INSURANCE BROKING

Chapter – 1

ROLE & NATURE OF INSURANCE BROKING SERVICES

Insurance Program
Quotations and Tenders
New Business
Alterations
Renewals
Claims
Role Survey
Risk Management
Reinsurance Arrangement Including Servicing
Code of Conducts
Ethics

Role of an insurance broker

A broker may see himself as being essentially a placer of insurance on behalf

of his clients, or he may offer many kinds of additional service, from
information about savings and pensions to fire, burglary or safety surveys.
The difference between the work of one broker and that of another may thus
be enormous, but there is one thing that they all have in common. Each of
them is an expert adviser to his clients on insurance matters, a link between
the client's need for cover and the insurers who can meet that need. The
broker's skill lies in finding as good a match as possible for his client's needs
from among the display of competing insurance products on the market and,
where necessary, stimulating insurers to modify their polices or to create
new covers in order to meet the client's needs better.

This means that not only must the broker understand the insurance market,
which is the basic specialist skill he is offering to the public, but he must also
understand his client. This is not simply a matter of finding out what kind of
insurance the client is looking for; it is also one of discovering what particular
needs underlie the request. A broker has thus to be very well informed about
both sides of the market he serves, and this necessity is often a sound
reason for spectalisation, particularly for the smaller broker.

The market sector chosen may be determined by some specialist knowledge

of particular classes of insurance which the broker's staff have, or the size of
his firm may lead the broker to concentrate on a particular type of client.
Large broking firms seek to provide service to clients both large and small,
but it may be uneconomic to handle insurances for individuals side by side
with those of large industria l clients. The solution usually adopted is to set up
subsidiaries or branches specially designed to serve the individual. This
avoids the difficulty inherent in trying to serve both markets with the same
organisation, namely that, since the broker's remuneration is normally by
commission calculated as a percentage of the premium, the overheads

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involved in providing all the services needed to deal with the insurance needs
of large companies might rule out handling small premium business.

Some brokers have neither individuals nor industrial companies as their main
clients, but insurers, for whom they place reinsurance. This may be an
important part of the business of a large broker, or it may constitute the
whole activity of a smaller braking firm
The broker's main role - that of a skilled intermediary using his special
knowledge to help his client to obtain the best from the insurance market -
will be the same in every case, but the way he goes about it will vary
according to the type of client he chiefly serves. Let us therefore consider in
turn the needs of the individual, of the industrial company and of the
commercial or professional concern.

INSURANCES OFTHE INDIVIDUAL AND THE FAMILY

The individual is not, on the whole, very insurance-conscious He is aware of a

few of the common forms of insurance but will probably have no conception
of the enormous variety of covers which the insurance market provides. He
may be prepared to concede that the idea of insurance is a good one, but he
still tends to be a reluctant purchaser.

His reluctance is perhaps understandable when one thinks that he is being

asked to payout money in return for which he receives no immediate tangible
benefit. All he gets is a promise and a piece of paper - the insurance policy -,
which embodies that promise. The policy is a legal document and as such is
written in a style and language, which the insured may find difficult to
understand.

The agreement is an odd one because not only may a very long time elapse
before there is an opportunity to test the promise that has been given, but
also that opportunity will usually arise only in unpleasant circumstances,
which the insured would rather not think about. It is, in short, an agreement,
which both parties would rather never, came into effect, and so it is hardly
surprising that most insurance for individuals is bought as a result of either
compulsion or persuasion.
Compulsory insurance, as far as the individual under non-life category, is
concerned, generally means motor insurance, and many brokers base their
business on individual motor policies. The motorist must have cover, and he
does not know how to find the best insurer. That, in a nutshell, is the
problem that the broker solves for him. The broker is able to find the best
combination of rates and conditions for the particular circumstances of his
client among the many on offer, and to recommend a sound insurer to him.
If the insured has a motor accident, it is to the broker that he turns for
guidance and help through the formalities of making a claim upon his
insurers, and possibly for assistance in making an uninsured loss claim
against the other motorist.

This is one of the simplest illustrations of the role played by a broker in

arranging insurance and in making sure that the insured obtains the full benefit
from it when he comes to make a - claim, but it can lead to a very successful
relationship between broker and client. Just how close the relationship can be
is shown by the number of clients who find it very difficult to remember the
name of their insurer but who have no difficulty in recalling that of the
broker.

