because by this contract loss by fire cannot be prevented. It is not an
insurance against accidents but an agreement to protect against damage by a fire

5. State whether a FIP is a personal /impersonal contract?

Ans: A contract of fire insurance though appears to be a property insurance is
not so and it is a personal contract between the insurer and the assured, for the
payment of money, in case the loss is occasioned to the property of the
contracting party by fire. The purpose of the contract is not to insure the safety of
the property but only to save the insured from the loss caused by damage to the
property by fire. Therefore, where a property insured against fire is consumed by
fire but still there is no pecuniary loss to the owner of the property, the insurer
will not be liable to pay any amount.

6. What is the coverage offered in a standard fire and special peril policy?

Ans: Under a Standard fire policy, the insurance company agrees for a specified
premium, to pay the amount of such damage or reinstate or replace such
property, if the insured property be damaged or destroyed by any of the perils
specified as under:

-   Fire
-   Lighting
-   Explosion / Implosion
-   Aircraft Damage
-   Riot, Strike, and Malicious Damage
-   Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and
-   Impact Damage
-   Subsidence and Landslide including Rockslide
-   Bursting and / or overflowing of Water Tanks, Apparatus and Pipes.
-   Missile testing operations
-   Leakage from Automatic Sprinkler installation
-   Bush Fire

7. Can you have a separate ‘consequential loss policy’ without an ordinary
   FIP? Give some examples of consequential losses.

Ans: No, there cannot be a separate ‘consequential loss policy’ without an
ordinary fire policy. Under a FIP, not only can one insure the property but any
consequential loss can also be covered. The claim under this head can succeed
only if the insurers adjust their liability for loss of property by fire under an
ordinary policy. The following are some of the examples of consequential loss for
which indemnity is provided-

a)   Loss of profits
b)   Standing charges
c)   Increased cost of working
d)   Increased cost of reinstatement

8. Is a FIP a contract of insurance?

Ans: Yes, a FIP is a special contract of insurance, the object of which is to
indemnify the other party from loss caused to him by damage or destruction of
his property by fire. In certain contracts, other than contracts of fire insurance,
such a duty to indemnify the owner from any loss to the property, including loss
by fire may be either imposed or implied by the law or may be undertaken by the
express terms of the contract (bailment, tenancy contracts).

9. In an FIP the cause of Fire is said to be immaterial. Justify.

Ans: In an FIP the cause of fire is immaterial. If the assured is careful and still
there is fire, it would be unjust to disentitle him to claim and even when he or his
servants are negligent and there is fire, even then it would be unfair to disentitle
him to claim, for it is precisely for these reasons that a FIP is taken. One should
understand that it is the damage and not the cause of fire that is insured. But in
the following two case compensation is not given-

-    When damage is caused voluntarily or wilfully
-    When cause is within an exception of the contract.

10. Give some examples of remote causes of fire.

Ans: A loss for which Fire is not the proximate cause but only a remote cause, is
not recoverable under an ordinary fire insurance policy. Examples of remote
causes of loss by fire are –

- anticipated profits
- continuing expenditure
- increased expenditure
- depreciation
- liability

11. What is meant by Loss by Fire?

Ans: For a loss covered by a FIP, there must be an actual fire or ignition. Any loss
attributed to the fire whether by actual burning or by cracking or scorching or by
smoke or otherwise will also have to be borne by the insurer.

12. What is a cover note? Discuss its validity.

Ans: A cover note is not a policy of insurance. It is only an interim protection note.
It is a temporary and limited agreement. The effect of the cover note is that if the
fire takes place between the date of the receipt of the cover note and the date of
intimation by the insurance company regarding the acceptance or refusal of the
policy the insurance company will be responsible.

13. What are Salvage expenses? Who incurs these expenses? What is the
implication of ‘sue and labor’ clause in a FIP policy?

Ans: Salvage expenses are those expenses incurred by the assured in salvaging
or saving the property. It is the duty of the assured to minimize the loss by
saving the property and preventing the spread of fire, because a fire insurance
contract is a contract of indemnity. In modern fire policies with a view to
encourage the assured to take steps to save the property a clause is inserted
known as the ‘sue and labor’ clause under which the insurance company will be
liable to pay the expenses incurred by the assured in salvaging the property even
though nothing has been saved.

14. State the significance of the doctrine of Proximate Cause with respect to
fire insurance claims.

Ans: The doctrine of ‘Proximate Cause’ holds a very significant place in the
determination of fire related claims. Proximate cause means the active efficient
cause that sets in motion a chains of events which brings about a result without
intervention of any force and working actively from a new and independent
source e.g. where insured object is burnt, cause is plainly fire and insured is
entitled to recover unless the insurer can show that the fire was caused by
exempted peril or willfully by insured or with his consent such as:

1. Where there is an explosion during a fire, the concussion damage falls within
   exception and the Insured cannot recover.

2. Where subject matter is burnt but fire, which burned it, was due to natural
   consequences of excepted peril- Insured cannot recover.

 3. Where fire was set in operation by earthquake, if not covered by insured
    under fire policy and then spread by natural causes i.e. spread by wind or
    one thing catching fire from another and so on…. Insured cannot recover.

 15. What are the general exclusions in a standard fire policy?

 Ans: The following are the general exclusions in a standard fire policy:

    i. This policy does not cover the first 5 % of each and every claim subject to a
       minimum of Rs. 10,000/- in respect of each and every loss arising out of
       lightning, STFI, landslide, and rockslide.
   ii. The first Rs. 10,000/- of every loss in respect of which the insured is
       indemnified by this policy.
 iii. Loss, destruction or damage caused by war, invasion, civil war, mutiny,
       civil commotion, and so on.
  iv. Loss, destruction or damage caused by ionizing radiation, radioactive toxic,
       explosives etc.
   v. Loss caused by contamination and pollution.
  vi. Loss caused to bullion, precious stones, works of art, for an amount
       exceeding Rs. 10000/-
 vii. Loss or damage caused to the stocks in the cold storage premises caused by
       change in temperature.
viii. Loss or damage caused directly or indirectly by earthquake, volcanic
       eruption, etc.
  ix. Loss of earnings, loss by delay, loss of market, or any other consequential or
       indirect loss.
   x. Loss or damage caused due to spoilage due to retardation or cessation of
       work / operations.
  xi. Loss by theft during or after the occurrence of any insured peril.
 xii. Loss or damage to any electrical machine due to overrunning or excessive
       pressure, short circuiting, self heating or leakage of electricity etc.
xiii. Terrorism damage.

 16. What is the liability of the insurance company if the value of the property
     lost is of greater value then the sum insured?

 Ans: A fire contract is a contract of indemnity and therefore only the actual loss
 can be recovered by the assured. The amount recoverable depends upon whether
 the policy is a valued or unvalued one. Fire policies are supposed to be unvalued
 or open policies, wherein the amount of insurance specified in the policy does

not necessarily represent the measure of indemnity. In such cases the amount is
calculated according to the intrinsic value or the market value of on the date of
the fire.

In the leading case Butter v Standard Fire Insurance Co the insured was held
entitled to recover the value of the stock as at the date of fire, though, in fact it
was greater than its value at the time of insuring.

The contract of fire insurance is a contract of indemnity, and the insured is not
adequately indemnified against the loss of property, unless, so far as money can
do so, he is restored to the position which he occupied at the time of loss.
 Prima-facie, therefore, the basis of calculation is either the market value of the
property destroyed or the cost of reinstatement. It is to be noted that, what the
insured to entitled to recover is the value of the property. Whichever basis is
adopted, it is only as a basis for calculating the real value of the property, and the
insured does not recover more than the market value or the cost of reinstatement
as such. In many cases the market value of the property destroyed represents its
real value. In such cases, payment of the market value is an adequate indemnity,
since the insured, by purchasing similar property in the market with that money
can be said to have been completely restored to his original position.

Theoretically, the market value and the cost of reinstatement ought to be the
same. In practice, however there is a difference between them. In a leading case,
“Equitable Fire Insurance Co v Quinn”, it was held that the insurers are liable to
pay the market value at the time of fire, which exceeded the cost price although
the insured has not insured the profit.

In another case, “McCuaig v Quacker City Insurance Co”, where a steam boat
was insured against fire, the insurers were held liable to pay the real value of the
steamboat notwithstanding the fact that there was a depreciation in the value of
steam boats caused by circumstances which might only be temporary.

Hence, the view that in all cases the basis of calculation is the market value of the
property, it is submitted, is not applicable. There are cases in which, the loss
cannot be made good except by reinstatement. The insured is not restored to his
original position, if he is unable to reinstate the property out of the proceeds of
the insurance.

Payment of market value therefore does not give the insured an adequate
indemnity, since he cannot reinstate the property with this sum representing its
market value, but is necessarily compelled to incur further expenditure before he
can restore the property to its original position. Consequently, a basis of

calculation must be adopted which gives him adequate indemnity, and the basis
is the cost of reinstatement.

However, where the cost of reinstatement is taken as a basis of calculation, the
reinstatement contemplated is a reinstatement sufficient to restore the property
insured to the condition in which it was at the time of loss. But very often, by
reinstatement the assured will be more than fully indemnified because an old
property is now substituted by a new property.

In certain cases, neither reinstatement nor market value can be the basis of
valuation as reinstatement is impossible and the market value does not exist. The
property may not have market value, except perhaps as scrap and it may be
capable of physical reinstatement but it may not be commercially practicable to
do this. In such cases, the test is the real value to insured at the time of loss.

17. Can an Insurance company be compelled to replace / reinstate the
    damaged property? Is it optional?

Ans: Reinstatement literally means replacement of what is lost or repairing the
damaged property and bringing to its original value and utility. The word
reinstate in a policy of fire insurance refers to buildings or chattels, which have
been damaged, and the word replace refers to those, which have been totally

Under an insurance policy, the normal liability of the insurer is generally to
indemnify the assured, by paying the value of the thing lost or the expenses
incurred by the assured in repairing the damage occurred by an event insured
against. Though usually the insurer, in certain cases, makes payment of money
with the consent of the assured, it may discharge their liability by reinstatement.

The right of ‘reinstatement’ is usually stipulated as an option to the insurer in the
sense that on the happening of the loss, the insurer will have right to elect either
to pay the assured in money or to reinstate the property.

The assured will not have the right to compel the insurer to reinstate, nor the
insurer has a right to compel the assured on payment of money to apply the
proceeds of the policy in reinstatement. The assured has always an unbridled
right to utilize the policy proceeds as he pleases without any interference from
the insurers.

The right of the insurer to reinstate the property instead of paying the money
may spring up:

•   Either from a contract in the form of a clause under the policy, or
•   Under a statute.

This type of clause is not inserted in all branches of insurances, e.g. it is not and
cannot be included in life policies.

Only in indemnity insurances, in appropriate branches of insurance, like fire,
burglary, steam boilers, or motor vehicles insurances, this clause called
the‘reinstatement clause’, entitling the insurers to exercise an option, on the
happening of the insured event, either to reinstate or to pay the insured money
can be incorporated. This only empowers the insured to exercise the option and
under no circumstances the assured can compel the insurer to reinstate. The
insurers on the other hand, can exercise this option by expressly giving a motive
to the assured or it may be inferred from their conduct.

18. What are the rights of Co-Insurers to combine in Reinstatement?

Ans: When two or more insurers grant insurances on the same subject-matter
and if they combine together to reinstate, the assured cannot prevent them from
joining to do the work and when once they complete reinstatement they are
discharged from their liability. This right of combination sometimes may be a
valuable right where the policies relate to separate interest on the same subject-
matter because the cost of reinstatement may then be very much less and more
economical than the measure of loss.

19. Discuss the implication of the doctrine of subrogation in a Fire Insurance

Ans: The doctrine of subrogation is a necessary incident to the contract of
indemnity and therefore applicable to a contract of fire insurance and one of
marine insurance.
Under this doctrine, as applicable to fire insurance, the insurer has a right of
standing in the shoes of the insured and avail himself of all the rights and
remedies of the insured, whether already enforced or not. The principle of
subrogation prevents an insured who holds a policy of indemnity from
recovering from the insurer a sum greater than the economic loss he has

Therefore, if a loss occurs under such circumstances that he has an alternative
right to recover damages, under common law, tort or statute and if the loss is
also covered by the policy and so he can recover the entire loss from the insurer
and if he so receives, the insurer is entitled to, or is subrogated to, the former
alternative rights and remedies of the insured and this is technically called
‘subrogation’. The insurer in his is entitled by subrogation only up to the amount
he has paid the insured.

The important type of right in respect of which subrogation arises are rights
arising out of a tort, contract or statute. The right of subrogation is exercisable at
common law after the amount has been fully paid, but condition 9 in the
standard policy enables the insurer to claim against the third party even before
the payment is made.

However, the insurer cannot recover from a third party before he has
indemnified his own insured, but can only take steps to hold the third party
liable pending the settlement of the claim under the policy. It is from actual
payment under the contract of indemnity that the right of subrogation springs.
As subrogation means substitution, where the assured himself cannot bring an
action the insurer also cannot claim anything by subrogation. For example,
where the wife of the assured set fire to his house and the insurers paid, it was
held in Midland Insurance v Smith that the insurers cannot recover the insurance
money as the assured had no right of action against his wife.

Similarly, where two ships belonging to the same owner collide by the fault of
one, the insurers of the ship not in fault will not be entitled to any claim on the
owner for acts of the other ship, though the insurers of the cargo owned by the
third party would have had a claim against him.

Limitations on the doctrine: The doctrine of subrogation –

  i. Does not apply to life and personal accident policies;
 ii. Insurer must pay before he can claim subrogation;
iii. Assured must have been able to bring action.

20. What are the underwriting factors to be considered for a fire insurance cover?

Ans: Underwriting the peril of fire focuses on the physical hazards presented by
a particular loss exposure. To assure a thorough review of these hazards
property underwriters use an approach that scrutinizes four specific areas. These
are traditionally referred as COPE: construction, occupancy, protection, and
external exposures.

Construction of the covered property is of primary concern to the underwriter.
The building construction is directly related to its combustibility when exposed
and its construction as fuel once ignited. The Insurance Services Office (ISO)
divides building construction into six classifications:

  i.   Fire resistive
 ii.   Modified fire resistive
iii.   Masonry noncombustible
iv.    Noncombustible
 v.    Joisted masonry
vi.    Frame

Occupancy factors affect the frequency and severity of losses. These factors
which vary from one occupancy to another can be grouped into three headings:

  i. Ignition sources or fire causes
 ii. Combustibility
iii. Damageability

Fire protection can be of two types: public or municipal protection provided by
towns and cities, and private protection provided by the property owner or

External exposures are those outside the area owned or controlled by the
insured. These exposures fall into categories:

  i. Single-Occupancy Exposures
 ii. Multiple-occupancy Exposures

When the property being underwritten consists of a single building, fire division,
or group of buildings owned and controlled by the same policyholder, a single-
occupancy exposure exists. A Multiple-Occupancy exposure occurs whenever
other portions of the same fire division are owned and controlled by persons
other than the policyholder.

                                 SECTION – C
                                CASE STUDIES

1. Reliance General Insurance Company Ltd. delivers a fire policy to Mr. Ajay
   on April 15. However, the insured paid the premium at a latter date.
   Unfortunately there was a fire in the premises resulting in loss of property
   insured. The company later denied its responsibility on the basis of the fact
   that the premium was overdue at the time of loss. Discuss.

Ans: No, the company cannot now deny its claim. For when an insurance
company delivers a policy without requiring immediate payment of the
premium, they incur responsibility for the risk, because having delivered the
policy, they are held to have given credit for the premium. Moreover, when once
the contract is concluded with the premium and other particulars fixed, the
policy drawn and delivered, the insurer becomes liable for loss by fire, and it is
immaterial whether the premium is paid before or after the fire.

2. Mr. Amar lost his factory furniture valued at Rs. 200,000 as on the date of
   fire. He wanted to recover a claim of Rs 2,50,000 for he had a policy of Rs
   500,000. On enquiry he found that for new furniture the cost would be Rs
   1,75,000. If the principle of indemnity is to be applied how much of his
   claim is to be accepted?

Ans: Since the market value of the furniture lost was Rs 2,00,000 and the cost of
reinstatement would cost the insurers only Rs 1,75,000, the Insurers would opt
for reinstatement and accept the claim of Rs 1,75,000.

3. Mr. Shetty, owner of an inn took out a FIP with Bajaj Alianz Ltd. A fire took
place and his inn was destroyed. The assured included in his claim the sum
which he had to pay by way of rent, the cost of hiring alternate
accommodation, loss caused by customers not frequenting the inn during the
period of repair. Justify his claim.

Ans: No, his claim is not justified. Where s fire destroys property, from the use of
which the insured expects to earn s profit in the ordinary course of business, he
does not merely lose his property. He also loses in addition the chance of earning
the profit, which he might have earned if the property had not been destroyed.
But this anticipated loss of profit is regarded as too remote and is not recoverable
under an ordinary fire policy on the property lost by fire. Accordingly, insurance
upon a hotel, shop or factory covers only the value of the hotel, shop or factory
but does not cover the loss of business. In the above case, none of the above items

is covered by the policy. Anticipated profit is to be distinguished from the profit
ascertained at the date of loss to ascertain the value of the subject-matter and in
fixing the amount recoverable under the policy. [Wright v Pole]

4. Mr. Kishore insured his machinery and stock of goods stored in the factory
   premises against damage by fire and a ‘protection note’ was given, subject
   to the usual conditions of the company’s policy, one warranty clause being
   “smoking and cooking be strictly prohibited in or about the premises”. The
   stocks were damaged by fire said to be of accidental nature. But the
   insurance company claimed that smoking a cigarette or bidi carelessly by
   some employee occasioned the fire. Is the denial justified?

Ans: In the above case, the company denied the claim on the ground that there
was a breach of warranty as the fire was occasioned by smoking which is strictly
prohibited. But as there was no eye-witness to the origin of the fire, the court
held that the cause of fire was a matter of conjecture. [Bhattacharjee v Sentinal

In the famous case Dekhari Tea Co v Assam Bengal Roadways Co, it was also
held that fires cannot always be explained, and it must be a matter of conjecture.
As regards the warranty, as the plaintiff had put notices strictly prohibiting
smoking in and around the places, in fact there is no breach of warranty. Hence,
the denial on the part of the insurance company is not justified. On the other
hand, the company should make good the loss.

                            CHAPTER – 3
                         MARINE INSURANCE
                                 SECTION - A

1. The marine insurance has its origin in
   a. England
   b. USA
   c. India
   d. France
   e. None of the above

2. A marine cargo insurance policy is a
   a. open policy
   b. valued policy
   c. unvalued policy
   d. indemnity policy
   e. none of the above

2. insurable interest is necessary in a marine insurance contract on
   a. the policy issue date
   b. on the policy termination date
   c. at the time of loss
   d. after the loss
   e. none of the above

3. the profit made by the ship owner by transporting his own cargo or the cargo
   of another person is known as
   a. carriage
   b. franchise
   c. excess
   d. freight
   e. none of the above

4. Any expenditure voluntarily incurred for the common safety of the ship is
   called as
   a. particular average
   b. general average
   c. total loss
   d. constructive loss
   e. none of the above

5. Cargo insurance is codified under the
  a. ITC clauses
  b. ICC clauses
  c. IIC clauses
  d. IHC clauses
  e. None of the above

6. which of the following perils are uninsurable in a marine policy
   a. fire
   b. barratry
   c. delay
   d. collision
   e. none of the above

7. A clause aimed to bring about cooperation between the assured and the
   insurer such that the rights of neither party is affected with regard to the
   goods is
   a. inchmaree clause
   b. waiver clause
   c. collision clause
   d. proximate cause clause
   e. none of the above

8. Unseaworthiness and unfitness clause is
   a. an implied warranty
   b. an express warranty
   c. an implied condition
   d. an express condition
   e. none of the above

9. “Salvage charges” generally form
   a. a part of the marine contract
   b. are not a part of the contract
   c. a part of the general average clause
   d. a part of the particular clause
   e. none of the above

10. Willful misconduct committed by the master and the crew of the ship is
    called as
    a. jettison
    b. barratry
    c. collision
    d. maritime adventure
    e. none of the above

                           SECTION – A ANSWERS

    1. a
    2. c
    3. d
    4. b
    5. b
    6. c
    7. b
    8. a
    9. b
    10. b

                                 SECTION - B

1. Outline the Importance of Marine Insurance to trade.

Ans: A marine insurance policy is indispensable for trade and commerce. Its

•   Significant in international trade than banking
•   Provides security for credit in international trade
•   Integral part of Overseas trade
•   Regarded as handmaid to commerce
•   LOC issued by the importer bank on the strength on Marine insurance cover

2. State the classification of Marine Cargo Policies

Ans: Marine policies can be classified into various categories as follows:

(A) On the basis of Subject Matter

•   Cargo
•   Freight & Disbursement

•    Hull
•    Builders Risk

(B) On the basis of Duration

•    Voyage
•    Time
•    Mixed

(C) On the basis of specific terms of insurance

•    Single journey
•    Floater Builders Risk
•    Port Risk

3. Mention the Import / Export Cargo clauses and coverage of marine

Ans: The broad classification used for the Ocean Transit cover for cargo is
• The Institute Cargo Clause (ICC) ‘A’
• The Institute Cargo Clause (ICC)‘B’
• The Institute Cargo Clause (ICC) ‘C’

Institute Cargo Clauses “C” covers the following losses:

1.   Fire or explosion
2.   Vessel being stranded, grounded, sunk or capsized.
3.   Overturning or derailment of land conveyance
4.   Collision or contact of vessel / craft or conveyance wit any external object (
     other than water)
5.   Discharge of cargo at the port of distress
6.   General Average sacrifice
7.   Jettison
8.   General Average contribution & Salvage charges
9.   Liability under both to blame collision clause

•    Institute Cargo Clause “B” in addition to the above 1-9, the following are

10. Washing overboard
11. Earthquake, Volcanic eruption or Lightning
12. Entry of sea, lake, or river water into vessel, craft, lift van or place of storage

13. Total loss of any package lost overboard or dropped whilst loading into or
    unloading from veaael or craft

•    Institute Cargo Clause “A” cover

All Risks of loss / damage to the cargo other than exclusions.

4. Mention the general exclusions of a MIP.


1. Willful misconduct of the insured
2. Ordinary leakage, ordinary loss in weight or volume or ordinary wear and
3. Inherent vice or nature of the subject matter
4. Delay
5. Insolvency or financial default of the owners, operators, etc of the vessel
6. Insufficiency or unsuitability of packing
7. War and allied perils
8. SRCC- Strike, Riot, Civil Commotion and Terrorism

However, War, SRCC risks can be covered by extra payment of premium. In
addition to the above , ICC ‘B’ & ICC ‘C’ exclude Malicious damage which can be
covered by additional premium.

5. Enumerate the extension available under ICC ‘B’ in a marine insurance

Ans: Under the ICC ‘B’ cover for extraneous perils include

a.   Theft, pilferage, and non-delivery
b.   Fresh / rain water damage
c.   Damage by hook, oil, mud, or acid
d.   Breakage or leakage (not ordinary leakage)
e.   Country damage
f.   Shortage
g.   Bursting and tearing of bags

6. Discuss the different types of Marine Insurance Policies

Ans: the different types of marine insurance policies are as follows:

•   Specific policy – this type of policy is issued to cover a particular risk
    proposed by an insured on an individual proposal. The specific policy will
    have to be duly stamped and signed. It contains the details of
    - conveyance or vessel name
    - B/L, RR number
    - Date, sum insured, terms and conditions of cover
    - Voyage , description of cargo
    - Premium etc.

•   Cover Notes – When insurance is arranged by the consignee at the time of
    opening of the LOC, he may not be aware of the vessel, bill number, date etc.
    for want of details the insurer will not be in a position to issue a stamped
    policy, and hence a Cover Note is issued.

•   Floating or Open Policies – this is taken by big commercial firms and
    industrial establishments having enormous volume of trade, regular and
    frequent dispatches, and when it is difficult to approach insurers for each and
    single transit. This policy covers all the dispatches from a specified place to
    specified places in the policy during the period of insurance.

•   Open Cover -This arrangement is beneficial for Overseas trade. It covers all
    shipments in accordance with the agreement. It is issued for one year in the
    form of an agreement to cover shipments by sea/ rail/ road/ between two
    specified termini on a worldwide basis. The policy is not stamped and
    separate policies to be issued for all the shipments declared under Open

7.What are the underwriting considerations to be taken before a policy of
Marine Insurance is issued?

Underwriting criteria to evaluate include:

•   Seaworthiness of the vessel
•   Waters navigated and the season
•   Experience of the operators
•   Susceptibility of the cargo
•   Packaging standards
•   Size and value of individual items of equipment

•      Financial status of the policyholder
•      Past loss history
•      Labor relations

The underwriters should properly evaluate the conditions that may increase the
hazards of a fire loss and so should check the installations of such equipment.

8. Discuss the various types of marine loss claims.

Ans: A marine claim upon a policy of marine insurance goods may arise upon
  the happening, as a result of insured perils of any of the following:

i.         Total Loss – actual or constructive
ii.        Particular Average – partial loss
iii.       General Average loss
iv.        Expenses which are:
       -   Sue and labour charges and particular charges
       -   Salvage charges
       -   Forwarding expenses
       -   Extra charges

Actual Total Loss

Actual total loss of the subject matter may occur
• where it is destroyed by an insured peril ( sinking of the ship, collision, or
   destruction by fire, enemy in times of war)
• where it loses its species, unfit for human consumption
• loss is irretrievable
• it is physical total loss and it is absolute

Measure of indemnity for actual total loss is the insured value under the policy.

Constructive Total Loss

This arises should all or any of the following occur:

•      actual total loss is unavoidable
•       where the preservation cost of the goods exceed their value
•      where the possession of the goods is unlikely
•      where the cost of repairing, forwarding to the destination exceeds their value
•      where there is a loss of voyage
•      it is a commercial total loss

•   to claim a CTL, the assured must give a notice of his intention to abandon the

Measure of indemnity for CTL is the sum insured less any proceeds of sale which
are due to the insurers.

Particular Average / Partial loss

•   it is a partial loss / damage caused fortuitously by an insured peril
•   measure of indemnity for PA to cargo depends upon

    -   whether it is total loss of part of cargo
    -   damaged cargo
    -   salvage loss

General Average Loss

Section 66 of MIA, 1963 defines GA as follows:

“ A GA loss maybe either a sacrifice or an expenditure, extraordinary in nature,
voluntarily and reasonably incurred, in time of general peril for the common
safety of the maritime adventure”.

•   all interests at risk namely the ship, cargo and freight which have been saved
    from loss by GA measures are liable to contribute rateably to make good the
    sacrifice and expenditure
•   these values are known as “ contributing values”
•   the sum necessary to reimburse the interest which have suffered the GA loss
    is called “ Amount Made Good” or “Allowance”

Sue and Labour Charges
• All reasonable expenses incurred in averting or minimizing a loss
• There must have been an operation of an insured peril
• The charges are payable in full irrespective of the value of the goods
• These charges are incurred short of destination
• These charges follow upon loss or damage

Particular Charges

•   Section 64 (2) of the MIA, 1963 states that expenses incurred by or on behalf of
    the assured for the safety or preservation of the subject matter insured, other
    than GA and Salvage charges are called Particular charges

•  Particular charges are incurred at destination
•  These charges are conditional on the attainment of the franchise percentage of
• These expenses are incurred where loss is threatening or imminent but
   avoided by expense for that purpose
  (reconditioning expenses)

Salvage charges

Third parties who voluntarily and independently of contract render services to
maritime property at sea which are of material assistance in saving the imperiled
property are entitled to claim salvage.

Forwarding Charges

Forwarding Charges include expenses incurred in unloading, storing, and
forwarding the insured goods at a place other than the destination port, on the
termination of the transit, excluding those charges arising from fault, negligence,
insolvency, or financial default of the assured or their servants.

Extra Charges

•   These charges include expenses of protests, survey and other proofs of loss,
    commissions, expenses related to auction sale etc.
•   Payable only when a claim is admitted
•   These charges “follow the claim”

9. Discuss the important documents to be filed for substantiating cargo claims

•   Original insurance policy / declaration
•   Original copy of sales invoice
•   Bill of lading
•   Bill of entry
•   Letter of subrogation
•   Loss overboard certificate in case of loss during loading, or discharge
•   Special power of attorney ( if applicable)
•   Railway receipt / Transport Receipt / Bill of Lading / postal receipt / air
    consignment note
•   Open assessment report by the carrier
•   Survey report of independent survey
•   Claim form and claim bill
•   Bankers certificate

                                 SECTION – C
                                CASE STUDIES

Three friends – Ashok Jadhav, Lalit Kapoor, ad Govid hadari – tamed up to start
a lobster export business. Jadav owned a ship which was used in the business
for fishing as well as for transporting the processed lobsters to foreign shores.
They insured their ship, the cargo, freight, profits and commission, for a total of
Rs. 80 lakhs. Expecting to obtain enormous profits on their cargo, it was
overvalued by the insured.

A few months later, the ship sank in mid-ocean as it had a hole. Consequently
the cargo was also lost. The insured approached the insurance company to file a
claim for compensation for the lost cargo. However, the insurance company
refused payment of the entire claim amount. It only made partial payment of the
claim stating that the cargo was insured for an amount more than its actual
market value. Moreover, investigation by the insurance company surveyor
revealed that the insured had intentions to sink the ship.

The vessel was retrieved by the insurance company and was offered for sale as
salvage. The insured approached the court to prevent the sale of the ship.


   1. Was the insurance company violating the insurance contract by refusing
      payment to the insured? Justify your answer.
   2. Discuss the duty of an insurer pertaining to salvage.

Ans: 1. An insurance contract legally binds an insurer to pay the policyholder for
    the damages or losses caused by the perils against which the policyholder
    has insured himself. In the given case, the sinking of the ship and the loss
    incurred by the insured was due to willful or fraudulent act of the insured
    and not by the perils against which the ship was insured. An insurer is not
    liable for refusing to accept a claim pertaining to a loss caused by the
    fraudulent act of the insured. Such losses are not covered by insurance

However, in taking over the ship to sell as salvage, the insurer was violating
the insurance contract because salvage belongs to the insurer only after he has
made the payment of the loss suffered to the insured. In this case, the insurer
should have rejected any further dealings with the insured once it was
apparent that the insured had involved in fraudulent act by intentionally
causing the ship to sink to claim the insurance amount. Instead, the
insurance company took over the insured’s property for salvage without the
latter’s approval.

Thus, the insurer was not acting within the framework of the insurance
contract and was liable to be legally penalized.

2. The term ‘salvage’ refers to partially damaged property. Salvage belongs
   to the insurer after the insurer has paid the insured for the loss incurred.
   Thus, insurers are entitled to any material that remains after damage
   provided they pay the full amount for the loss. Hence, an insurer can claim
   his right on the salvage only after he makes the payment for it to the

  The insurer is also entitled to the salvage after paying the claim amount
  when the insured is unwilling to retain it or unable to dispose it.

                            CHAPTER - 4
                          MOTOR INSURANCE

                                    SECTION - A

1. Originally the motor insurance policies were issued to cover only
   a. own damage losses
   b. only accidental losses
   c. third party liability losses
   d. war losses
   e. none of the above

2. Besides the owner, insurable interest in a motor insurance for a financed
   vehicle is present with the
   a. Financier
   b. Mortgagor
   c. Bailor
   d. Garage owner
   e. None of the above

3. Which of the following vehicles are exempted from compulsory insurance
   a. vehicles owned by the government
   b. vehicles owned by film stars
   c. vehicles owned by the banks
   d. vehicles owned by the politicians
   e. none of the above

4. A cover note is valid only for
   a. 15 days
   b. 25 days
   c. 60 days
   d. 90 days
   e. none of the above

5. Assessment of motor losses are done by the
  a. underwriter
  b. agent
  c. surveyor
  d. ombudsman
  e. none of the above

6. For speedy settlement of the third party claims, the cases are referred to
   a. MACT
   b. Consumer forums
   c. Sessions court
   d. Family courts
   e. None of the above

7. Knock-for –knock agreement applies to a situation involving collision
   a. many vehicles
   b. two vehicles
   c. only one insured vehicle
   d. uninsured vehicles
   e. none of the above

8. Settlement of losses in a motor accident claim is usually arrived on the basis of
   a. Ombudsman report
   b. FIR report
   c. Survey report
   d. Loss notice
   e. None of the above

9. On sale of a motor vehicle the insurance policy is also
   a. automatically transferred
   b. not transferable
   c. conditionally transferable
   d. transferable only on application to the insurer
   e. none of the above

10. Which of the following give rise to adverse claims experience
    a. traffic density
    b. high cost of labour
    c. inflated claims
    d. cost of spare parts
    e. all the above

                            SECTION A ANSWERS

   1.   c                   6. a
   2.   a                   7. b
   3.   a                   8. c
   4.   c                   9. d
   5.   c                   10.e

                                  SECTION - B

1. Discuss the nature and scope of the Motor Insurance cover.

Ans: A policy of motor vehicle insurance is, in ordinary course, a combined
insurance. It insures the damage of the motor vehicle and its accessories, liability
for damage for property, death of or injury to, the assured himself or spouse and
it also insures the motor vehicle against the risk of liability for injury to, or the
death of third parties caused by the driver’s negligence.

2. What are the different types of policies available and what is the limit of
   indemnity under those policies?

Ans: The terms of the policies define the nature and extent of the indemnity
provided by the policy. There are two types of policies namely:

 i. The third party liability policy.
ii. A comprehensive policy.

  The third party liability insurance is a compulsory under the Motor Vehicles
  Act. It is often said that ‘a motor car policy is a unique combination of several
  types of General Insurance’.

  For example a private motor car comprehensive policy indemnifies the
  assured against loss or damage to the insured car by accidental external
  means, by fire, self ignition, external explosion, lighting, frost, burglary,
  house-breaking or theft, and by malicious act. Thus it is very clear that the
  insurer is liable to make good the loss of a motor car to the owner of the car,
  for loss of car means loss to the owner of the car.

3. Mention the conditions in a motor vehicle policy to make the insurer liable.

Ans: Some of the conditions in a motor vehicle policy to make the insurer liable

a) The insured will maintain the vehicle in a good state of repair and efficient
b) He takes all reasonable steps and precautions to avoid accidents and to select
   competent and sober drivers ;
c) He takes all reasonable steps to safeguard the car from loss or damage.

4. Explain the following-

   -   Knock for knock agreements
   -   No fault liability

Ans: Knock for knock agreements are agreements between the insurers, to
  avoid confusions and complications at the time of settlement of claims.
  Suppose, if there are other insurances on the same vehicle, the insurer are
  liable to pay only a rateable proportion.

    Similarly, when two motorists, insured under comprehensive policies, are
   involved in a motor accident, both may be liable. Both cases involve doctrines
   of subrogation and contribution involving costs and multifarious litigation.
   To avoid this complication, insurers enter into agreements known as ‘knock
   for knock’.

   It is an agreement between both the insurers that irrespective of whoever was
   responsible for the accident, provided the liability is covered under the
   policy, each insurer will indemnify his insured in respect of the damage to the
   vehicle insured by it and will not enforce subrogation rights.

   On similar lines, ‘third party sharing agreements’ are entered into under
   which each will share equally the third party costs and damages.

   No Fault liability in other words also known as ‘liability without fault’ is to
   make the owner of the vehicle liable unconditionally. This clause states that
   where death or permanent disablement of any person has resulted from an
   accident arising out of the use of a motor vehicle or motor vehicles, the
   owners of the vehicles shall, jointly and severally, be liable to pay
   compensation provided in the Act in respect of such death or disablement,
   which is generally Rs. 25,000 in case of death and Rs.12000, in case of
   permanent disablement.

   This section of the Act makes the liability absolute whether fault or no fault,
   the owner of the vehicle is made liable to pay this amount. Further the
   liability is also made ‘a joint and several’ where by the assured may demand
   from any one or some or all of them where there are more than one vehicle
   owner involved. The payment of compensation is made certain, expedient
   and expeditious by dispensing with the necessity of proving any fault on the
   part of the payer and by providing immunity debarring any defences against
   the receiver of the compensation.

5. Discuss the nature and scope of the third party or compulsory insurance of
   the motor vehicles.

Ans: In law of torts, if a person negligently drives his vehicle and causes injury
  or death to a third party the driver whose negligence caused the damage is
  liable to the third party. Under the vicarious liability clause of the common
  law, the owner on behalf of the driver is liable to the third party.

       The object of this type of policy is too protect the insured against his liability
       to third parties arising out of an accident caused by the use of a motor vehicle
       on a public road and it is also made compulsory. The persons required being
       insured are-

a) Who uses the vehicle except as a passenger, i.e. a driver.
b) One who causes or allows any other person to use the vehicle- other than an
   owner, one who is in possession of the vehicle under a contract of loan or

6. Mention the provisions and conditions to be adhered to, under the Motor
   Vehicles Act in respect to third party insurance.

Ans: The Motor Vehicles Act has made it statutory and obligatory for a third
  party insurance cover to be taken by every owner of a vehicle. The Act
  specifically states that no person shall use except as a passenger or cause or
  allow any other person to use a motor vehicle in a public place, unless there is
  in force in relation to the use of the vehicle by that person or other person, as
  the case may be, a policy of insurance complying with the requirements of the
  Act. Thus, third party insurance is a must for running a motor vehicle in a
  public place. The following are some of the important provisions to be
  adhered to in case of third party insurance, namely

  i.It applies to any other person other than a passenger;
 ii.What is prohibited is the user by himself or allowing another person to use;
iii.Such use should be a motor vehicle;
iv. Such vehicles should be used in a public place;
 v. The using or causing of use by the other person should be without a policy
    of insurance.
vi. The policy of insurance should comply with the provisions of the Act.

7. Is there a statutory contract between an Insurer and Driver?

Ans: According to section 147 (5) of the Motor Vehicles Act, the Act states that, a
  person issuing a policy of insurance under this section, shall be liable to
  indemnify the person or classes of persons specified in the policy in respect of
  any liability which the policy purports to cover in the case of that person or
  those classes of persons. In fact by virtue of the provision of this section the
  insurer is liable to indemnify any specified class of driver, but is not thereby
  liable to the injured third party himself.

   This section gives statutory recognition to the practice of extensions of the
   policy. The effect of this provision is to create a contract, between the insurers
   and any driver of the vehicle who is of a class covered by the policy.

   A satisfactory form of policy therefore, not only covers the liability of the
   policyholder while driving his own car but also extends to indemnify-

   a) The policy holder while driving another’s car;
   b) Other persons while driving the policy holder’s car;

   In fact, it is a second statutory contract, which runs subsidiary to the main
   contract, and it stands or falls with the main contract. If the owner sells away
   his vehicle, his contract comes to an end and along with it the second contract
   also disappears.

8. Discuss the effect of the following on claims:

   -   Insolvency;
   -   Death.



Under the provisions of section 154, the Act protects the rights of the third party
  against insolvency of the assured. The broad effect of the section is that all
  rights and liabilities arising between the insured and the insurers in the case
  of compulsory motor insurance shall remain unaffected, not withstanding
  that a third party has been given larger rights against the insurers than the
  assured himself had.

Death of parties

The general principle of actio personalis moritur cum persona does not apply to
   accidents under this act. Under the provisions of the Act, if the death of a
   person in whose favour a certificate of insurance had been issued, occurs after
   happening of an event which has given rise to a claim under the provisions of
   this chapter, shall not be a bar to the survival of any cause of action arising
   out of the said event against his estate or against the insurer.

From this the following rules may be laid down:

  i. Where the owner of the motor vehicles dies in the accident and the injured
     party is alive, the injured third party can make his claim against the estate of
     the deceased owner unless he died before the accident.
 ii. Where the third party dies as a result of the accident his legal representative
     can make a claim for the compensation before the appropriate tribunal.
iii. Where the owner of the vehicle and the third party die in the accident, the
     estate of the deceased owner will be liable to the estate of the dead third
iv. Where the third party is not dead in the accident, he can himself make a
     claim within six months of the accident, in such a case it does not matter
     whether the owner is alive or dead in the accident.