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If motor insurance tends to be the result of compulsion, life assurance often
depends upon persuasion. A broker has to be a good salesman to be
successful in life assurance, but he has to be much more than that. He must
also be a financial adviser to his client, recommending the best forms of
cover for the client's particular circumstances. These will decide whether it
will be protection of the client's family in the event of his death or life
assurance as a means of investment, which will be emphasised.

The relationship built up through meeting these more readily recognizable

needs of the client is often the starting-point for the broker to introduce his
client to other forms of insurance because, where the individual is concerned,
the broker's role must to some extent be that of an educator in insurance
matters. The client, who probably has many things he would rather think
about than insurance, will often need prompting to consider the need to
insure his possessions against loss and to make sure that his family would
have a continuing income not only in the event of his death but also if he
were involved in an accident or suffered a major illness.

The broker ne eds to do more than merely introduce his client to the forms of
cover he requires. He must keep in touch with his client to ensure that the
insurances he has are still appropriate as his way of life or family
circumstances change. In these days of inflatio n, too, the broker has a duty
to remind his client of the necessity to make sure that the sums insured on
his policies are regularly adjusted so that the cover remains adequate.
In arranging insurances for individuals, the broker's task will largely be to
select the most appropriate cover from a range of standardised policies.
Some, particularly those which set out to package several insurances in one
policy, may offer a range of options which between them will meet the needs
of a very large majority of the general public, but there is comparatively little

The Broker will at times find himself/herself acting as a ‘first-line’

underwriter. As the Broker gains exposure, he/she will come to know the
decisions that companies are likely to make when confronted with different
situations. For example, an life insurance proposal from a professional
trapeze artist may well be refused by most insurers because of the high risk
of injury that it presents Similarly, the Broker knows the insurers’ attitudes
to certain medical conditions such as hypertension, heart conditions, and so
on. Some may result in exclusion of certain types of claims from the cover,
others to premium loadings, or declinature. With this wisdom, the Broker
alerts the client to the possible problems that may be encountered in an
insurance proposal, and even be able to advise on alternatives.

The scope for designing a 'tailor-made' policy for a particular individual

Insurance is, of course, based on the principle of a fund built up from the
contributions of many people, out of which the losses of a minority of them
can be paid. There must be a certain minimum of premium to be derived
from a form of insurance before it becomes economic to offer it, so that the
individual who wants a cover applicable to him alone is unlikely to find it.
Nevertheless, it is the broker's job to search the market to find as close an
approximation to a 'tailor-made' cover as possible at a reasonable premium,
provided that it is offered by an insurer in whose security and reputation the
broker has absolute confidence. However good the cover may look on paper,'
its value is diminished if there are unwarranted difficulties or delays in claims
settlement, and it is worthless if the insurer becomes insolvent.

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INSURANCES OF INDUSTRIAL CONCERNS

Businesses come in all sizes, and the role of the broker will vary in some
respects with the size of the client company and the amount of insurance
expertise it has available among its own staff. The approach to insurance of a
small engineering workshop in a side-street will not be the same as that of a
huge multi- national corporation which may number an insurance company
among its subsidiaries. The essentials of the broker's task will be the same,
however, for the largest company as it is for the individual: to use his
knowledge of insurance and of the insurance market to help his client to
arrange a sound insurance program which, to the maximum extent possible,
meets the client's particular insurance needs.

The broker will handle the insurances of a small company in a manner very
similar to those of an individual. The relationship is likely to be a personal
one with the directors of the business, and they can be considered, in away,
as individuals who have a different, and more extended, set of insurance
needs because of their involvement with the company.

The first essential will be for the broker to ensure that his clients have the
compulsory insurances, which they need for their business to be carried on
legally. Employer's liability cover to protect the workforce must be arranged,
and motor insurance is also likely to be a necessity. If the business has plant
or machinery, which must have a periodical statutory inspection, it will be
usual possibility of a huge award being made in a products liability case. In
cases such as this, the broker may have to go to markets beyond the British
one in order to find sufficient capacity. The broker who has large companies
and multinationals as his clients cannot therefore think in purely national
terms.