9. What is the liability of the insurer in case of ‘Hit and Run’ motor accident

Ans: A ‘hit and run’ motor accident means an accident arising out of the use of a
  motor vehicle or vehicles the identity whereof cannot be ascertained inspite of
  reasonable efforts for the purpose. According to the Central government
  instructions to the GIC, the insurer has to pay compensation in such ‘hit and
  run’ cases to third parties in respect of death of any person-

   a) Fixed sum of Rs.8500.
   b) In respect of grievous hurt a fixed sum of Rs. 2000.

   Before this provision, where the wrongdoer is not identified, which is very
   common in a case where a vehicle driver hits a poor pedestrian, though the
   victim has a statutory right to get compensation, he is denied on the ground
   that his respondent is unidentified. It is just, that in such cases GIC should
   provide full compensation for such victims.

                                SECTION –C
                               CASE STUDIES

1. Mr. Suresh, who was the owner of a car, sold his car for its price and when
   the cheque could not be encashed he claimed indemnity from the insurer
   for the loss of the car. Is his claim valid?

   Ans: In the above case, the claim put forth by Mr. Suresh is not justified
   because, as the court also held that the loss was the loss of the sale proceeds
   and not the loss of the car and so the insurer is not liable to pay any
   compensation. [Eisinger v GAFL].

2. Mr. Rahul, the owner of the insured car sold away the car and thereafter,
   while driving another car met with an accident and claimed indemnity
   from the insurer. Justify his claim.

   Ans: Mr. Rahul cannot claim any amount by way of compensation from the
   insurer because the policy ceased to have effect on the sale of the insured car
   and so he could no longer get any benefit of insurance under the policy.

3. Ms. Payal met with an accident while driving her car, and it was due to
   defective brakes. She claimed compensation from the insurers for the
   damages. Decide.

   Ans: Ms. Payal cannot claim any compensation in the above situation because
   the Insurers are not held liable where there is inherent defect in the vehicle.
   Moreover, when the vehicle is not roadworthy and in a dangerous condition
   the insurer is absolved from his liability to indemnify such an insured,
   whenever any condition of the policy is breached by the insured. The insurer
   will not make the loss good, similarly where the loss is due to want of foot

4. Mr. Ranjit Singh had engaged a driver for his car, who had negligently
   driven the vehicle and caused damage to a third party. Is Mr. Ranjit
   responsible in the above situation?

   Ans: As per the common Law, the master is liable for the tortious acts of the
   servant provided the servant does such act in the course of his employment.
   The common law also recognizes the vicarious liability of the owner of the

   motor car. In the law of torts, if a person negligently drives his vehicle and
   causes injury or death to the third party, the driver whose negligence caused
   the damage is liable to the third party. The driver is the servant of the owner,
   and since he is a person of no means, the owner is liable for all his acts so far
   that he has done such acts in the course of his employment.

   In the above case based on the provisions of the common law Mr. Ranjit is
   held liable for the damage caused to the third party. [Pushpabai Sudershin v
   Ranjit G and P Co].

5. Parul Agarwal received a brand new Maruti Zen from her husband on her
birthday. The ca was insured against damage or loss with Wheels Insurance
Company for an amount of Rs 5 lakhs with a deductible of Rs 75,000 from her

One day, Parul, who was an experienced driver, took the car out to visit her
friend. On the way to her friend’s place, she had to stop at a traffic signal.
Although she stopped her car to avoid jumping the signal, a speeding driver
from behind rammed into her car. The impact of the collision was such that Parul
suffered severe injuries and she had to be hospitalized. Her car was reduced to a
wreck. Investigations revealed that the car that hit Parul’s car was being driven
by one Mr.Ranjit Garg.

Parul filed a claim for loss with her insurance company and received Rs 4,25,000
as damage claim. The insurance company, in turn, sued Ranjit on behalf of its
policyholder, Parul for the same amount that it had paid her. Ranjit approached
the court challenging the validity of the insurance company’s suit.

Questions for Discussion:

   1. What is the principle on the basis of which the insurance company
      accepted Parul’s claim and later filed a suit against Ranjit?
   2. What is a deductible? How does an insured benefit by having a deductible
      clause in his insurance coverage?,

Ans: 1 The insurance company paid the claim amount to Parul and later filed a
suit for claiming the same from Ranjit by following the process of subrogation. In
common parlance, subrogation is the process of legally substituting a person in
place of another. In subrogation, legal proceedings are initiated by the insurance
company against a third party that has a liability to the policyholder.
Subrogation gives the insurance company the right to collect the claim amount
from a third party after paying the insured’s claim. It is one of the most effective

procedures of post-loss claims handling. Subrogation is common in claims that
pertain to automobile damage, property insurance, and worker’s compensation
claims. Although the policyholder’s deductible may be included in the claim,
other losses suffered by the policyholder such as medical expenses, which are not
included in the coverage are not taken into account during subrogation.

2. Deductible is the amount that an insurer deducts from the amount of loss
before paying the remaining amount to the policyholder. For example, if a
certain company has a Rs 50,000 deductible in its fire insurance policy, the
insurer will only pay for claims that exceed Rs 50,000. Thus, a loss of Rs 1,00,000
caused due to a fire or some other insured peril would produce a payment of
only Rs 50,000 from the insurer.

The rule related to a deductible clause is – the higher the deductible, the lower is
the insurance premium for a loss exposure. This means increasing the deductible
amount in the insurance policies leads to considerable savings in the premium.
Businesses too stand to benefit from increasing the size of the deductible in their
insurance policies. By doing so, they can achieve a savings in their insurance
premiums. However, in the process, the deductible portion in the insurance must
not be increased to such an extent that it becomes financially difficult for the
individual or firm to bear the risk assumed.

                       CHAPTER – 5

                               SECTION - A

1. Which of the losses are not covered by a Boiler Explosion policy
     a. Explosion
     b. Fire
     c. Collapse
     d. Damage of surrounding property
     e. None of the above

2. ‘Explosion’ does not mean
      a. Sudden and violent tearing apart
      b. Collapse due to external pressure
      c. Bursting apart due to high pressure
      d. Bursting of the boiler due to chemical reaction
      e. None of the above

3. A boiler explosion policy specifically covers losses caused to
      a. Damage of surrounding property
      b. Third party personal liability
      c. Third party property damage
      d. Losses not caused by Inherent defects
      e. All of the above

4. Warranties in a boiler explosion policy are inserted to ensure
     a. Safety of the boilers
     b. Sound maintenance of the equipment
     c. Certifications by authorized persons
     d. To check fraudulent claims
     e. All the above

5. At the time of loss, if the value of the pressure plant is greater than the
   sum insured, the obligation of the insurer is to pay for the
      a. Total losses
      b. Deny the claim
      c. Pay rateable share of loss
      d. Pay only half the loss
      e. None of the above

6. The Boiler explosion policy cannot be issued on
      a. Agreed value basis
      b. Market value basis
      c. Book value basis
      d. Replacement value basis
      e. None of the above

7. Refund of premium during the standstill period is not payable when
   caused by
      a. Shortage of raw-materials
      b. Break down of plant and machinery
      c. Workers strike
      d. Lack of provision of stand by equipment
      e. None of the above

8. The Machinery breakdown policy covers any damage caused to
      a. At work
      b. At rest
      c. While dismantling for repairs
      d. Shifting or re-erection
      e. All the above

9. MB policies cannot be issued on the
     a. First loss basis
     b. With a bonus clause
     c. Without excess clause
     d. For plants located outside India
     e. All the above

10. Deductible Franchise / Excess is the amount out of each claim by the
      a. Insured
      b. Agent
      c. Broker
      d. Insurer
      e. None of the above

11. Refund of premium is not permissible in a Machinery breakdown policy
    in case of
        a. Lock out period
        b. While at work
        c. While at rest
        d. Standstill period due to shortage of fuel & raw material
        e. None of the above

12. The Machinery loss of profits policy covers loss of gross profit only due to
       a. Increase in out put
       b. Decrease in out put
       c. Decrease in cost of working
       d. Lock out period
       e. None of the above
13. The minimum time exclusion period for LOP policies in case of power
    plants is
       a. 15 days
       b. 14 days
       c. 30 days
       d. 45 days
       e. None of the above

14. The basis of total loss settlement in an EAR policy is payable on the basis
       a. Actual value less salvage
       b. Market value plus salvage
       c. Reinstatement value
       d. Value decided by IRDA
       e. None of the above

15. Which of the following is not Act of god perils

       a.   Earthquake
       b.   Flood
       c.   Negligence
       d.   Storm/ Tempest
       e.   None of the above


   1.   b                   10. a
   2.   b                   11. a
   3.   e                   12. b
   4.   e                   13. b
   5.   c                   14. a
   6.   a                   15. c
   7.   c
   8.   e
   9.   e

                                    SECTION - B

1. Define the scope and aim of ‘engineering insurance’
Ans: Engineering Insurance schemes aim at protecting business houses from
eventualities that could give rise to a loss and disrupt their day-to-day
functioning. Such losses arise due to the failure of machineries, explosion of
boilers and breakdown of computers and sophisticated electronic equipment. A
major breakdown due to mechanical failure could also result in consequential
loss of profits. All these risks can be covered under various engineering policies –
Engineering Insurance covers are available at the time of putting up of a factory
or even during an expansion. These insurance covers are the Storage-cum-
erection policies for industrial risks, the Contractors all risk policy for civil works
and the Contractors plant & machinery policy, which takes of the Contractors
Insurance requirements. The Advance loss of profits policy is a sophisticated
insurance cover, which takes care of losses arising out of delay in completion of a
project well beyond the stipulated period where the delay is caused by an
insured peril.

2. Define the term ‘explosion’ and explain the scope of coverage in a Boiler
explosion policy
Ans: The term Explosion’ refers to the sudden and violent rending or tearing
apart of the permanent structure of a boiler or pressure plant or any part or parts
thereof by force of internal steam gas or fluid pressure causing bodily
displacement of the said structure and accompanied by the forcible ejection of its

The BP policy explicitly covers the following:
1.       Damage (other than by fire) to the boilers and/or other pressure plant or
         surrounding property described in the schedule.
2.       Liability arising due to death of or bodily injury to any person provided he
         is not employed or under apprenticeship with the insured.
3.       Liability arising from damage to any property whether the insured is
         responsible for it or not

3. State the general exceptions of Boiler Explosion policy.
Ans: The follwing losses are not covered under the policy:
     -    damages arising directly or indirectly from fire that from explosion or
          collapse or any other cause.
     -    Damages caused by war, hostilities or war like operations, natural
          calamities etc. Similarly damages from nuclear reaction, nuclear radiation
          or radioactive contamination are excluded.
     -    Loss resulting from any experiment requiring overloading or abnormal
     -    Defects that are gradually developing and would require repairs at some
          future date are not covered under this policy.
     -    Wearing away or wastage of materials of any part of the boiler or failure
          of individual tube (if there are multiple tubes in the boiler).
     -    Damages due to negligence.
     -    Consequential losses
     -    Damages due to known flaws

4. Discuss the rules of rating for mid-term increase or decrease of sum insured.
Ans: If the sum insured is increased during the currency of the policy.
         a) Short period scale of rates shall apply to increased amounts.
         b) If the policy is renewed thereafter for 12 months for an amount not less
            than the increased sum insured, the difference of premium between
            short period scale of rate and pro-rata rate may be refunded.
         c) If the sum insured is decreased during the currency of the policy, short
            period scale of rates shall apply on the reduced sum insured.

5. what are the facts to be disclosed in a proposal form of a boiler explosion
Ans: The material facts that need to be disclosed in a proposal form include the
•       Total sum insured
•       Details of boiler and pressure plants
•       Details of surrounding property of the insured including property held in
        trust or commission
•       Legal liabilities to third parties
•       On payment of additional premium, does the insured wish to cover express
        freight, overtime and holiday rates of wages, owner’s surrounding property
        and third party liability? If yes provide limits of indemnity.
•       State how boiler is fired, e.g. oil, gas, coal or pulverised fuel.
•       What is maximum load on a safety valve per square per inch?
•       What is the working pressure?
6. Discuss the scope of coverage of a Machinery breakdown insurance policy
Ans: The policy covers the damage caused to the machinery whether they are at
work or at rest or even when dismantled for repairing or overhauling. Similarly
damages caused during shifting them from one place to another or subsequent
re-erection are also covered.

7. What is the basis of indemnity under a MB policy?
Ans: the basis of indemnity is as follows:
    -    In cases where damage to an insured item can be repaired, the company
         will pay expenses necessarily incurred to restore the damaged machine to
         its former state of serviceability plus the cost of dismantling and re-
         erection incurred for the purpose of effecting the repairs as well as
         ordinary freight to and from a repair shop, customs duties if any, to the
         extent such expenses have been included in the sum insured.
    -    No deduction shall be made for depreciation in respect of parts replaced
         except for (i) wear and tear parts and (ii) parts for which manufacturers
         have specified a fixed life for use and the like but the value of any salvage
         will be taken into account.
    -     In cases where an insured item is destroyed, the company will pay the
         actual value of the item immediately before the occurrence of the loss
         including costs for ordinary freight erection and customs duties if any

           provided such expenses have been included in the sum insured, such
           actual value to be calculated by deducting proper depreciation from the
           replacement value of the item.
      -    Any extra charges incurred for overtime, night-work, work on public
           holidays, express freight are covered by this insurance only if especially
           agreed to in writing.
      - The cost of any provisional repairs will be borne by the company if such
         repairs constitute part of the final repairs and do not increase the total
         repair expenses.
8. What is the main aim of a Loss of profits insurance policy?
Ans: Under this policy the company makes good the losses arising from
unforeseen and sudden damages to any machinery described in the schedule,
during the period of policy, on the basis of the following requirements:
•         The liability of company for claims remains within the limit specified in the
•         The accident should happen during period specified in the policy and
          should be covered by standard machinery insurance policy or boiler &
          pressure plant insurance policy.
•         The terms and conditions of the policy have been fulfilled.
•         The statements and answers in the proposal form are true.
The cover provided under this policy shall be limited to loss of gross profit due
(a)       Reduction in output and
(b)       Increase in cost of working and the amount payable as indemnity there
          under shall be
          a)    In respect of reduction in output
          b) In respect of increase in cost of working
The reduction in fixed charges if any during the period business is disrupted,
shall be deducted from the compensation amount.

                                      SECTION – C
                                    CASE STUDIES


                          CHAPTER - 6

                                 SECTION –A

1. Miscellaneous insurance policies cover losses concerning
   a. person
   b. property
   c. pecuniary risks
   d. liabilities
   e. all the above

2. Workmen’s compensation policy takes care of the liability of the
   a. Employer
   b. Owner
   c. Tenant
   d. Mortgagee
   e. None of the above

3. Crop insurance in India to all loanee farmers is
   a. compulsory
   b. not obligatory
   c. optional
   d. voluntary
   e. none of the above

4. Which of the following losses are not covered by the personal accident policy
   a. natural death
   b. disability
   c. accidental death
   d. suicide
   e. none of the above

5. For items of high sentimental value a burglary policy can be issued as a
   a. floater policy
   b. declaration policy
   c. valued policy
   d. open policy
   e. none of the above

6. Which of the following does constitute ‘money’
   a. bank notes
   b. coins/ currency
   c. stamp papers
   d. jewelry & ornaments
   e. all the above

7. Which of the following losses are not covered by the Plate and Glass
   insurance policy?
   a. Willful breakage
   b. superficial damages
   c. scratches
   d. cracked or imperfect glass
   e. all the above

8. Fidelity Guarantee policy covers the employer against pecuniary losses
   caused by
   a. natural calamities
   b. servants
   c. dishonest employees
   d. customers
   e. none of the above

9. The D&O insurance policy is aimed to protect the interests of the
   a. policyholders
   b. shareholders
   c. customers
   d. employees and creditors
   e. all of the above

10. Which statement regarding the liability of the insurance company for a D&O
    policy true
    i. The underwriter is liable when the policy in force
    ii.The underwriter is liable even after the policy is cancelled or lapsed.

   a.   only (i.)
   b.   only (b)
   c.   both (a) & )b)
   d.   neither (a) or (b)
   e.   none of the above

                             SECTION A ANSWERS

    1. e
    2. a
    3. a
    4. a
    5. c
    6. e
    7. e
    8. c
    9. e
    10. c

                                 SECTION - B

1. What are the risks covered under miscellaneous insurance policies


The risks covered by miscellaneous insurance are classified into four main
categories concerning
•      Person
•      Property
•      Pecuniary risks and
•      Liabilities.

2. What was the rationale behind initiating the Workmen’s Compensation
Ans: The objective of this Act is to take over the liability of the employer under
the Act in return for payment of appropriate premium to the insurer. It provides
compensation for workers for death and disability due to accident arising out of
and during the course of employment for which the employer is liable under the
Workmen’s Compensation Act, 1923. The act thus provides a comprehensive
protection for the timely payment of compensation to the injured employee. The
compensation amount is directly proportionate to the wages drawn by the

If the accident has been caused directly because of:
•    The influence of intoxicants consumed by the worker
•    His willful removal or disregard of any safety guard or other device meant
     for his safety or
•    His willful disobedience to any express order or rule meant for his safety;
     then the employer is only liable if it results in death and not otherwise.

3. Outline the salient features and the objectives of the crop insurance scheme.
Ans: The objective behind the crop insurance policy was to provide insurance
coverage and financial support to farmers in the event of natural calamities, pests
& diseases. Secondly to encourage the farmers to adopt progressive farming
practices, high value inputs and higher technology in agriculture and to help
stabilise farm incomes, particularly in disaster years.

The Salient features of the scheme: -
     The crops in the following broad groups in respect of which i) the past yield
     data based on Crop Cutting Experiments (CCEs) is available for adequate
     number of years, and ii) requisite number of CCEs are conducted for
     estimating the yield during the proposed season:
     a.   Food crops (Cereals, millets & pulses)
     b.   Oilseeds
     c.   Sugarcane, cotton & potato (annual commercial/annual horticultural
     Other annual commercial/ horticultural crops subject to availability of past
     yield data will be covered in a period of three years. However, the crops,
     which are covered next year, will have to be specified before the close of
     preceding year.
     All farmers including sharecroppers, tenant farmers growing notified crops
     in notified areas are eligible for coverage.
     The scheme covers the following groups of farmers:
     a.   On a compulsory basis: All farmers growing notified crops and
          availing Seasonal Agricultural Operations (SAO) loans from financial
          institutions i.e. loanee farmers.
     b.   On a voluntary basis: All non-loanee farmers growing notified crops
          who opt for the scheme.

4. Define the scope of Aviation insurance policy?

Ans: The most common coverages of aviation insurance are:
•      Aircraft liability insurance
•      Hull coverage
•      Personal accident
Aircraft Liability Insurance:
The liability in case of aviation insurance is divided into two categories:
•       Passenger liability
•       Death and injury to third parties
There are some policies that cover both these categories as well as property
damage with a single limit to cover all three of them (like floating policies in
fidelity guarantee). The aircraft liability insurance also provides coverage of
medical payments for injuries sustained while travelling in or entering or
alighting from the aircraft. This policy coverage is available only if the policy
includes passenger bodily injury liability. Some policies also provide for Hull
coverage which include coverage the body and machinery of the aircraft. Some
policies provide open perils coverage both on ground and in flight whereas
others restrict the open perils coverage to ground only. In flight policies do not
cover crash or collision. They cover perils of fire, lightning or explosion in air.

5. How is ‘insurance of a person’ policy different for life insurance policy?

While in life insurance a claim can be made only on the death of a person or the
attainment of a specific age, in ‘insurance of person’ policy provides cover
against any personal accident or specified diseases. Secondly the Life Insurance
Corporation of India provides the former policy, while the latter is provided by
the General Corporation of India. Like life insurance the amount to be awarded
in case of accident is pre-decided in the policy. Personal accident insurance is not
a contract of indemnity. The coverage is linked to the income of the insured.
Generally sum insured in restricted to 5/6 times of annual income or 50/60 times
of monthly income in case of salaried employees. The schedule of the policy
specifies the amount to be paid in case of death of the insured, total or partial
loss of eyesight, amputation or irrecoverable loss of limbs without physical

Personal insurance also covers many insurances like personal accident insurance,
disability insurance, baggage, medical, individual liability covers for
professionals like doctors, architects etc.

6. How is ‘Burglary’ defined in a Burglary insurance policy?

Burglary is defined as forceful and illegal entry into the business premises for the
purpose of stealing. “Forceful entry” is the prerequisite for burglary. It is
necessary to differentiate it from theft, robbery or housebreaking. While
Robbery requires a forceful personal contact. It is an aggravated form of burglary
where force is used against a person.
7.What is the cover available for loss in a burglary policy?
Ans: Burglary insurance is not only for the goods owned by the person but also
for the goods he is responsible for like those held in his trust. It also includes the
relationship of bailment or agency regarding the goods. The policy with wider
cover excludes the items that are specifically covered under other policies.
The main policies available under the burglary insurance are:
i)     Burglary business premises insurance policies.
ii)    Burglary private dwellings insurance policies.
iii)   Combined fire and burglary insurance policies.
iv)    All risk insurance policies.
v)     Baggage insurance policies.
vi)    Jewellery and valuables insurance policies.

8. Discuss the scope of cover available under a Bankers’ Indemnity Insurance
Ans: A bankers’ blanket cover provides insurance against fire perils, burglary,
cash in transit, fidelity guarantee and marine insurance. This policy provides
comprehensive insurance cover to the banking sector.
Coverage: This policy covers the direct losses of money and/or securities
discovered during the period specified in the policy. More specifically, it covers
the following losses:
Premises - By fire, riot and strike, burglary or house breaking or hold up resulting
in loss to money/securities at the premises.
Transit - Lost, stolen, mislaid, misappropriated or made away either due to
negligence or fraud of employees of the insured whilst in transit.

Forgery - Loss by bogus, fictitious or forged or raised cheque/drafts/FDRs or
forged endorsements.
Dishonesty - Loss of money and/or operations due to dishonesty.
Hypothecated goods - By fraud and/or dishonesty or criminal act of the insured
Registered postal sending - Loss of parcels by robbery, theft or by other causes to
the parcels insured with the post office.
Appraisers - Infidelity or criminal acts by appraisers on the approved list.
Janata agents - Infidelity or criminal acts by Janata agents/Chhoti Bachat Yojana
Agents/Pygmy collectors.

9.Enumerate the exclusion of this policy
Ans: The policy categorically excludes losses due to:
     1.   Default of Director or partner of the insured other than salaried
     2.   War and allied risks
     3.   Acts of God
     4.   Incendiaries
     5.   Direct or indirect nuclear reactions
     6.   Acts of omission by the concerned employee after discovery of a loss in
          which the said employee was involved
     7.   Losses of money, securities or personal property of the insured, the
          nominal value and description of which have not been ascertained by
          the insured before loss
     8.   Trading losses and
     9.   Losses sustained or discovered beyond the period specified in the

10. Discuss the coverage and exclusions of a Plate Glass Insurance
Ans: The policy specifically indemnifies damages to glass, lettering or
ornamentation described in the schedule caused by breakage or by accidental
chemical spills or acids. The policy also covers repairer replacement of sashes or
frames, boarding up or protecting windows in the event of unavoidable delay in
replacements, and removal of fixtures or other obstructions to replace the glass.
Policies also cover breakage of other than “regular” glass, such as neon signs,
half-tone screens, memorial windows, glass bricks, and fluorescent lights.

However, the policy excludes the following risks:
•    Fire or explosion
•    Earthquakes
•    Riots, strikes, war and kindred risks

11. Why is Fidelity Guarantee Insurance policy becoming a necessity?

Ans: Fidelity Guarantee Insurance (FGI) is a necessity in today’s scenario
bexause of the increasing frauds.

12. Enumerate the different types of Fidelity Guarantee Insurance policies
Ans: The different policies include
•    Individual policy – where the behaviour of only one person is guaranteed.
     The individual’s name is written in the policy.
•    Collective policy –The behaviour of more than one individual (usually the
     whole staff) is indemnified in the single policy. The schedule of such a
     policy contains the names of all the individuals whose behaviour is
     guaranteed. .
•    Floating policy or the Floater – The problem with the collective policy is the
     assignment of the amount of guarantee to each individual. It is difficult to
     estimate the amount of loss that an individual can create alone or with
•    Positions policy –This policy is similar to a collective policy (actually an
     improvement over it). Instead of the names of the individual, the positions
     are listed in the policy with the duties and the amount guaranteed for their
•    Blanket policy – As the name suggests, this policy covers the entire staff of
     an organisation. No name or position is shown in the policy. The policy is
     suitable for organisations with large staff.
•    Excess floating policy – This is a mix of the floating and cumulative
     policies. The individual amounts are bundled with the names of each
     employee but for unforeseen to unusually big losses, an additional floating
     amount is fixed. That is why the policy is known as an excess floating

13. Enumerate the risk exposures of the Directors and Officers and the
available insurance policy to insure these risks.
Ans: Directors and Officers are exposed to potential risks that might come in the
form of:
-    Misrepresentation of the firm’s financial status
-    Lack of diligence and failure of supervision
-    Conflicts of interest
-    Imprudent decisions and
-    Mismanagement of funds
D&O insurance policy enables the directors to work peacefully with the
knowledge that somebody else will take care of the losses in case the company
fails to fulfill all its obligations. It offers a broad protection to the insured.
Though not mandatory, most of the top corporations in the west purchase D&O
                                 SECTION – C
                                CASE STUDIES
Hemant Patel, a real-estate broker, lived in Delhi with his wife and two children.
He owned a bungalow in Karol Bagh which was insured with Elite Insurance
Company, New Delhi, for Rs 35 lakhs.

On Dec 31st 1999, Hemant went to the local club with his family to attend a New
Year party. When they returned home in the early hours of the next day, they
found that their house had been burgled and many valuables had been taken.

While the police investigation was going on, the insurer sent his surveyor to look
into the cause of the loss, the compliance of the insured with the terms of the
policy, and the amount of loss suffered by the policyholder.

During the course of investigation, the surveyor observed significant
discrepancies in the statements given by the insured. These discrepancies
pertained to the list of items reported to have been stolen by the insured and the
mismatch between the true value of these items and the amount supposedly
involved in the burglary. When the surveyor submitted his report to the
insurance company, he mentioned that the financial condition of the insured was
not good before the burglary and he had increased the insurance coverage on his
house just a few days before the burglary took place.

Hemant’s claim form was therefore rejected by the insurance company on
grounds of fraud. Hemant filed a lawsuit against the insurance company.

Questions for Discussion:

   1. Was Hemant eligible to receive the claim amount for the reported loss that
      he had suffered? Why do insurers make payments for suspicious claims?
   2. What are the precautions that a loss adjuster has to take while handling
      claims for loss caused by theft?

Ans: 1 Hemant failed to give convincing replies to the questions posed by the
surveyor. Even the information he supplied was full of discrepancies. Further, he
increased the value of the insurance coverage on the house, which proves that
the insured’s motive behind obtaining insurance was purely to obtain financial
gain rather than protect against risk. Therefore, Hemant is not eligible to receive
the claim amount for the reported loss.

Insurers often make payments towards suspicious claims for fear of being
blamed for tardiness in claim settlement. The fear of loss of goodwill, and the
need to maintain good standing with the insurance regulators is also responsible
for the insurers making hasty settlements of suspicious claims.

2. An adjuster should thoroughly review relevant policy provisions while
handling a claim for loss due to theft. If the policyholder has theft coverage for
the type and location of property concerned, then the verification of the loss
becomes a very difficult task for the adjuster. While verifying a theft claim, both
the loss itself as well as the amount of loss due to theft has to be verified. Since
little or no evidence remains after a theft, it is easy for a dishonest insured to
fabricate claims. Even if a theft has truly occurred, there is no evidence to prove
that there was a thief involved in the incident, or to prove the existence of the
property involved in the theft, or even to prove the true value or quantity of the
property involved. The statements of the insured about the nature, quantity and
value of the property that has been allegedly stolen are accepted as evidence in
courts. The failure of the insured to provide receipts to validate his claim cannot
form the basis for denial of the claim by the adjuster.

                         CHAPTER 7

                            SECTION - A

1. By availing the conversion feature of a life insurance policy, one may shift
      a. whole life policy
      b. endowment policy
      c. long-term assurance policy
      d. Either (a) or (b) above
      e. Either (b) or (c) above.

2. What    are the features that help in designing the endowment assurance
      a.   Term endowment and pure insurance.
      b.   Term endowment and pure assurance.
      c.   Term insurance and pure endowment
      d.   Term assurance and endowment insurance.
      e.   Term insurance and endowment insurance.

3. In which of the following cases, the highest amount of premium is
      a. Term insurance.
      b. Pure endowment
      c. Endowment assurance
      d. Term endowment
      e. Pure insurance.

4. Who decides the broad patterns of investments for the capital market
   linked variable life insurance policies?
       a. The insurance company
       b. The policyholder.
       c. The market situation.
       d. The overall economic scenario.
       e. All the factors mentioned above.

5. Which of the following is not a feature of universal life insurance policy?
     a. The cash value of the policy grows at a fixed rate with respect to
     b. The insured can vary his annual death benefit coverage.
     c. The insured can vary the amount of premium payable.
     d. The insured can make partial surrenders of the policy.
     e. The insured can take loan against the cash value of the policy.

6. How is the purchase price of a deferred annuity plan paid?
     a. Through a lump sum amount.
     b. Through installments over a period of time.
     c. Either through a lump sum amount or through installments.
     d. By deferring the due date of the payment of the premiums.
     e. None of the above.

7. In which of the following annuities, the accumulation period is not
      a. Immediate annuity.
      b. Deferred annuity.
      c. Single life annuity.
      d. Joint life annuity.
      e. All of the above

8. What is the risk managed by a life annuity?
     a. Premature death.
     b. Temporary disability.
     c. Excessive longevity.
     d. Permanent disability.
     e. Critical diseases.

9. What is the characteristic feature of the accumulation period of the
   annuity contract?
      a. The annuity amount is gradually paid back to the annuitant.
      b. The annuitant may withdraw himself/herself from the scheme.
      c. The investment made by the annuitant gradually grows.
      d. The annuitant may take loan from the purchase price of the
      e. The insurer is liable to refund the policy money to the annuitant.

10. How does the Life Insurance Corporation of India refund the premiums
    (single or installments) of a deferred annuity as per the present condition?
        a. Without any interest if the annuitant dies within 3 years.
        b. Interest at the rate of the small savings, if the annuitant dies prior to
           the deferred date.
        c. Yearly compounding at a rate of 3%, provided the annuitant dies
           after 3 years from the date of commencement but prior to the date
           of maturity.
        d. Either (a) or (c).
        e. Either (b) or (c) as chosen by the annuitant.

11. How is the purchase price for an immediate annuity paid?
      a. By installments over a period of time.
      b. By a lump sum amount
      c. Either through installment or by a lump sum amount as chosen by
          the annuitant.
      d. From the salary of the annuitant.
      e. None of the above

12. Why is the word profit redundant in life insurance business used?
      a. The insurance companies cannot earn any profit.
      b. The insurance companies are not carrying out the business they are
          working for the charitable interest of their policyholders.
      c. The insurance companies’ commitments are contingent liabilities
      d. The insurance companies cannot meet all the liabilities at a time.
      e. The insurance companies honor the unlimited volume of liabilities.

13. Which of the following is a investment plan of LIC
      a. Bima Plus
      b. Jeevan Asha
      c. Asha Deep
      d. Jeevan dhara
      e. None of the above

14. Which of the following is not children plan
      a. Jeevan Balya
      b. Jeevan Kishore
      c. Jeevan Sukanya
      d. Jeevan Akshya
      e. None of the above

15. The Whole life plans in India,
     a.  Pay death benefits after a persons expiry
     b. Pay death benefits after retirement
     c.  Pay policy benefits after the person attains a certain age, say 80-85
     d. None of the above

16.   Term assurance provides the following benefits
      a.  Death benefits if the person dies
      b. Death and survival benefits
      c.  Periodic payments at predictable intervals
      d. Death benefits with bonus.

17.   Endowment plans
      a.  Always participate in profits
      b. Are not eligible for loans
      c.  Are most popular in India
      d. Non of the above

18. Which of the following is a children’s policy?
     a.  Jeevan Sneha
     b. Jeevan Vishwas
     c.  Jeevan Dhara
     d. Jeevan Sukanya

19. Varistha Pension Yojana
     a.   Is an LIC plan
     b. Provides an effective yield of 9% p.a.
     c.   Surrender value can be paid on merits if the person is critically ill
     d. All of the above

20. Which of the following is a health insurance scheme?
     a.  New Jeevan Dhara
     b. Jeevan Aadhar
     c.  Jeevan Chayya
     d. Asha Deep

                       SECTION – A ANSWERS

1. (d) A policyholder can avail the conversion feature in a policy and may
   shift to a whole life policy or an endowment policy as per the
   requirement. There is no such policy called long-term assurance policy.

2. ( c) Term insurance and pure endowment are the two building blocks of
   the life insurance products. Every product incorporates these two features
   in varying proportions to suit the specific requirements of a particular
   class of customers.

3. ( c) The endowment assurance policies consider the two components –
   risk coverage and maturity benefits – in the same policy. In order to take
   both the features, the insurer needs to charge more towards the coverage
   of both.

4. (b) The capital market linked variable life insurance policies contain two
   components – risk premium and investment premium. Since the hard
   earned money of the policyholder is invested in various types of financial
   instruments, the choice of the policyholder, depending upon his/her
   return requirements and risk taking abilities, should be given due

5. (a ) In case of universal life insurance policy, the cash value grows at a
   variable rate depending upon the developments in the market.

6. (c ) The annuitant of a deferred annuity plan may pay the purchase price
   either by a lump sum amount or through installments as convenient to
   him. However, lump sum payment will allow the annuitant to get some
   discount following the time value of money.

7. ( a) since the annuity payments starts immediately after the payment of
   the purchase price, the accumulation period is not applicable.

8. (c ) In case of life annuity, one receives money at regular periodical
   intervals throughout the life. During the old age, one cannot continue
   active work life. All sources of earnings may dry up and the level of
   savings may gradually deplete. Money may not be available to meet even
   the basic physiological needs. A contract of life annuity assures the much
   needed regular cash flow during these days.

9. (c ) In a deferred annuity contract, the annuitant pays the purchase price
   earlier than the commencement of the policy. Then he/she is required to
   wait for a definite period as chosen by him/her to start the payments.
   This waiting period is known as the accumulation period during which
   the proceeds are invested to grow with respect to time.

10. (d ) The given choice is the correct one as per the procedures practiced by
    Life Insurance Corporation of India.

11. (b) The purchase price of an immediate annuity is paid in lump sum.

12. (c ) At the time of commencement of a policy, the insurer undertakes the
    obligation to meet the liability as soon as the claim arises. As a going
    concern, there is no end for such expected claims. Therefore, an actuary is
    required to certify the present value of the expected amount of outflow as
    claims to estimate the valuation surplus and not the business profit.

13. a

14. d

15. c

16. a

17. c

18. d

19. d

20. d

                                   SECTION - B

1. Describe briefly the nature of whole life plans. Mention some of the plans
   which are available in the market.

Ans. Whole life insurance is a cash value policy that provides lifetime protection.

  It provides for the payment of the face amount upon the insured' death
  regardless of when death occurs
  The face amounts payable under whole life policies typically remain at the
  same level through out the policy duration, although dividends are often
  used to increase the total amount paid on death
  In most policies the gross premium also remains at the same level through
  out the premium payment period with some exceptions.
  Universal life policies can function as whole life insurance if they have
  sufficient cash value

  All whole life policies involve some pre-funding of future mortality costs
  Cash values are available to the policy owner at any time by surrendering the
  Facility of obtaining a loan with rate of interest upto that of the policy' cash
  Loan is deducted from the gross cash value when death claim is payable
  Whole life policies may be participating or non participating with some non
  guaranteed element.

Some of the LIC whole life plans are
  • with profit plan [plan2]
  • limited payment whole life with profits [plan 5]
  • single premium whole life plan [plan 8]
  • convertible whole life policy plan [plan 27]

Some of the Allianz Bajaj whole life plans are
  • life time care – economy plan
  • cash care health plan
  • life time care total plan

Some of the TATA –AIG plans are
TATA mahalife plans

2. Describe briefly the nature of endowment plans. Mention some of the
    plans which are available in the market.
Ans: Unlike term policies Endowment policies promise not only to pay the
policy face amount on the death of the insured during a fixed term of years, but
also to pay the full-face amount at the end of the term if the insured survives the
Money back policies, Children’s policies, Women’s policies - all are having the
elements of endowment plans.

Some of the LIC Endowment plans are
  • without profits [plan 11]
  • with profits plan [plan 14]
  • limited payment endowment with profits [plan 48]
  • Jeevan Surabhi and Jeevan Sanchay plans [money back plans]

Some of the ICICI Prudential plans are
  • ICICI Pru save n product
  • ICICI Pru Assure Invest

HDFC Standard endowment plans are
  • Endowment Assurance Plan]
TATA – AIG endowment plans are
  • Assure Security and growth plan

Allianza Bazaz endowment plans are
   • Save Care economy plan

3. Describe briefly the nature of term plans. Mention some of the plans which
    are available in the market.

Ans: Term insurance has several basic characteristics.
• Protection for a limited number of years.[temporary protection]
• Unless the policy is renewed, the protection expires at the end of the period.
• These policies have no cash value or saving element.
• Nothing is paid in case of survival.
• Issued for one year to a set number of years such as 10 or 20 or to a stipulated
  age 65 or 70.
• Initial premiums are low.
• Premiums for term coverage can escalate rapidly as the duration of the policy
• These prices are more easily compared than are prices of other products.

•   Hence this market is more price competitive than the market for cash value
•    These policies have no cash values, no dividends - so easy to compare on
    the basis of premiums.
•   Term lapse rates are higher than other policies [ because of sensitivity in price
    and low profit margin.]
•   Most term insurance policies are renewable, for additional periods without
    evidence of insurability with increased premium at each renewal based on
    insured' attained age.
•   Most term insurance policies are convertible for a cash value policy without
    evidence of insurability. This conversion may be permitted on an attained age
    or original age basis.
•   Traditional term premiums often are based on aggregate mortality
•   Reentry term premiums are based on a select \ ultimate mortality split.
•   Hence the scale of premium rates varies not only by age but also by the
    duration since the insured last demonstrated insurability.

Term insurance is appropriate when income is limited, or there are temporary
high insurance needs. It cannot be used for retirement or saving purposes
because it has no cash values.

Some of the LIC Term Plans are
• Bima Sandesh – plan 94
• Convertible plan – plan 58

Some of the ICICI Prudential plans are
• Life Guard [term level assurance – single premium]
• Life Guard [ term level assurance – instalment premium plan]
• Life Guard Term Assurance with Return of Premium

Some of the HDFC Standard plans are
• Loan cover term assurance
• Term assurance plan

Some of the Allianz Bazaz Term Plans are
• Risk care
• Term care plan

4. What are the features and benefits of investment plans?

Ans: Basically it was a type of whole life insurance whose values may vary
directly with the performance of a set of earmarked investments. Now many
markets are offering these ULIPs in children plans [ICICI Smart Kid policy]
endowment and retirement plans [LIC’S Forty Plus policy] also. These plans give
an option to the investor to choose between three fund options – debt, equity,
and balanced. In these products, premiums can be paid quarterly, half yearly or
yearly. Out of the premium amounts, deductions will be made towards

   •   Initial administrative charges
   •   Investment management charges [ there will be an extra charge if the
       policyholder utilizes the switch over (from equity to debt or debt to
       balance) option]
   •   Annual administration charges
   •   Risk cover
   •   and the balance will be invested in a selected fund [debt or equity or

Insurance Companies charge anywhere between 20 -35 percent as upfront
charges for their unit-linked plans. So, every time you make your premium
payment, only a part of it is actually invested in the fund of your choice.