Many large clients these days are interested in forming an insurance

subsidiary named as 'captive' insurance company - usually in an offshore tax
haven. The broker's role thus becomes extended to carrying out a feasibility
study on such a proposal, advising on suitable locations, and setting up,
managing and arranging reinsurance programe for the captive)

INSURANCES OF COMMERCIAL AND PROFESSIONAL CONCERNS

In many respects, the role of the broker with a client in commerce or the
professions w ill be similar to his function as broker to an industrial company.
He must be able to understand the intricacies of his client's business, so that
he can recommend the best insurance programme from among all the
available options. The range of covers from which the choice is to be made
will be the same as for an industrial company, but the relative importance of
covers will not be the same.
For smaller companies, some form of package policy covering most of the
risks of shops or offices in a single document may be appropriate. It will be
part of the broker's duty to examine how well a cover of this kind, with its
standardisation, meets the particular needs of his client firm, and to
recommend the stage at which it would be better served by separate policies
designed to cover the client's individual circumstances.

The insurances of larger companies will be handled in the same way as those
of an industrial company, with the same combination of expert placing of the
risk in the insurance market and advice on means of preventing or
minimising loss. In large retail organisations security will assume particular

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importance. There will inevitably be a substantial amount of cash in transit,
and losses through theft by shoplifters or by staff can, if unchecked, assume
serious proportions. The broker should be equipped either to give advice on
risks of this kind himself or to draw his client's attention to the need for loss
prevention, and perhaps to indicate some other sources of specialist advice.

The presence of t he public on the insured's premises leads to risks, which the
industrial client is unlikely to have to face to anything like the same extent.
Liability insurances, both public liability and products liability, which will
provide cover against liabilities incurred through products sold or supplied,
will be important, and the broker must ensure that his client has insurance
protection which is both adequate in amount and wide enough to cover all
the types of business in which he is engaged. Subsequently, the broker must
remind his client of the necessity of ensuring that the limits of liability under
his policies are reviewed periodically so that they remain adequate as
inflation and court awards rise.
Liabilities will also be very much in the broker’s mind in advising clients in
the professions. The major risk in this case will be that of professional
negligence. Substantial professional indemnity cover is now a condition of
being permitted to practice many professions, including that of an insurance
broker. The public is entitled to expect that persons or firms holding them-
selves out as possessing particular professional skills will in fact exercise
them, and the trend is towards the extension of liability to include persons
other than those with whom the professional person is in a contractual
relationship.

Placing the professional indemnity risk may call for the exercise of just such
a professional skill on the part of the broker, for the financial consequences
of an error may be far greater than any other risks the professional person
may face. Apart from professional indemnity, his insurances may be no more
complicated than those of a simple office risk.

It is in alerting his client to major risks of this kind which may be concealed
in what appears to be a comparatively risk-free occupation, as well as in the
skilful placing of insurances both complicated and simple, and in helping the
client to obtain a speedy and fair settlement when a claim comes along, that
the broker earns his money.

Although he will normally be remunerated by the insurer through a

commission based on the amount of the premium, and although he will be
for some purposes the agent of the insurer, there is no doubt where the
broker's chief loyalty lies. Above all other consideratio ns he must put the
interests of his client first.
CLAIMS
The client cannot see the result of those insurances for which he has paid
until he makes a claim. He will expect and be entitled to immediate and
expert attention. He should receive guidance on h ow to make the claim and
how to deal with insurers and loss adjusters when they are appointed.

The limitations and extent of the client's policy must be fully explained to him
and the insurance broker should be active in safeguarding the interests of his
client.

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Finally to summarise, the role of both life and general brokers will inter alia
consists of

• Having a detailed knowledge of available markets

• Obtaining a detailed and thorough knowledge of the client’s business
and philosophy and analysis of the same
• Recommendation of an insurer or a group of insurers to the client
• Maintaining clear records of the client’s business so that this can be
explained to an insurer and other parties
• Providing technical advice on developments in the insurance market
and the law
• Negotiating with insurers on the client’s behalf
• Collecting and remitting premiums and claims
• Maintaining precise records of past claims.
• Assisting in the negotiation of claims
• Where appropriate and dependent on the size of both the client and
broker, providing additional services, such as insurance consultancy
services, risk management services and uninsured loss recoveries.