In case of death during the premium paying term or the term of the policy, the
sum assured [Rs.1 Lakh in example] or value of policy fund, whichever is higher,
is paid to the beneficiaries. In case of survival up to maturity, the value of the
fund is paid out. The returns on that day [maturity or death] on the plan
depend upon the performance of the market, be it equity or debt. So if the fund
value falls below amount invested on that day, the policyholder will receive a
lesser amount. Hence one can see that the risk here is transferred to the
policyholder as nothing is guaranteed.

Unit-linked plans are essentially similar to mutual fund products wherein the
premium is invested in various funds in keeping with policyholders’ risk

However, the difference in a mutual fund investment is that the money is
virtually at call by the customer. In case of unit-linked insurance plans, it is
impossible to predict whether the market will be in an upswing on the day of
the policyholder’s death or on maturity. The Net Asset Value [NAV] will reflect
the underlying value of assets, which in turn is dependent on the movement of
the Sensex.

   • A Unit linked plan providing an opportunity for the discerning investor to
      benefit from the returns available in the Capital Market without going for
      direct investment in the capital market
   • Unlike traditional products where investment details and various charges
      are kept under wraps, ULIPs project all these information upfront.

                                SECTION – C
                               CASE STUDIES

1.Term, whole life, endowment, annuity policies or the combination of policies
are available in the market. The best policy is the one that best meets your
financial needs. You have to select the policy according to your needs.

Suggest suitable policies for the given situations:
   1. You are in the age of 25. You just joined an organization. You are recently
      married. Now you cannot spend more on life insurance.

   2. You are in 50s; both of your children are in the middle of their education.

   3. You are the only earning member in your family. You purchased a flat by
      taking loan from housing finance. As long as you are there you can pay
      EMIs’ regularly. You want to retain the house for your family members
      even in your absence.

   4. You are in the beginning of career; you want to combine both insurance
      and saving. But the combination of this saving and insurance is costly.
      Right now you cannot invest much, having dependents and you want to
      invest later after settling in the career.

   5. You want to get life time protection.

   6. You believe that you cannot save money without being forced to do so.

   7. You want to leave an estate to your family after you. But you cannot pay
      the premiums after retirement. You are undisciplined in your saving
      habits and you are not financially savvy.

   8. You want to set up a saving stream, beyond term plans

   9. You want to plan for retirement at an early age.

   10. You want to invest your VRS funds for retirement needs


1 & 2 For these situations the suggested best policy is Term Insurance Policy.
These plans offer life insurance cover for specific number of years, at least cost.
Since entire premium goes towards the cost of insurance, there is only risk cover
and no saving element is involved.

3. The best policy for this situations is Mortgage redemption Insurance policy.
These plans offer life insurance cover for specific number of years like till the
loan is cleared [or on death, outstanding loan is covered] at the least cost.

4. The best policy for this situation is Convertible term insurance policy. These
plans offer life insurance cover for specific number of years, and at the same time
it also facilitates to convert this policy into endowment policy [when your
income increases]which includes saving element.

5 & 6 The best policy for these situations is whole life insurance policy. It
provides the payment of the face amount upon the insured’s death regardless of
when death occurs.

7. The best policy for this situation is Limited Payment whole life insurance
policy. In this plan the policy remains in full force for the whole of life, but
premiums are payable for a limited number of years only, after which the policy
becomes paid up for its full face amount. The premium-paying period may be
expressed as a set number of years or to a specified age.

8. The best plan for this situation is Endowment plans or money-back plans.
These policies promise not only the policy face amount on the death of the
insured during a fixed term of years, but also the full face amount at the end of
the term if the insured survives the term.

9. Consider deferred annuity plans.

10. The best policy is immediate annuity plan or single premium annuity plan

                    CHAPTER 8

                               SECTION - A
1. On which basis the premium is decided in a life insurance coverage?

      a.   Educational qualification of the insured.
      b.   Social status of the insured.
      c.   Risk Profile of the insured
      d.   Earning potential of the person
      e.   Spending habit of the insured

2. On what does the accuracy of the statistics of mortality depend?

      a.   Source from which the data has been collected.
      b.   Analytical ability of the user for the calculation of mortality.
      c.   Availability of government approval in that context.
      d.   All of the above.
      e.   None of the above.

3. Law of large numbers plays an important role for the

      a.   estimation of the past mortality rate
      b.   determination of the future trends of mortality
      c.   calculation of the present mortality rate
      d.   assessment of the accuracy of mortality estimation
      e.   evaluation of the necessary amount of death risk coverage

4. How can the mortality statistics be obtained?
     a. Census figures
     b. From the office of the Death and Birth Registrar
     c. Records of a life insurance company
     d. Both (a) and (c) above
     e. All of (a), (b) and (c) above

5. The mortality investigations are carried out in order to
      a. assess the changes in mortality experienced by any population
      b. estimate the extent by which the rate of mortality has changed
      c. analyze the reasons for changes in mortality table
      d. review the applicability of the existing mortality tables
      e. All of the above

6. What is the insured required to pay in order to get term insurance benefits
   in case of the level premium concept?
       a. Increasing amount as the age increases.
       b. Decreasing amount as the age increases.
       c. Equal amount despite the increase in age.
       d. Any amount as agreed by the insurer and the insured
       e. Unpredictable

7. The amount of net premium in a life insurance policy is equal to
      a. gross premium minus the rebates eligible for the insured
      b. pure premium plus the additional loading for the insured
      c. natural premium plus the interest to be paid by the policyholder
      d. natural premium minus the interest expected to be earned from
      e. natural premium plus additional loading due to extra risk.

8. Which of the following are premium related expenses?

      a.   Commission payable to the agent.
      b.   Administrative expenses for recruiting and training the agents.
      c.   Expenses for the publicity and promotion of the products
      d.   Both (a) and (b) above.
      e.   All of (a), (b) and (c) above

9. Which of the following is true about the first year expenses of an insurer?

      a.   The expenses incurred in the first year are significantly high.
      b.   The expenses incurred in the subsequent years is less.
      c.   An insurer cannot spend beyond a certain limit
      d.   Both (a) and (b) above
      e.   All of (a), (b) and (c) above

10. Due to which of the following adverse possibility some margin is charged
    by the insurer along with office premium?

      a.   Behavior of the insured in future
      b.   Developments in the financial markets.
      c.   Mortality experience among the insureds.
      d.   Insurance regulations.
      e.   None of the above.

11. What should the insurer do for the adequacy and consistency of the
       a. Review its financial position periodically by comparing the actual
          position with that of the actual one.
       b. Assess the compatibility of the rates of premiums for various
          benefits offered.
       c. Examine that the premiums for the policies of similar duration are
          approximately similar.
       d. Both (a) and (b) above.
       e. All of (a), (b) and (c) above

12. Through which channel can an insurer generate surpluses?

      a.   Savings from a lower mortality.
      b.   Excess interest earnings.
      c.   Savings from a lower level of contingency.
      d.   Both (a) and (b) above
      e.   All of (a), (b) and (c) above.

13. The reason behind the different levels of mortality among the insured
    lives is due to
        a. better level of care undertaken by the insurers for the insured lives
        b. the careful selection process undertaken by them
        c. death of the insured lives follow some special rules of mortality
        d. higher strength of the insured lives to fight against death
        e. None of the above

14. What do the mortality tables develop?

      a.   Natural premium.
      b.   Level premium.
      c.   Single premium.
      d.   Annual level premium.
      e.   Uniform level premium

15. What is the amount of premium payable by a normal insured?

      a.   Net premium and office premium
      b.   Pure premium and office premium
      c.   Natural premium and office premium
      d.   Risk premium and office premium
      e.   Mortality premium and office premium

      16. What does office premium consist of?

            a.   Premium related expenses
            b.   Policy related expenses
            c.   Risk related expenses
            d.   Both (a) and (b) above
            e.   Both (b) and (c) above

17.    Mortality table is used for pricing
       a.   Individual life insurance policies.
       b.   Motor insurance policies.
       c.   Health insurance policies.
       d.   Group insurance policies.

18.    ‘Pricing’ in the context of this chapter means
       a.   Profits of an insurance company.
       b.   Surplus determined as per valuation.
       c.   Cost of servicing claim.
       d.   The method used to determine general rate levels.

19.    ‘Fair’ pricing in insurance means
       a.   Pricing that brings handsome profits to the insurer.
       b.   Pricing that is economical from the point of view of the customer.
       c.   Pricing that is acceptable to the regulator.
       d.   Price paid is adequate to the risk.

20.    Single premium policies are not within the reach of every person because
       a.   It requires a lump sum payment upfront.
       b.   It requires payment of premium frequently.
       c.   It is not economical from the point of view of the policyholder.
       d.   Insurers offer single premium policies only to selected customers.

21.    Level premium under life insurance means:
       a.   The amount of premium remains the same throughout the term of the
       b.   The amount of premium varies with the level of risk.
       c.   It means charging premium commensurate with the risk.
       d.   None of the above.

                        SECTION – A ANSWERS

1. (c ) In any insurance business, a large volume of resources is pooled form
   a large number of persons for the benefit of the unfortunate few. The
   premiums are decided on the basis of the risk profile of the insured.

2. (a) The level of accuracy of the mortality statistics depends on the source
   of the required data. The source may be primary or may be secondary.
   Other options do not have any role in determining the accuracy of the
   collected data.

3. (d) According to the law of large numbers, as the number of trials
   increases, the variation of the results decreases. Proceeding on the same
   line, if an infinite number of trials are made, the actual and expected
   results will coincide.

4. (e ) All the three given options can give the mortality rate experienced by
   a group of people in a country and any of these three may be used to
   prepare the mortality statistics.

5. (e) Mortality investigations are carried out by the life insurance companies
   for the reasons mentioned in the given options. With the improvement in
   medical technology, a lower rate of mortality is being experienced.

6. (c ) The risk of death of the insured increases along with his age. As a
   result of that, the amount of risk premium should be higher for a higher
   age. But this is not convenient for the needs of the insured. As a result,
   the concept of level premium is followed to enable the insured to pay an
   equal amount of premium throughout the term. Initial premiums exceed
   the costs of risk that ultimately subsidize them during the later years.

7. (d) The amount of net premium is required to cover just the risk of
   occurrence of the insurable event. Life insurance is a long-term contract
   and premiums are collected from a large number of insureds. This large
   pool of resources is invested in safe and secured financial instruments for
   its appreciation. Benefits of these appreciations are passed on to the
   policyholders up to the extent of interest expected to be earned in future.

8. (e) All the given three expenses are considered as premium related
   expenses as these vary with the amount of premium.

9. (e) First year expenses are the expenses incurred by an insurer for
   procuring a proposal, assessing the risk, decision making about
   underwriting, insurance of policy document, etc. Most of these expenses
   are one time expenses and so are significantly high compared to
   subsequent years. But under the Insurance Act, 1938, an insurer should
   not spend more than 90% of premium earnings as first year expenses and
   15% of the renewal premium.

10. (c ) Life Insurance premiums are decided on the basis of the rate of
    mortality experienced by a group of individuals. But various events like,
    occurrence of natural calamities e.g. flood, earth quake, and breaking out
    of epidemic, etc. may lead to a higher level of mortality. It may ultimately
    result in a substantially higher amount of outflow from the exchequer of
    the insurer. Hence, a margin is required.

11. (e) Here, all the given steps are expected to be followed by an insurer to
    keep a sound financial health. If the expenses (claims settlement as well as
    operational) of the insurer are more than the earnings, the premium
    amounts are required to be revised to achieve consistency. The premium
    rates should be compatible with the level of benefits. Policies of similar
    duration are expected to serve equitable risk profile, to earn equal interest
    and cost the same amount of administrative charges.

12. (e) Savings from a lower level of mortality will finally lead to lower
    expenses towards claims settlements and thus increases the volume of life
    funds. Excess interest earnings will enable a better level of surpluses.
    Savings from a lower level of contingencies help the insurer to face lower
    volume of claims in emergency situation than that was expected.

13. (b) Different levels of mortality experienced by the insured lives is mainly
    due to the fact that the lives to be insured are selected with utmost care
    against the inclusion of any extra risk of mortality than that of the normal
    one. Therefore, the inferior lives are left behind while the normal lives are

14. (a) From the mortality tables, one may easily find out the probability of
    death or survival of an individual of a certain age. Natural premium is
    obtained by multiplying the amount of financial benefits with that of the
    probability as estimated above.

   15. (a) Net premium considers the concept of risk premium and the expected
       amount of interest to be earned by investing the proceeds of the
       premiums. While office premium considers the operational expenses
       required to be made by the insurer to serve the policyholders and
       contingent situations, sum of these two is charged by the insurer from a
       normal insured as insurance premium.

   16. (d) Office premium consists of premium related expenses like,
       commission payable to the agent and policy related expenses like, stamp
       duty to be paid by the insurer, administrative expenses, etc. But the risk
       related expenses are considered as part of the natural premium.

   17. a

   18. d

   19. d

   20. a

   21. a

                                 SECTION - B

1. Briefly describe the rate making function.
Ans. Rate making refers to the pricing of insurance. The difference between the
pricing of the other products and insurance is in pricing of the other products the
company knows in advance the cost of production to establish a price. But the
insurance company does not know in advance what its actual costs are going to
be. An actuary who determine the rates in insurance is a skilled mathematician
who involves in all phases of insurance company operations, planning, pricing
and research. An actuary calculates premiums that will make the business
profitable, enable it to compete effectively with other insurers, and allow it pay
claims and expenses as they occur. Also actuaries help resolve management
problems in underwriting, sales, claims and product development.

2. Explain why the rates of insurance are fair [equitable], adequate, and not
Ans: Basically these three are the pricing objectives of an insurer.

   1. Rate adequacy: To avoid financial problems and insolvency, insurance
   company rates must be adequate in the light of benefits promised under the
   company’s insurance products. Rate adequacy means that, for a given block
   of policies, total payments collected now and in the future by the insurer plus
   the investment earnings attributable to any net retained funds are sufficient to
   fund the current and future benefits promised plus cover related expenses.
   2. Rate equity: Equity means charging premiums commensurate with the
   expected losses and other costs that insureds bring to the insurance pool. The
   pursuit of equity is one of the goals of underwriting [classification and
   selection of insureds].
   3. Rates not excessive: Rates should not be excessive in relation to the
   benefits provided. By establishing a ceiling on the rates, this objective is
   achieved. Competition discourages excessive pricing.

3. Explain various elements, that influence effective pricing of life insurance

Ans: Pricing elements of any insurer are
1. The probability of the insured event occurring: It is shown by mortality
   tables in life insurance and morbidity tables in health insurance. The part of
   risk premium can be calculated by multiplying sum assured with relevant
   information in these tables.
2. The time value of money: The time value of money through rate of interest is
   the second factor taken into account for calculation of premium. By deducting
   interest component from risk premium, net premium can be calculated.
3. Loading to cover expenses, taxes, profits, and contingencies: By adding all
   these office expenses to net premium, tabular premium can be calculated.
4. The benefits promised: The fourth factor is the benefits promised under the
   contract. A loading in this respect is also included to arrive at the actual
   premium payable. Tabular premium + benefits promised = office premium.

A favorable experience by the insurer, in respect of the above factors, leads to the
generation of surplus. The surplus so generated is shared among the eligible
policyholders and the owners.

An unfavorable experience leads to creation of deficit, which has to be taken care
of by the management / owners.

4. What are the various premium payment plans? Explain why there are
   various premium payment plans in the market for life insurance policies.

  1. Yearly renewable term life insurance: This plan provides coverage for
  one year only but guarantees renewal irrespective of the insurability of the
  policy owner. Premium depends on the rate of mortality. As age increases,
  premium rate increases. Therefore, there is a possibility that those in good
  health discontinue the policies because of burdensome premium.
  2. Single premium plan: In this system, premium will not increase year after
  year. Only one single lump sum is collected at the inception to cover risk for
  the selected period of insurance. The present value of total death claims
  anticipated to be paid by the insurer over the period of insurance is calculated
  at a chosen rate of interest. To arrive at the single premium payable by each
  policyholder lis arrived at by dividing the total value by the number of
  persons taking insurance at inception. The total fund created by collection of
  single premiums will be utilized to pay claims year after year.
  3. Level premium plan: In this system, premium payable throughout the
  period of insurance is level or uniform. In this system, reserve builds up
  under each policy because the premium charged in the initial years of the
  policy is more than what is required to cover the death risk. The difference
  between the face value of a policy and the reserve under the policy is called
  the ‘net amount at risk’.
  4. Flexible premium plan: Flexibility of deciding the amount of premium to
  be paid is allowed by many insurers to policy owners. Ex.Universal life
  policies. Out of the amount paid, mortality charges and expenses are
  deducted and balance accumulates and the insurer gives interest credit to the

5. Explain the procedure of calculation of life insurance premiums or rate
   making in life insurance

Ans. Though most policies in life Insurance are purchased with annual, semi
annual, quarterly or monthly, the net single premium [NSP] forms the
foundation for the calculation of all life insurance premiums
The NSP is based on three basic assumptions

1. Premiums are paid at the beginning of the policy
2. Death claims are paid at the end of the policy year
3. The death rate is uniform through out the year [ insurers develop their own
   mortality table]

The amount needed to pay death benefits is discounted for compound interest.

In Term insurance : The NSP for term insurance can be calculated easily. There
is specified period of protection. The face amount is paid if the insured dies
within that specified period and nothing is paid if the insured dies after the
period of protection expires.

In a yearly renewable term insurance the cost of each year' insurance is
determined by multiplying the probability of death by the amount of insurance
multiplied by the present value of One Rupee for the time period the funds are

In a five year term insurance the cost of each year' mortality must be computed
separately and then added together to determine the net single premium. The
same method is followed even in ordinary life insurance to calculate NSP --
except that the calculations are carried out to the end of the mortality table [ age
99 ]

Consumers find it more convenient to pay insurance in installments than net
single premium due to large amount of cash is required for it.

If premiums are paid annually, the net annual level premium cannot be
determined by simply dividing the net single premium by the number of years
over which the premiums are to be paid. It produces an insufficient premium
due to the loss of interest on the smaller amounts of investment and the risk of
premature deaths. So the mathematical adjustment for the loss of premiums and
interest is accomplished by dividing the net single premium by the present value
of a life annuity due [PVLAD] of Rs.1 for the premium paying period.


       NALP =
                       PVLAD OF Rs.1 for the premium paying period

The series of premium payments are refered to as life annuity due. If it is paid in
an ordinary life policy that is called a whole life annuity due.

If it is paid for temporary period [ term insurance ] it is called temporary life
annuity due Even for ordinary life insurance, the same procedure is used
except that the calculations are extended to the end of the mortality table.

GROSS PREMIUM: The gross premium is determined by adding a loading
allowance to the net annual level premium which includes operating
expenses,[production, distribution, maintenance] a margin for contingencies and
contribution to profits.

                                 SECTION - C
                                CASE STUDIES

1.Assume that you are asked to explain how premiums in a life insurance policy
are calculated. Based on the following information, answer the questions below:

   a. Compute the net single premium for a five-year term insurance policy in
      the amount of $1000 issued at age 40.
   b. Compute the net annual level premium for the same policy as in part (a)
   c. Is the net annual level premium the actual premium paid by the
      policyowner? Explain your answer.

   Age at          Number          Number              Present value of $1 at 5%
beginning of       living at     dying during     --------------------------------------
    year         beginning of     designated            Year                  Factor
                  designated         year
      40           9,377,225        28,319                 1                 0.9524
      41           9,348,906        30,758                 2                 0.9070
      42           9,318,148        33,173                 3                 0.8638
      43           9,284,975        35,933                 4                 0.8227
      44           9,249,042        38,753                 5                 0.7835

Age         No.of       Dies       Prob.                       P.V.           Cost of
beginning   lives                  deaths                                     insurance
of year
40          9,377,225   28319      .0030        1000           .9524          2.8572
41          9,348906    30758      .0033        1000           .9070          2.9931
42          9,318,148   33173      .0035        1000           .8638          3.0233
43          9,284,975   85933      .0038        1000           .8227          3.1263
44          9,249,042   38753      .0041        1000           .7835          3,2124

Answer: NSP = 15.2123

b) The Net Annual Level Premium is calculated as:

age 40 $ 1 due immediately = $1.

Age 41, 9,348,906
        ------------- x 1 x .9524   = 0.9495

Age 42, 9,318,148
        ------------- x 1 x .9070   = 0.9013

Age 43, 9,284,975
        ------------- x 1 x .8638   = 0.8553

Age 44, 9,249,042
        ------------- x 1 x .8227   = 0.8115

∴ Net annual level premium =                 NSP
                                    PVLAD of $1

   = 15.2123
     ---------- = 3.3673

c) The net single premium must be converted into a net annual level premium.
   Which must be the mathematical equivalent of the net single premium.

The net single premium cannot be determined by simply deciding the net single
premium by the no.of years over which the premiums are to be paid. Such
division would produce an insufficient premium i.e. for 2 reasosn:

(i) the net single premium based on the assumption that the entire premium is
paid in advance at the beginning of the period. If premiums are paid

isntalments, and some persons die prematurely, the insurer suffers the loss of
future premiums. Second,

(ii) Installment payments results in the loss of interest income because of the
smaller amounts that are invested.

∴the net single premium is divided by the present value of an appropriate life
annuity due of $1.

NALP                   -------------------
                           PVLAD of $1 for
                           The premium – paying policies

                         CHAPTER 9

                                SECTION - A

1.   What is the name of the social security scheme pension plan withdrawn
     recently by LIC for people aged 55 and above?
     a.   Landless Agricultural Labourers’s Group Scheme
     b.   Rural Group Scheme
     c.   Varishtha Pension Bima Yojana
     d.   Krishi Shramik Samajik Suraksha Yojana

2.   Janashree Bhima Yojana was introduced
     a.   For the middle class people
     b.   For the upper middle class people
     c.   For poor people
     d.   For people living below the poverty line, belonging to specific
3.   OASDI stands for:
     a.   Old Age Satisfying and Direct Insurance
     b.   Orphan Aged Seriously Disabled Illiterate
     c.   Old Age Survivors and Disability Insurance
     d.   Old Age Senior and Disability Insurance.

4.   Unemployment Insurance is a component of:
     a.   E.S.I. Act
     b.   Social Security Act
     c.   Workers Compensation Act
     d.   None of the above
5.   OASIS report recommended a new pension system on the basis of:
     a.   Individual Retirement Account
     b.   Workers current account
     c.   Balance account of worker after he is deceased
     d.   None of the above

6. The Gramin personal accident policy does not cover
   a. natural death
   b. accidental death
   c. disability
   d. accidental injuries
   e. none of the above

7. Which of the following perils ar enot covered under the hut insurance policy
 a. earthquakes
 b. war
 c. terrorism
 d. flood
 e. none of the above

8. Who amongst the following do not contribute in the Employees Family
pension scheme in India?
 a. employer
 b. employee
 c. government
 d. unions
 e. none of the above

9. The Gratuity Act provides for payment to the employee at the time of
   a. retirement
   b. resignation
   c. death
   d. disability
   e. none of the above

10.The EDLI scheme was primarily aimed to protect the family in case of
      a. untimely death
      b. retirement
      c. oldage
      d. disability of the employee
      e. none of the above

11.Which out of the following is not a Social Security insurance schemes in US?
 a. Medicare & Medicaid schemes
 b. Fidelity guarantee insurance
 c. Disability insurance
 d. Unemployment insurance
 e. None of the above

                              SECTION – A ANSWERS
1.     ( c)
2.     ( d)
3.     (c)
4.     ( b)
5.     (a )
6.     (a)
7.     (b)
8.     (d)
9.     (a)
10.    (a)
11.    (b)

                                   SECTION - B
1. Define social security and describe its nature.

Ans: This concept first started in the western countries during the 30’s at the
time of depression. In one way we can say that social security emerged as result
of economic insecurity.

Social security became a major area of concern in many countries of the world
when society was slowly shifting from agro-based economy to an industrial
economy. People started moving to cities from villages in order to satisfy their
economic needs and to get some security. This change came about in Europe for
the first time during the 19th century.
This development, which later came to be known as industrial revolution had its
own advantages and disadvantages. It resulted in inappropriate living
conditions for the migrant population and created friction between the upper
and lower classes in the society. This happened first in Europe and later in USA.
In order to deal with this situation the governments in these countries came up
with the idea of providing “social security” through various schemes to the
weaker section of the society which consisted mainly of the migrant population
working in the industries, the industrial revolution had given birth to.
The intention of the German chancellor Otto von Bismarck, who introduced
social security, was to provide benefits to the workers. The basic idea behind this
scheme was to help the retired workers through the contribution of the present
workers. This led to development of social security measures (accident
insurance, disability and old age insurance), which were adopted in the 20th
In USA, during the time of depression, the government felt the need for social
security legislation. It became vital to support the employees who lost their jobs
due to the depression. Necessary legislation was passed in 1935 and it later
became effective in 1937.

2. What are the causes of economic insecurity?
Ans: The following are some of the major causes of economic insecurity:
•    Unemployment
•    Premature death
•    Old age
•    Poor health
•    Inflation

•    Substandard wage
•    Natural disasters
*   Personal factors
Let’s discuss them briefly:

Unemployment: This is one of the vital factors that cause economic insecurity.
People lose their job due to restructuring of organisation and technological
changes. This results in:

Loss of income
More people are forced to go in for part time jobs (leading to reduced income)
Uncertainty about income
No jobs

Premature death: It occurs when the head of the family expires without fulfilling
his obligations. It could be his child’s education, marriage of his son or daughter,
payments of bills, instalments etc. Again the level of insecurity is more when the
head of the family has not insured his life or health or has previously saved very
little. But if a person who dies has a very little by way of commitments to fulfil
with regard to the other family members, it’s not considered a premature death
in insurance parlance.

Old age: After the retirement age, people no longer have a steady income and
even if they seek re employment, they earn less. People in this category often
develop heath problems and poor health leads to more expenditure. These
expenses can be faced only if there is reasonable savings or financial assets or
annuities and health insurance.

Poor health and disability: It can be due to illness or injury, which affects the
earning capacity. The inability to pursue gainful employment as a result can be
long term or short-term. From the family’s point of view it is a major medical
expenditure. If the head of the family is the victim, the insecurity increases all
the more as the source of income itself is blocked.

Inflation: If there is an increase in prices without a comparable increase in
income, inflation occurs. This is a problem especially for salaried people and
pensioners. They find it difficult to manage the increase in price level.

Substandard wage: The government should fix up a minimum wage to alleviate
poverty and exploitation by the employer. A minimum level of income is needed
to meet the basic expenses. By substandard wage we mean wage lower than the
minimum subsistence wage level.
Natural disasters: The most unavoidable are the natural disasters like
earthquakes, famines, floods and hurricanes. They cause huge losses. Nothing
can be done about it as most of the properties are uninsured or underinsured.
The level of economic insecurity is at its highest in such times.
Personal factors: Till now we have seen the external factors that cause economic
insecurity. But economic insecurity can also develop on account of factors within
us. Self-motivation is the key to success in life. If we lose that, low income or no
income would be the consequence. There may be other personal reasons for
economic insecurity like:
Addiction to alcohol and drugs: This can lead to two things: loss of income, and
loss of health. Both of them are interrelated. Addiction to these can cause a
heightened level of insecurity.
Divorce: The most affected people as a result of divorce are children and the
women. This situation is more prevalent in western countries than in India. Lack
of income and emotional needs lead to a higher level of insecurity. In order to
overcome these social maladies, governments set up suitable social security
Gambling: This unnecessary expenditure leads a person to huge debts. This may
also drive a person to fraud, forgery and other such practices.

3. Describe the nature of social security in India.
Ans: The literature relating to developmental issues is not easy for developing
countries to pay for social security systems. This assumption has to be
challenged. Studies by UNICEF and World Bank prove that the success of social
security programmes depend on the support of the public.
In India social security is still in the early stage of development while in reality a
large number of people are in need of social security support. Since these people
live below the poverty line just earning enough to make both ends meet through
agricultural operation their livelihood depends on the vagaries of weather. When
they are hit by natural calamities such as drought, cyclone, failure of monsoons
etc. they have no choice except to look to the government for relief and support.
The need for social security support is also felt when the breadwinner of the
family dies and especially when it is a premature death.

The situation with regard to regular workers in the industrial sector is a lot better
as they enjoy many social welfare benefits as employees. However there are large
number of seasonal workers in the industry whose situation is no better than
the agricultural workers particularly in times of industrial depression when they
have to face unemployment for long period. They are forced to join during such
times, the unorganised sector in urban areas. Thus the need for social security
support is felt most by people in two categories: the agricultural worker in the
villages and the labourers belonging to the unorganised sector in the urban areas.
Since the number of people involved who need social security support is huge,
finding resources is the major issue for the government. However the
government has made a beginning by affording some form of social security to
these people through social insurance.

In India the government has launched several social insurance schemes. All these
have been developed and implemented through nationalised insurance
organisations. The following are some of the social insurance schemes
introduced through Life Insurance Corporation of India.

Landless Agricultural Labourers and Group Insurance Scheme
Group Insurance Scheme for beneficiaries of the Integrated Rural Development
Rural Group Life Insurance Schemes
Krishi Shramik Samajik Suraksha Yojana

Social security in India has not developed truly to meet the need of the target
group.     This is due to two reasons: scarcity of funds and large numbers

4. Enumerate the schemes categorized as social insurance under the general
   insurance branch
Ans: The social insurance schemes initiated by the government aim to provide
protection and financial assistance to the small farmers and workers. All these
schemes and policies have been categoriesed under Integrated Rural
development programme. Some of the schemes are as follows:
Cattle Insurance
Sheep and goat insurance
Poultry insurance
Aqua culture (shrimp/prawn) insurance
Sericulture (silk worm) insurance

Animal driven cart insurance
Failed well insurance
Salt works insurance

5. Discuss the coverage under the Hut insurance scheme.
Ans: Hut insurance emerged with funds given by banks, financial institutions
and cooperatives. This policy was initiated in rural areas to insure against fire,
earthquakes etc. The maximum coverage was Rs.6, 000 (Rs.5, 000 for structure
and Rs.1, 000 for contents).This policy covers upto two hundred huts in a single
area, with Rs.3 rate per thousand. The state government covers rural and semi
rural areas under this policy. The following risk are covered:
-    Fire
-    Lightning
-    Flood
-    Cyclone
-    Terrorism
-    Landslide
-    Impact by rail/vehicles or animals

6. Why is the Employees Provident Fund Scheme made mandatory?
Ans: Any employer who has more than twenty employees working under him is
statutorily obliged to have a Provident Fund. The objective of provident fund is
to save money both at the employer and the employees end. This will enable
them to save a reasonable amount of money inclusive of interest. Later this
money can be utilized for the economic security during the time of retirement.
The accumulated fund with interest forms part of the terminal benefit payable to
the employee or his beneficiary in the event of death.

7. What is the scope of coverage given in the Employees’ State Insurance
Ans: The E.S.I act is applicable to non-seasonal factories with certain restrictions
relating to number of employees. This scheme is applicable to industrial,
commercial, agricultural and other sectors, including hotels, restaurants, shops,
cinemas, transport, newspaper, where the number of employees should be more
than twenty to be covered under the scheme.

The scheme provides for
    -     Medical benefit under this scheme is provided to workers and their
          dependants, at E.S.I. hospitals, dispensaries, diagnostic centres and
          occupational disease centres.
    -     family welfare services, health education and check up, basic health care,
          surgical procedures etc.
    -     Cash benefit is payable to employees under this scheme if they are sick or
          disabled temporarily or permanently due to employment, which is usually
          equal to 50% of the wages.
    -     In case of temporary or permanent disablement the cash benefit is paid at
          higher rates.

8.Discuss the rationale for the existence and development of Worker’s
Compensation concept and program.

Ans: Workers time and again are injured and become sick because of job-related
accidents and disease. Besides pain and suffering, these disabled workers also
deal with other mental tensions and agony such as loss of earned income,
payment of medical bills, partial or permanent loss of bodily functions or limbs
or job separation.

Worker’s compensation is a social program that provides:
• Medical care
• Cash benefits
• Rehabilitation services to disabled workers from job related accidents or
  disease. These benefits reduce the economic insecurity that may result from
  job related disability.

9.State briefly the objectives of Workers compensation concept.

Ans: The following are the broad objectives of the workers compensation laws.

•       Broad coverage of employees for job-related accidents and diseases. The
        workers compensation covers most occupation or job-related accidents and

•       Substantial protection against loss of income. The cash benefits are designed
        to restore a substantial proportion of the disabled worker’s lost earnings, so
        as to enable the disabled worker to maintain the same standard of living.

•   Sufficient medical care and rehabilitation services. The workers compensation
    laws require employers to pay hospital, surgical, and other medical costs
    incurred by injured workers, as well as rehabilitation services to restore the
    disabled employees to productive employment.

•   Encouragement of safety. The workers compensation laws encourage the
    firms to reduce job-related accidents and to develop effective safety
    programs. Experience rating is used to encourage firms to reduce job-related
    accidents and diseases, because firms with superior accident records pay
    lower WC premiums.

•   Reduction in litigation. Workers Compensation laws are designed to reduce
    litigation by making prompt payment to disabled workers without requiring
    them to sue their employer. The objective is to reduce or eliminate payment
    of legal fees to attorneys and avoid delays in trials and appeals.

10.List out the occupations not covered under the Workers Compensation

Ans: Although the WC laws cover most occupations, some occupations are either
not covered or have incomplete coverage, namely:

•   Farm workers
•   Domestic servants
•   Casual employees
•   Concerns with numerical exclusions ( less than 3-5)
•   Professional athletes

11.What are the eligibility requirements to receive Workers Compensation?

Ans: There are two principal eligibility requirements to be met to receive the
workers compensation benefits:

•   The disabled worker should work in a covered occupation.
•   The worker must have a job-related injury or disease.

This means the injury or disease must arise out of and in the course of
employment. However, now the meaning of the term has been broadened so as
to include the following:

    • An employee who travels is injured while engaged in activities that benefit
        the employer.
    • The employee is injured while performing specified duties at a specified
    • The employee is on the premises and is injured while going to the work area.
    • The employee has a heart attack while lifting some heavy material.

12.What are the benefits provided under the Workers Compensation

Ans: The Worker’s compensation insurance provides four principal benefits:

•    Unlimited Medical Care: Generally medical care is covered in full. But
     medical care being expensive, and to hold down costs, some employers prefer
     tying up with some managed care organizations such as HMO’s, and PPO’s.

•    Disability Income: The disability income is paid after the worker satisfies a
     waiting period that usually ranges from 3 to 7 days. If the injury lasts or the
     worker is disabled after certain number of days or weeks, benefit is given
     from retrospective date of injury.

     The weekly cash benefit is based on a percentage of the injured worker’s
     weekly wage typically 2/3rd , and is subject to minimum and maximum

     Disability is classified into four categories:
         •      PT ( Permanent total)
         •      TT ( Temporary total)
         •      TP ( Temporary partial)
         •      PP ( Permanent partial)

     Temporary total disability claims are the most common and account for
     majority of cash claims.

•    Death benefits: The death benefits are paid to the eligible survivors, if the
     worker dies as a result of a job-related accident or disease. Two types of death
     benefits are paid:
      • Burial allowance
      • Weekly income benefits are paid to eligible survivors.

     Weekly incomes are a percentage of the diseased worker’s wages (2/3rd) and
     is paid to the spouse for life or until she/ or he remains, and also to a
     dependant child until a specified age.

•   Rehabilitation services: In most cases, rehabilitation services are also
    provided to restore disabled workers to productive employment. Besides
    weekly benefits, boarding and room, travel, books and equipment charges are
    also given and also training expenses.

13.Discuss the objectives and justification of having a social insurance scheme.

Ans: Social insurance programs refer to compulsory government insurance
programs that are different from those of other private and government
insurance companies. These programs provide security to those who need it at
times when they face grave financial insecurity resulting from premature death,
unemployment, poor health, job related disabilities and last but not the least
from oldage. These programs are extremely necessary to protect those families
with limited incomes. The basic reasons for the establishment of Social
Insurance(SI) programs can be summarized as follows:

♦ SI programs are enacted to solve complex social problems, where
   Government intervention is necessary.
♦ SI programs are necessary in some cases where certain risks are difficult to
   insure privately.( e.g. unemployment, where the State can tackle this by
   implementing State sponsored Unemployment Insurance programs)
♦ SI programs provide a base of economic security to the population, when
   they need it. (long- term financial consequences resulting from premature
   death, disabilities, unemployment, etc.)

14. Enumerate the basic characteristics of Social Insurance.

Ans. Social insurance programs have certain characteristics that distinguish them
from other Private and Government programs.

♦ Compulsory programs: These programs being compulsory have two inherent
   advantages. They provide equitable floor of income to the entire population
   and moreover adverse selection is also reduced.
♦ Floor of income: These programs are designed to provide floor of income
   with respect to covered risks, to enable them to substitute with their own
   savings and investments and private insurance so as to maintain a
   reasonable standard of living.
♦ Emphasis on social adequacy rather than individual equity: Social adequacy
   means that benefits paid should provide a certain standard of living to all
   contributors. It means the benefits in particular concentrate or favors certain
   groups such as (low-income persons, large families, and retired aged). It also

     means that the benefits received by these groups exceed their contributions
     unlike in private insurance.
♦   Benefits related to earnings: Social Insurance benefits are proportionately
     related to the workers earnings. Thus some consideration is in fact given to
     individual equity.
♦   Benefits prescribed by Law: Law prescribes these programs, in the sense,
     Government performs the eligibility requirements and administration and
     suspension of programs.
♦   No means test: Social Insurance benefits are paid as a matter of right and not
     as a matter of need. Means test is applicable in public assistance where
     welfare applicants must prove that their income level is below certain
     threshold level but in case of SI programs, applicants are eligible for the
     benefits as a matter of statutory right if they fulfill certain eligibility
♦   Full funding unnecessary: Social Insurance programs need not have to be
     fully funded programs for many reasons. Firstly they have indefinite future,
     and because of their compulsory nature. New workers will join the program
     and pay taxes to support them. Even from economic viewpoint, full funding
     will require levying of higher taxes which would result in deflation and
     cause substantial unemployment.
♦   Financially self-supporting: Social Insurance programs are usually
     financially self-supporting: that is, these programs are financed from
     contributions of covered employees, employers, self-employed, and from
     Trust fund investments.

15.Discuss the eligibility criteria for the entitlement of benefits under OASDI

Ans: The OASDI program commonly known as Social Security program is the
most popular Social Security programs in the USA, initiated as a result of the
Social Security Act, 1935. This OASDI program covers workers and groups
engaged in almost all spheres such as-

♦   Employees in private firms
♦   Civilian employees
♦   State and local Government employees
♦   Employers of non-profit organization
♦   Self-employed
♦   Other groups- Church ministers military personnel, etc.

16.Briefly discuss the major benefits under the Medicare program.

Ans: one of the major benefits of the Social Security Program is the MEDICARE.
Medicare covers the medical expenses of almost all persons of age 65 and older.
Medicare also covers disabled persons younger than age 65, who have been
entitled to disability benefits for at least 24 months. Besides, the program also
covers persons below the age 65, who need long term kidney dialysis treatment
or kidney transplant.

The Medicare program has the following coverages:

♦ Hospital Insurance (Part-A)
♦ Supplementary Medical Insurance (Part-B)
♦ Medicare + Choice

Hospital Insurance (Part-A)

Inpatient Hospital care is covered upto 90 days for each benefit period. A benefit
period starts when the patient first enters the hospital and ends when the patient
has been out of the hospital or skilled nursing facility for 60 consecutive days.
For the first 60 days, Medicare3 pays all the covered costs except for initial
hospital deductibles. The patients who are in hospital after 90 days can use a
lifetime reserve of 60 additional days. Hospital deductibles and coinsurance
charges are adjusted each year, with changes in costs of treatment. Inpatient care
in skilled nursing facility is also covered upto a maximum 100 days in a benefit
period. The first 20 days of the covered services are paid in full. The next 80 days,
the patient bears coinsurance charges. To be eligible for this benefit, the patient
must be hospitalized first for at least 3 days and need skilled nursing care.

17.Discuss the sources of finance for the OASDI programs.

Ans: OASDI programs are usually financed from a payroll tax paid by-

   -   Employers
   -   Employees
   -   The self-employed
   -   Interest income on the trust-fund investments
   -   Tax revenues

   The employee’s contribution is matched by an identical contribution from the
   employer. The self-employed are allowed some deductions, which reduce the
   effective tax-rate.

   The Hospital Insurance (Part A) of Medicare is financed by monthly
   premiums and by the general revenues of the State.

18.Discuss the objectives of Unemployment Insurance.

Ans: Unemployment Insurance programs are the federal State programs in the
USA that pay weekly cash benefits to workers who are involuntarily
unemployed. These programs are a result of the provisions of the SS Act, 1935.
Unemployment Insurance has several basic objectives.

♦ Provide cash income during involuntary unemployment.
Weekly cash benefits are paid to the unemployed workers during periods of
  short-term involuntary unemployment.
♦ Help unemployed workers find jobs.
♦ Encourage employers to stabilize employment.
♦ Help stabilize the economy.

19. Discuss the coverage and the eligibility requirement for the unemployment

Ans: The following groups are covered for the unemployment benefits:
    ♦ A private firm.
    ♦ State and Local governments.
    ♦ Non-profitable, charitable, educational, or religious organizations.
    ♦ Agricultural firm.
    ♦ Domestic employment.

An unemployed worker should meet the following eligibility requirements:

  ♦ Should have qualifying wages and been unemployed during the base
    year. The base year usually is the first four of the last five-calendarSS
    quarters preceding the unemployed worker’s claim for benefits.

  ♦ Be able and available for work.
    The applicant must be physically and mentally capable of working and
    must be available for work. The claimant should also have registered at a
    public employment office and seek work.

      ♦     Actively seek work and be free from disqualification.
            The applicant should not have been specifically disqualified from
            benefits, which include acts such as voluntarily quitting his/her job,
            participation in labor disputes, discharged for misconduct, etc.

      ♦     Serve a one-week waiting period.
            Finally, a one-week waiting period eliminates short-term claims,
            reduces costs, and provides time to process the claimant wage records
            and processes the claim.

20.List out the benefits available under the Unemployment Insurance scheme.

Ans: The various benefits available under the Unemployment insurance for the
claimant can be listed as follows:

I.        Cash benefit – Weekly cash benefit is paid for each week of total
          unemployment. The cash benefit depends upon the worker’s past wages,
          within a certain minimum and maximum amount.

II.       Extended benefit- Sometimes, during periods of high unemployment,
          some workers exhaust their regular unemployment benefits for whom
          under the extended benefit program, claimants can receive up to 13
          additional weeks of benefits whichever is less. However, there is an
          overall limit of 39 weeks for both regular and extended benefits.

                                   SECTION – C

                                 CASE STUDIES
What is the liability of the employer in the following cases?

      1. A workman suffered an injury by an accident arising out of and in the
         course of employment and was permanently disabled. But the accident
         had been caused by his willful disobedience to an order issued for the
         purpose of securing the safety of workmen.

Ans: No, the employer is not liable for any compensation because the law does
not provide for willful disobedience as a ground for compensation. However the
insurance policy covers even the injuries and death resulting from the negligence
of the worker.

2. A worker in XYZ Ltd. a plastics manufacturing unit, broke his leg and was
totally disabled for 3 months. What is the benefit under the Workers
Compensation laws?

Ans: After a one-week waiting period, the disabled worker would receive two-
thirds of his weekly wage up to a maximum of qualified number of weeks
according to the disability.

3.A worker lost his mental balance as a result of an injury by accident while
working in the factory and committed suicide.

Ans: Yes, the worker is entitled to workers compensation because the injury was
caused to the workman in the course of employment.

                            GROUP INSURANCE

                                 SECTION –A

1. Employee benefit schemes are plans sponsored by
   a. employers
   b. employees
   c. government
   d. none of the above

2. Employee benefit schemes include benefits covering the risks of
   a. salaries and wages
   b. premature death, disability, superannuation and unemployment.
   c. fringe benefits
   d. none of the above

3. Employee benefits are more clear
   a. in the unorganized sector
   b. in the agricultural sector
   c. in the organized sector
   d. in the semi organized sector
   e. none of the above

4.       Employee benefit schemes improves
     a. employer-employee relations
     b. employee loyalty
     c. industrial relation climate
     d. all of the above
     e. none of the above
5. For the introduction of a group scheme we need a
     a)   Homogeneous group
     b)   Insured group
     c)   A small group of persons
     d)   A large group

6.   The group scheme specially designed to discharge the gratuity liability of
     the employer is called
     a)   Group superannuation scheme
     b)   Group gratuity insurance scheme
     c)   Group insurance scheme
     d)   EDLI scheme

7.   Group superannuating scheme in conjunction with group insurance scheme
     is taken
     a)   To meet statutory requirements
     b)   To offer group insurance protection
     c)   To ensure that even in the case of premature death, the employee’s
          widow gets a reasonable pension
     d)   None of the above

8.   Group savings linked insurance is a
     a)   Group insurance scheme with a survival benefit
     b)   Scheme offered in lieu of EDLI scheme
     c)   Scheme for meeting employer’s liabilities under Payment of Gratuity
          Act, 1972
     d)   Scheme offered by National Savings Organisation

9.   In India, most group insurance schemes are marketed by the insurance
     companies through
     a)   Agents
     b)   Brokers
     c)   Directly by the company
     d)   Banks

                            SECTION - A ANSWERS

   1.   a
   2.   b
   3.   c
   4.   d
   5.   a
   6.   b
   7.   c
   8.   a
   9.   c

                                  SECTION - B

1. What are the characteristics of group insurance?

Ans: Group insurance is a means through which a group of persons, who usually
have a business or professional relationship to the contract owner, are provided
insurance coverage under a single contract.

Distinguishing characteristics:
• Group underwriting – The premium to be collected and maximum sum
   assured to be granted for a group will be decided on: 1. The nature of the
   group. 2. The size of the group. 3. The age distribution in the group. 4. The
   type of group scheme sought for. No individual evidence of insurability is
   usually required, and benefit levels can be substantial, with few, if any
   important limitations.

A number of controlling factors of group underwriting are

1. Homogenous lives - It aims at obtaining a group of homogeneous lives, to
   predict the mortality or morbidity rate. It aims at controlling adverse selection
   by individuals within a given group.
2. The insurance should be incidental to the group - That is the members of the
   group should have come together for some purpose other than to obtain
3. There should be a steady flow of persons through the group - That is there
   must be influx of new young lives into the group and an outflow from the
   group of the older and impaired lives to assume that they are in average

4. There should be an automatic basis for determining the amount of benefits
   on individual lives to avoid adverse selection.
5. Contributory plans and non-contributory plans - For contributory plans [an
   employee pays a portion of the premium], generally at least 75 percent of the
   eligible employees must join the plan if coverage is to be effective. In the case
   of non-contributory plans [employer-pay-all plan], 100 percent participation
   is required. By covering a large proportion of a given group, the insurance
   company gains a safeguard against an undue proportion of substandard
• The use of a master contract – The master contract is a detailed document
   setting forth the contractual relationship between the group contract owner
   and the insurance company. The insured persons under the contract, usually
   employees and their beneficiaries, are not actually parties to the contract,
   although they may enforce their rights as third-party beneficiaries. The four-
   party relationship [employer, insurer, employee, and dependents] found in a
   group insurance plan can create a number of interesting and unusual
   problems that are common only to group insurance.

•   Lower administrative cost – The nature of the group approach permits the
    use of mass-distribution and mass-administration methods that afford
    economies of operation not available in individual insurance. Small
    proportions of commission, simplified accounting techniques and
    administrative procedures, minimum cost of medical examinations and
    inspection reports etc. help to lower administrative costs.

•   Flexibility in contract design – The group insurance program usually is an
    integral part of an employee benefit program. In most cases, the contract can
    be moulded to meet the objectives of the contract owner, and as long as the
    requests do not entail complicated administrative procedures, open the way
    to possibly serious adverse selection, or violate legal requirements.

•   The use of experience rating – The point at which a group is large enough to
    be eligible for experience rating varies from company to company, based on
    that insurer’s book of business and experience. The size and frequency of
    medical claims vary considerably across countries and among geographic
    regions within a country and must be considered in determining a group
    insurance rate. The composition [age, sex, and income level] of a group will
    also affect the experience of the group and, similarlly, will be an important
    underwriting consideration.

2. Discuss the advantages of group insurance.

Ans: The Advantages of the group mechanism are
• Effective solution to the need for employee benefits
• Extended protection to large number of persons
• Enable life insurance companies to reach vast numbers of individuals within
  a relatively short period and at low cost.
• Extended protection to a large number of uninsurable persons.
• Tax effective vehicle
• Substitution to government security programs.

3. Discuss the limitations of group insurance.

Ans: The Limitations of the group mechanism are
• From the viewpoint of the employee, group insurance is temporary nature of
  the coverage. [in case of retirement, quitting, termination of plan]
• Those who are having large amounts group life insurance during their
  working years fail to recognize the need for, or are unwilling to face the cost
  of, individual life insurance.
• Group plans typically fail to provide the mechanism for any analysis of the
  financial needs of an individual—a service that is normally furnished by an
  agent or other advisor.

4. Who are the eligible groups for group insurance?

Ans: The Eligible groups for group insurance are
• Employer – employee groups
• Members of trade union
• Trade associations
• Creditor – debtor groups like the loanees of a housing finance company and
  the like.
• Miscellaneous groups like professional associations, college alumni
  associations, veteran associations, religious groups, customers of large retail
  chains, and savings account depositors, poorer sections of the society such as
  poura karmikas, landless agricultural workers and the like.
• Non conventional groups like Co-operative societies, welfare funds etc.

5. What are the major types of group insurance schemes?

Ans: The major types of group insurance schemes are as follows:
     • Group life insurance: a group life insurance is further classified into three
       types-group term life insurance, group gratuity scheme and group
       superannuation scheme
     • Group disability income insurance: group disability income insurance
       can be a short- term disability or a long- term disability plan

6. How many ways group benefit plans can be funded?

 Ans: Group benefit plans can be funded in different ways. The major
alternatives available to the insurer are as follows:
     •    Employer funded plans
     •    Trustee-administered fund
     •    Insured schemes

7. Discuss the techniques of marketing group insurance.

Ans: Marketing group insurance can be done through general agencies or
branch offices and through brokers and employee benefit consultants. The
market can be segmented by 1. Size of group, 2. Type of group, and 3. Funding
method.Group insurance in India is mostly marketed directly by executives of
the insurance company. But in the present market, banks and other institutional
agents have also emerged as the market intermediaries for group insurance

8.   Make a comparison between the trustees administered gratuity scheme
     and an insured scheme in terms of advantages to the employer and the
 Ans: An insurance company is well experienced and efficient in administering
 the pension plan. Trustees may lack such expertise. Therefore a prudent
 employer may prefer to entrust the administration and management of the
 pension scheme to the insurance company. This way, the employer can
 concentrate on other promotional activities of the business.
 It is observed that the costs involved in insurance schemes are high when
 compared to a trustee-administered scheme.

      To choose between these two alternatives, employers in our country keep in
      mind the expected yield on contribution and the size of the group. Where
      the number of employees is large the employer may go for the trustee-
      administered fund. In such organisations, experienced and trained staff can
      efficiently administer and invest the large contributions. On the other hand,
      the employer selects an insured scheme where the number of employees
      covered under the pension scheme is small. This is because with small
      contributions, the trustees cannot follow the suggested investment pattern
      and they also lack the expertise required for managing the pension scheme.
      With a trustee- administered fund, employees are provided with a wide
      range of benefits. Such benefits include disablement pension, discretionary
      pension, early retirement pension and ill health retirement pension. On the
      other hand, in an insured scheme the benefits available for the employees
      are limited to pensions that are dependent on life. The insurance schemes
      available to the employer are standardized and not tailor-made.
      The rate at which a fund is built may be changed if required under a
      trustee-administered fund. This is not possible in an insured scheme.
      The most favourable characteristic of an insured scheme is that it makes
      sure that the employees get their pensions regularly and without any
      difficulty. It relieves the trustees from the responsibility of administering
      the fund and at the same time, offers financial security to the employees.
      The insured pension scheme also has the advantage of offering a reasonable
      pension in the event of the premature death of a member, if the employer
      adopts a gratuity insured scheme in conjunction with the superannuation
9.      Describe Group insurance in lieu of EDLI

     Ans: Group insurance in lieu of EDLI [Employees Deposit Linked Insurance
     Scheme under PF] has been in operation in our country right from 1952. In a
     significant amendment brought to the Provident Fund Act in 1976,
     Government introduced life insurance cover for the employees included in
     the PF scheme. Employers were asked to remit a fee of 0.5% of their wage bill
     and in return Government offered life insurance cover to the employees. This
     scheme is known as the Employees Deposit Linked Insurance Scheme.

10. Describe Group life insurance

      Ans: Group life insurance is one of the most common forms of employee
      benefit plans. Employer-employee groups account for most of the group

      Nature of the coverage:
      • Minimum size of lives is required.
      • Maintanence of a reasonable average age is required
      • Individual eligibility requirements – 1. Conditions pertaining to their
         employment. 2. He must be actively at work [this requirement assures a
         reasonable minimum of health and physical well being and protects the
         insurer against serious adverse selection]. 3. A completion of waiting or
         probationary period. Under a non-contributory plan, the employee
         automatically is covered after the completion of the probationary period.
         Under contributory plan, the employee is given a period of time, known
         as the eligibility period, during which he or she is entitled to apply for
         insurance without submitting evidence of insurability.
      • Duration of coverage – once the insurance becomes effective for a
         particular employee, the protection continues for as long as he or she
         remains in the service of the employer. Upon permanent termination of
         service, the employee’s coverage continues for 31 days beyond the date of
         termination. This extension of coverage gives the employee an
         opportunity to replace the expiring protection with individual insurance,
         to obtain employment with another firm with group insurance, or to
         convert the expiring term insurance to a cash-value form of insurance.

11.      Describe Group superannuation scheme

Ans: Retirement benefits like provident fund and gratuity are paid in lump sum,
which may not be invested wisely or simply spent away by the recipients.
Therefore, pension is becoming more and more popular for providing a regular
income after retirement. Improved longevity on the one hand and the desire of
employers to retain loyal and competent employees in their service on the other,
have made pension much sought-after retirement benefit. An employer can
provide for pension by building lup a fund for the purpose. The contributions
made by the employer are allowed as management expenses under the I.T.Act,
subject to the maximum of 27% of the salary of each employee. The employer’s
contribution is a non-taxable perk in the hands of the employees. The fund has to
be maintained in an irrevocable trust approved by the I.T. commissioner. Instead
of the employer himself managing the fund for providing pension to his

employees he can think of opting for the group superannuation scheme offered
by an insurer.

12.      Discuss the schemes offered to non-conventional groups.

Ans: For the non-conventional groups the following schemes are offered.
1. Scheme covering outstanding housing loans.
2. Schemes offered to members of cooperative banks, credit societies etc.
3. Vehicle loans granted by employers to their employees can be covered under
   group schemes.
4. Government has been encouraging group insurance cover for the
   economically weaker sections of the society such as landless agricultural
   labourers, beneficiaries of the integrated rural development programmes and
   the like.

                                 SECTION – C
                                CASE STUDIES

      1. Vasundhara is president of a consulting firm that has ten employees.
         The only employee benefit provided by the firm is a paid two-week
         vacation for employees with one or more years of service. The firm’s
         profits have substantially increased, and Vasundhara would like to
         provide some additional benefits to the employees. Nancy would like
         advice concerning the types of benefits to provide. Assume you are an
         employee benefits consultant. Based on the following considerations,
         answer the following questions:

            a. Vasundhara would like to provide life insurance for the employees
               equal to two times their salaries. What type of life insurance do
               you recommend?
            b. Several employees have expressed an interest in having income
               after retirement. Explain to Vasundhara how employees can have
               income after retirement.
            c. Vasundhara would also like to provide health insurance benefits to
               the employees. Identify the major types of group health insurance
               plans that she might consider.
            d. Are there any other group insurance benefits that Vasundhara
               should consider? Explain your answer.

       a.   Group life insurance – It is the most common group insurance
            provided to employees. Group life insurance is a simple and
            economic way of providing life insurance to employees.
       b.   Group superannuation scheme - After retirement, employees need
            financial security. The provident fund and the gratuity provided by
            the employer may not be sufficient in an inflationary economy.
            Secondly such lump sum payments are often utilised by the
            employees to meet their current contingent liabilities. The
            employers observed that the employees actually also need a
            periodical payment over and above the normal terminal benefits.
            Such payment is made in the form of pensions by creating a
            superannuation fund. Superannuation scheme aims at providing
            old age pensions to employees after retirement.
       c.   Group disability income insurance - Workers compensation
            provided to employees in the event of work-related disability is
            often inadequate. These benefits also fail to cover disability due to
            accidents that are not work- related. The group disability income
            insurance available in most of the foreign countries (but not in
            India) provides economic security to the employees in the event of
            disability. Group disability income insurance is of two types - short
            term plans and long term plans.

            •     Short-term disability income insurance
            This plan is also known as the sick leave plan. It pays benefit to the
            employees for a short period of about six months. The employees
            are credited with a certain number of sick days for each month
            worked. If the employee takes more sick days than he actually
            earned, then his salary is reduced accordingly.

            Such plans also have an elimination period, generally for a week. It
            means that the benefits are not paid for the first week of illness or
            disability. By imposing such a condition, the employer tries to
            reduce the moral hazards like malingering and excessive
            absenteeism. Under short- term plans, only disability that is not
            work- related is covered. The amount to be ascertained as disability
            income benefit depends upon the earnings of the employee. The
            short-term plan may or may not be insured.

             •      Long-term group disability income plan
             The long-term group disability income plan pays benefits for a
             minimum period of two years and upto a maximum age of 65
             years. Such benefits are normally paid on a monthly basis. Long-
             term benefit plans also require a waiting period of about 3 months
             or more. These benefits are generally offered to fulltime employees
             only. Under long-term disability plans, benefits are given to the
             employees for both work- related and non-work-related injuries or
             disability. Disability in this context generally means total disability.

       d. Group savings linked insurance scheme - Group savings linked
       insurance scheme is a group insurance scheme, which is very popular
       since it offers a survival benefit in addition to the death benefit available
       under a group term assurance policy.
      Where life insurance benefits are not linked to any statutory requirement,
      there is often a demand to link it with a survival benefit, particularly when
      the employees come forward to make contributions. The central
      government employee’s group insurance scheme is an example of such a
      This scheme was introduced with the objective of providing, low cost
      insurance on a wholly contributory and self-financing basis, with a
      survival benefit to help the families of the government employees in the
      event of death of the employees while in service, and a lump sum
      payment to the employees on cessation of employment.
      Insurance companies now offer a similar scheme, which was originally
      formulated to suit the requirements of large public sector organisations
      like BHEL, HHAL, HMT, LIC, GIC, etc.The scheme has since been
      extended to reputed private companies and educational institutions.
      The group savings linked insurance scheme can be a contributory or non-
      contributory scheme. Part of the premium collected is the savings
      premium that is accumulated at the rate declared from time to time; a part
      is utilised to provide life cover in case of death.
Main features:
•   The employer acts as a facilitator and coordinator in maintaining the
    scheme and in making monthly deductions from salary
•   Contribution consists of risk premium and the savings portion. The savings
    portion earns interest at the declared rate, compounding yearly
•   As per regulations, the life cover premium and contribution for savings
    should be in the ratio 1:2 respectively

•     Employees are grouped into several agreed categories based on their salary
     and therefore the contribution and coverage depend on the category to
     which the employee belongs
1.   In the event of death of the employee, the nominee gets an assured sum
     with accumulated savings and interest on the same.
2.   On retirement/resignation/termination, only the accumulated savings
     portion with interest is payable. Monthly contribution of employees is
     exempted under Section 88 of IT Act 1961.
The number of members joining the scheme has to be atleast 75% of the total
number of employees. The scheme has to be made compulsory for all the new
The premium payable is based on weighted mean of the ages of the members.
Contribution is uniform for each category.

                            CHAPTER 11
                     SUPER ANNUATING POLICIES

                                    SECTION - A
1. The meaning of the term “Gerontology” is
     a. The scientific study of old age.
     b. The scientific study of young age
     c. The scientific study of middle age
     d. The scientific study of genes

2. Old people have to overcome two problems of financial implications. They are

     a. Experience and senility

     b. Declining earning power and poor health.

     c. Exercise and physical fitness

     d. None of the above

     e. All of the above

3.    In India the percentage of old people in the population is:
      a) Increasing
      b) Decreasing
      c) Remain the same
      d) No data available to reach any conclusion

4.    The person employed in organized sector are better off than those in the
      unorganized sector because:
      a)    They have assured income and employee benefits
      b)    They are better educated
      c)    They are subject to very strict rules and regulations framed by the
      d)    They are under the control of the trade union

5.   OASIS means in this context:
     a)   A green patch with water resources in the midst of the desert
     b)   A water fall
     c)   The project called Old Age for Social and Income Security
     d)   A project for the welfare of the female child

6.   Varishtha Pension Bima Yojana is:
     a)   A new LIC pension plan for the youth
     b)   A withdrawn pension plan for the persons aged above 55
     c)   Is the same as Jeevan Dhara
     d)   A special pension plan for working women

7.   The insurance plans specifically meant to meet regular income needs, post
     retirement, are referred to as:
     a.   Annuities
     b.   Endowment plan
     c.   Whole life plan
     d.   Term assurance

8.   Ageing at the base refers to
     a. Increased life expectancy due to decline in the fertility
     b. Increased life expectancy due to increase in the fertility
     c. Increased life expectancy due to decline in the mortality.
     d. Increased life expectancy due to increase in the mortality.

9.   Ageing at the apex refers to
     a. Increased life expectancy due to increase in mortality among the older
     b. Increased life expectancy due to reduction in mortality among the older
     c. decreased life expectancy due to reduction in mortality among the older
     d. Increased life expectancy among the older persons.

                            SECTION - A ANSWERS

   1.   a
   2.   b
   3.   a
   4.   a
   5.   c
   6.   b
   7.   a
   8.   a
   9.   b

                                  SECTION – B

1. What are the problems of ageing?

Ans: There are two processes in the ageing of population; one is ageing at the
base and second ageing at the apex of the population. (the former is due to the
decline in the fertility and latter because of reduction in mortality among the
older persons.) “When the population ages, the share of older people in
population increases while the share of children and youth decrease resulting in
a rise in the median age” (Conception, 1996). Median age summarises the age
structure of the population.

   •    These people become more vulnerable to health problems. This leads to
        physical disabilities such as blindness, deafness and other health related

   •     The needs of the aged are no longer met by the younger members of the
        family. The reasons are emerging changes in technology have minimised
        the role of the elderly people, as their knowledge and skills are outdated.
        And nuclear families are also growing at a much faster rate. In this
        situation who will take care of the elderly is the quest.

   •    There has also been a vast improvement in the field of medicine and
        health care, which has extended the life span of many.

2. Describe “OASIS”
   Ans: Government of India launched the project called “OASIS” (Old Age
   Social and Income Security). This study indicated that between year 1991 and
   2016, the population of old aged i.e. 60 years and above would increase by
   107% to 113.0 million and would continue to grow rapidly in the year 2026 to
   179 million which will be 13.3% of the population.

3. Describe the different attributes to understand the problems of ageing
Ans: The aged population refers to people who have crossed at least 60 years.
They are not a homogeneous group. And the attributes are also not similar. To
actually understand the problems of ageing, the diversity must be understood.
Some of the characteristics of aged persons are given below:
     Sex composition: Age and sex are the basic tools for any demographic
     analysis. For elderly population it is an indication of differential mortality
     that took place during their life. Males when compared to females have
     higher mortality rate. This leads to sex imbalance when they become old.
     According to the Census so far, unlike other countries, India has more
     number of males. The same was also true for the elderly population till
     1991.It is interesting to note according to UN projections, the number of
     women population (80+) is likely to increase.
     Age composition: Almost two-thirds of the aged population, i.e. 60 to 69 is
     declining by each decade while others are increasing. But in absolute terms,
     population is increasing in almost all age group categories. In 1961 there
     was an increase in the age group category of 70-79 when compared to other
     Place of Residence: It is seen that three out of four elderly are found in
     rural areas. This is expected since three-fourth of the Indian population live
     in rural areas.
     Marital Status: The distribution of marital status among the elderly is vital.
     It is an age wherein everyone requires a partner. Children and
     grandchildren tend to spend less and less time with the elderly people, as
     they are busy with their own activities. A study shows that the percentage
     of widowed women was more when compared to those who are currently
     married and in case of males it was the other way round. This indicated that
     the wives were much younger to their husbands and therefore tended to
     outlive their husbands.

     Literacy level: Majority of elderly population is illiterate and that includes
     both males and females. In 1961 only 29% of males and 4% of females (60+)
     were literate. In 1991 it jumped to 41% and 13 %.
     Employment: Usually during old age the level of income reduces, and
     simultaneously expense pertaining to health increases. Remaining
     employed even after the age of 60 is not desirable. But this at the same time
     has certain advantages. It reduces boredom, loneliness and unwantedness.

4. What are the alternative ways of managing the retirement risk?

Ans: Alternatives ways of managing the retirement risk: There are many
individuals who work even after their retirement age to receive income. They
fully avoid the risk of outliving their income. Even if the person continues to
work, it is for sure that after a certain age (65 and above) he will not be physically
strong to give his best and earn sufficient income.

5. From an individual’s point of view what are the two important
Ans: The risk of premature death and the problem of living too long after

6. What are the dynamics of financial security? How to overcome the problems
of outliving assets?
Ans: At present the current population is living a longer life span after the
retirement age. Simultaneously people are retiring earlier as organisations are
also providing early retirement packages to the employees so that they can
employ younger people with better skills at much less cost.
There are actually two risks linked with retirement. The first being the risk of the
person being left with insufficient assets to manage during the post retirement
phase. The second risk is the risk of outliving the assets that had been
accumulated. Even if the assets are utilised properly after retirement, it is
difficult to calculate how much of the asset should be used every year in order to
ensure that the income from the assets lasts till the end of the individual’s
The second risk is much easier to explain. The annuity principle can be utilised to
change an accumulation into an income so that an individual cannot outlive the
asset collected. Annuities are considered as vital tools in administering and
managing retirement risk and they are the best solution for the second problem.

7. Describe the retirement planning process.
Retirement planning is similar to that of life insurance planning. It consists of
three steps.
    •    The first step is to estimate the future income needed after retirement. It is
         also important to identify existing resources to meet these needs
    •    The second step is to decide how these funds will be accumulated. The
         fund must be sufficient enough to contribute the difference between the
         resources that are available and will be needed to give the necessary
         retirement income. Further appropriate amount needs to be added to meet
         health care and hospitalisation expenses, as the old are more prone to
         health related problems
    •    Finally the individual has to decide how the fund is to be consumed. He
         needs to consider his likely period of life after retirement and the
         provisions to be made for the spouse.

8. What are the Financial needs of the aged?
As the individual grows older his stamina decreases. There comes a time when
the individual is no longer able to work and at this time his income ceases. Even
if the individual gets into a part time job, it would be strenuous for him and
would give him very meager income. It has been estimated that at least 80% of
the income earned during service is necessary to maintain the same standard of
living after retirement. If the part time employment and the interest from
savings/annuities do not make up this 80% there is a problem. The individual
concerned will have to reconcile himself to a fall in the standard of living.
 As an individual grows older he tends to spend less for items of luxury.
Expenses relating to health increases for him. It might be a temporary sickness,
or some long-term disability. In such a situation what can the individual do? He
should have planned in advance the accumulation of funds to meet the expenses
directly or through insurance.

9. Describe ‘three legged stool’ in the context of economic security.
Ans: In the west, retirement needs are met through three sources:
•       Social security
•       Employers sponsored benefit schemes
•       Private savings
These 3 are traditionally considered the three legs on which the retirement stool

In India the situation is completely different - the government does not have
sufficient funds to meet the requirements of the growing population of aged.

                                SECTION - C
                               CASE STUDIES

   1. “ In our country, most people are conditioned to think that post-
      retirement living means scaling down the standard of living. But in
      reality, that is something of a myth. A little planning, some forethought
      and a clear understanding of options may be all that is needed to live a
      retired life like a prince, albeit of a small nation. Savings for retirement
      should be in the risk free instruments that offer regular cash flows as per
      the requirements.”

         a. What type of risks is one required to face in the post-retirement
         b. How can the life insurance products help one to meet the financial
            requirements in those days.


   a. The greatest burden on an old man is the need to be economically
      dependent. With retirement, the regular income of a person stops and one
      may not be able to start another working life during the post retirement
      days. One is required to depend on the earlier savings made while
      working. At the same time, some expenses, especially the medical
      expenses, generally go up owing to the very nature of the geriatric
      problems. Even a small increase in prices may worsen the situation. Due
      to these reasons, one may end up with an empty purse as the possibility of
      further inflow of funds may dry up. Even the required amount of money
      may not be available to satisfy the most basic physiological needs.

   b. Life insurance products can provide the required amount of funds to a
      person during these days. One may buy a suitable annuity plan either on
      retirement or during the working life, depending upon the convenience.
      At the time of buying such plan, one may decide the nature of cash flows
      as per the expected future requirements. In India, the pension market has
      not yet developed properly. LICI has developed a few such products to
      meet the varying requirements of different types of individuals. One may

   choose life annuity or annuity certain or joint-life last survivor annuity
   depending upon the needs of self as well as the spouse. LICI also offers a
   refund option to meet the necessities of other dependents. But whatever
   may be the choice, one can get the assurance of regular income during the
   post-retirement days.

2. As per the Indian psyche, it is comfortable to think that young son(s) will
   take care of the parents during their old age. The annuity plan can act as a
   bonus to such thinking. In the age of nuclear families, one may feel lonely
   following the end of working life. During the post-retirement period,
   everyone desires to be financially more secure and independent. Proper
   post-retirement planning can help one to retain the financial freedom as
   enjoyed during the active working life.

       a. What type of annuity product will you suggest to retain the
          financial independence of self as well as the spouse?
       b. Do you feel the necessity to liquidate a pension scheme and should
          that be at the option of the annuitant?


a. The suggested annuity product should be joint-Life and Last Survivor
   Annuity. Under such plan, the insurer will start the payment of the
   installments as per the requirement of the annuitant. The periodical
   payment will continue will the survival of the annuitant. The periodical
   payment will continue till the survival of the annuitant as well as the
   spouse. Following the death of either of them, the amount of annuity
   installment will be reduced by 50% of the normal annuity. The annuity
   plan for the surviving spouse will continue as long as he/she survives. In
   case of a deferred annuity program, the annuitant may also prefer a cash
   option, if required, to withdraw a lump sum amount from the
   accumulated fund.

b. No such option should be given to the insured. If the option is available,
   one may not be able to resist the temptation of withdrawing that money as
   soon as any need arises, however minor it may be. This may also result in
   emptiness during the very old age of the annuitant when all other sources
   of earnings might dry up. In that case, the very economic purpose (to
   provide a regular income to the annuitant during old age) of annuity will
   not serve its purpose at all. Since the basic objective has failed, no such
   option should be allowed during the lifetime of the annuitant. However,
   considering the interest of the survivors (successors) of the annuitant, that
   option may be allowed only after the death of the annuitant.

                           CHAPTER – 12
                       ACTUARIAL VALUATION

                                  SECTION - A

1) Life fund is defined as:
       (a) The premium balance accumulated after adding the expenses.
       (b) The premium balance accumulate before adding the expenses.
       (c) The premium balance accumulated after deducting the expenses.
       (d) The premium balance accumulated after multiplying the expenses.

2) The formula for the calculation of prospective reserve:
      (a) tVx = Ax+t – Px äx+t
      (b) t+1VX = Αx+t – Px+t ax+t
      (c) tVx+t = Ax – Px+t äx+t
      (d) tVx = Ax+t – Px+t äx+t

3) Valuation surplus is defined as:
      (a) [Life fund – present value of future previews] + [present value of
          future claims]
      (b) [Life fund + present value of future previews] x [present value of
          future claims]
      (c) [Life fund x present value of future previews] – [present value of
          future claims]
      (d) [Life fund + present value of future previews] – [present value of
          future claims]

4) Death strain is defined as:
      (a) Sum insured (s) + policy value
      (b) Sum insured (s) % policy value
      (c) Sum insured (s) – policy value
      (d) Sum insured multiplied by policy value

5) Expected death strain is equal to:
    (a) Qx (s+v)
    (b) Qx – (s+v)
    (c) Qx (s-v)
    (d) Qx ÷ (s-v)

6) Mortality surplus is equal to:
       (e) [Qx – qx] [S– V]
       (f) [Qx S – Qx V – qx S + qx V]
       (g) [Qx qx] [S – V]
       (h) a & b

7) Give that A = principal ; I = interact n is no of years. What is the formula for
Accumulated value of 1:
   (a) S = A [1+i]
   (b) S= A + [1+i]n
   (c) S = A [1+i]n
   (d) none

8) Present value is equal to (un) =
    (a) 1/ (1+i)
    (b) 1/(1+i)n
    (c) [1+i] – n
    (d) b & c

9) Accumulated value of series of payments is symbolized by whole payment is
made at the end of year:
   (a) Sn (1+i)
   (b) Sn
   (c) (1+i) + (1+i)2 + (1+i)3 + ----+ (1+i)n
   (d) b & c

10) Present value of series of payments of all immediate annuity:
    (a) än   (b) an         (c) a & b (d) none

11) The process of valuation in a life insurance company is taken up by:
    (a) An Actuary
    (b) Chartered Accountant
    (c) A financial analyst
    (d) A surveyor

12) Valuation in life insurance means:
    (a) The process of arriving at the project of a life insurance company
    (b) The process by which the value of all the existing policies is a sectioned in
        a life insurance company
    (c) The process of determining the net premium for a life insurance policy
    (d) The process of arriving at the ‘bonus’ in a life insurance company

13) The mathematical estimation of the risks involved in life insurance is based
    (a) The laws of probability
    (b) The laws of gratify
    (c) Parkinson’s law
    (d) Millers law of insurance

14) What is actuarial risk?
    (a) It is the risk that actuaries are exposed to
    (b) It is another expression for market risk
    (c) It is save as legal risk
    (d) It is the risk that arises from an insurer developing funds vis – a – vis the
        issuance of insurance policies and other liabilities

15) Pricing risk means:
    (a) Risk arising out of pricing an insurance product to high
    (b) The risk caused due to inadequate pricing of products
    (c) Risk arising out of interact rate movements
    (d) The risk of becoming in solve up

                           SECTION – A ANSWERS

(1) c (2) a (3) d (4) c (5) c (6) d     (7) c   (8) d (9) d (10) b     (11) a (12) b
(13) a (14)d (15) b

                                  SECTION - B
1) State the contribution principle name the three sectors in this principle:
Ans: The contribution principle aims to obtain equity during the distribution of
surplus. According to this principle a way of obtaining reasonable equity “would
be to return to each class of policy owners a share of the visible surplus
proportionate to the contribution of the class to the surplus”

The three-factor Contribution method

   i)     Loading savings
   ii)    Excess interests
   iii)   Mortality savings

2) Name the different methods for distribution of dirigible surplus?
        (a) Contribution method
        (b) Simple reversionary method
        (c) Compound reversionary bonus system
        (d) Bonus in cash
        (e) Bonus in reduction of premium
        (f) Tontine bonus
        (g) Inter inn bonus
        (h) Guaranteed bonus
        (i) Final additional bonus

3) Name the different methods of liability valuation. Explain prospective
Ans:: there are different methods valuations.
          (a) Prospective method
          (b) Net premium method
          (c) Modified net premium method
          (d) Gross premium method
          (e) Gross premium method for with profit policies
          (f) Retrospective method

Prospective method: it is the value the current value of future premium and the
current value of claims.
          (a) : prospective reserve = (Life fund + P.V of future premiums) – (P.V
              of future claims)

The formula for prospective method is:
tVx = (S.A) Ax+t – Px. äx+t

   (a) It is the deviation elapsed since the date of commencement of the policy. It
       is reckoned in integral number of years.
   (b) ‘X’ is the age as in dewing the last birthday (or) next birthday as per the
       practice of the office.
   (c) It is obtained by calculating the difference between the calendar year of
       valuation and calendar year of commencement of the policy but
       adjustment has to be made with regard to the months of valuation and the
       month in which the policy begins
   (d) X+t is the valuation age. It is calculated by adding the deviation elapsed
       (t) to the age (x)

4) What are the risks involved in providing insurance cover desevibe about
   pricing risk

Ans: these all: (o) Actuarial
          1) Asset risk
          2) Pricing risk
          3) Interact rte risk
          4) Miscellaneous risks

Pricing risk: This also called as the pricing inadequacy risk. This is the risk
caused due to inadequate pricing of product. The risk arises, as the future
operating results are not anticipated while pricing the product. Thus the price is
inadequate for meeting future liabilities. There, due to inadequate pricing of
product liabilities increase.

When the liabilities rise beyond the assets available. It causes in solvency.

The inadequate pricing is the result of occurrence of erects at rates higher thus
anticipated relating to the following
   (x) Mortality
   (x) Morbidity
   (x) Lapse (or) expenses
   (x) Lower investment income
   (x) Lower sales
   (x) Increased costs to be met while providing breathes care as required under
   the policy

5) What are the assumptions underlying rate calculations?

Ans: some of the factors that need is be borne in mind by the insurer while
compacting the interest rate.
         (a) When is the premium paid? (e.g: annually, semiannually?)
         (b) What is the deviation for which the premium has to be paid (no. Of
         (c) How will mortality rates be determined?
         (d) What will become of the money from the time it is received till it is
             paid back to the policyholder
         (e) Age of the assured
         (f) Sex of the assured
         (g) Mortality table to be used for that particular customer
         (h) Rate of interest
         (i) Sum set aside to cover the expenses increased by the insurer, to
             meet contingecting and margin for profit

             (j) Benefits to be provide the policy
             (k) Premium can be paid as a lamp sum
             (l) Premium can be paid through out the existence of the policy on a
                 regular basis

                                    SECTION – C
                                   CASE STUDIES

1)       I am paying Rs. 100 yearly at the end of the year from 2006 to end of
         2010, at the rate of 6% regularly what is the present value of there
         annuity payments.

Sol:       given that n= 5: i = 6 %,   payments Rs. 100 per year

                 => present value = a5 = 100 v+100v2 + 100v3 + 100v4 + 100v5

                            => a5 = 100 [v+v2+v3+v4+v5]. @ 6%
             100 [(1/1.06) + (1/1.06)2 + ---- + (1/1.06)5]
             100 [0.9434 + 0.8899 + 0.8396 + 0.7921 + 0.7473]
             100 (4.2123)
 2) In a savings account plan, a person paying 2073 rupees yearly at the end of
 the each year it is paying at the rate of 7% p.a. if due pays 10 years acuity
 payments what is the accumulated value of that payments?

       Sol: Give that: payments of Rs. 2073; i = 7%; n = 10 years

       => Accumulated value: S10 = 2073 (1+07) + 2073 (1.07)2 + -------+ 2073(1.07)10
                                =2073 [(1.07) + (1.07)2 + -----------+ (1.07)10]
                                =2073 [1.07 + 1.1449 + 1.2250 + 1.3108 + 1.4026 +
                                      +1.5007 + 1.6058 + 1.7182 +1.8385 + 1.9672]
                                =2073 [14.7837] = 30646.6101


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