Code of Conduct

The Code of Conduct shall serve as a guide to insurance brokers and other
persons concerned with their conduct. The objective of the Code is to assist
in establishing a recognised standard of professional conduct required of all
insurance brokers who should, in the interests of the public and in the
performance of their duties, bear in mind both this objective and the
underlying spirit of the Code.
Principles:

A. Insurance brokers shall at all times conduct their business with Utmost
good faith and integrity.

B. Insurance brokers shall do everything possible to satisfy the insurance

requirements of their clients and shall place the interests of those clients
before all other considerations. Subject to these requirements and interests,
insurance brokers shall have proper regard for others.

C. Statements made by or on behalf of insurance brokers w hen advertising

shall not be misleading or extravagant.
The following are some specific examples of the application of these
principles:

(1) In the conduct of there business insurance brokers shall provide advice
objectively and independently.
(2) Insurance brokers shall only use or permit the use of the description
'insurance broker' in connection with a business provided that business is
carried on in accordance with the requirements of the regulation

(3) Insurance brokers shall ensure that all work carried out in connection
with their insurance broking business shall be under the control and day-to-
day supervising of a registered insurance broker and they shall do everything
possible to ensure that their employees are made aware of this Code.

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 (4) In surance brokers shall on request from the client explain the differences
in, and the relative costs of, the principal types of insurance, which in the
opinion of the insurance broker might suit a client's needs.

(5) Insurance brokers shall ensure the use of a sufficient number of insurers
to satisfy the insurance requirements of their clients.

(6) Insurance brokers shall, upon request, disclose to any client who is an
individual and who is, or is contemplating becoming, the holder of a policy of
insurance the amount of commission paid by the insurer under any relevant
policy of insurance.

(7) Although the choice of an insurer can only be a matter of judgment,

insurance brokers shall use their skill objectively in the best interests of their
client.
(8) Insurance brokers shall not withhold from the policyholder any written
evidence or documentation relating to the contract of insurance without
adequate and justifiable reasons being disclosed in writing and without delay
to the policyholder. If an insurance broker withholds a document from a
policyholder by way of a lien for monies due from that policyholder he shall
provide the reason in the manner required above.
(9) Insurance brokers shall inform a client of the name of all insurers with
whom a contract of insurance is placed. This information shall be given at the
inception of the contract and any changes thereafter shall be advised at the
earliest opportunity to the client.

(10) Before any work involving a charge is undertaken or an agreement to

carry out business is concluded, insurance brokers shall disclose and identify
any amount they propose to charge to the client or policyholder, which will
be in addition to the premium payable to the insurer.

(11) Insurance brokers shall disclose to a client any payment, which they
receive as a result of securing on behalf of that client any service additional
to the arrangement of a contract of insurance.
(12) Insurance brokers shall have proper regard for the wishes of a
policyholder or client who seeks to terminate an agreement with them to
carry out business.
(13) Any information acquired by an insurance broker from his client shall
not be used or disclosed except in the normal course of negotiating,
maintaining, or renewing a contract of insurance for that client or unless the
consent of the client has been obtained or the information is required by a
court of competent jurisdiction.
(14) In the completion of the proposal form, claim form, or any other
material document, insurance brokers shall make it clear that all the answers
or statements are the client's own responsibility. The client should always be
asked to check the details and told that the inclusion of incorrect information
may result in a claim being repudiated.

(15) Advertisements made by or on behalf of insurance brokers shall comply

with the applicable parts of the Code of Advertising Practice published by the
Advertising Standards Council and for this purpose the Code of Advertising
Practice shall be deemed to form part of this Code of Conduct.

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(16) Advertisements made by or on behalf of insurance brokers shall
distinguish between contractual benefits, that of those that the contract of
insurance is bound to provide, and non-contractual benefits, that is the
amount of benefit which it might provide assuming the insurer's particular
forecast is correct. Where such advertisements include a forecast of non-
contractual benefits, insurance brokers shall restrict the forecast to that
provided by the insurer concerned.
(17) Advertisements made by or on behalf of insurance brokers shall not be
restricted to the policies of one insurer except where the reasons for such
restriction are fully explained in the advertisement, the insurer named
therein, and the prior approval of that insurer obtained.

(18) When advertising their services directly or indirectly either in person or

in writing insurance brokers shall disclose their identity, occupation and
purpose before seeking information or before giving advice.
(19) Insurance brokers shall display in any office where they are carrying on
business and to which the public have access a notice to the effect that a
copy of the Code of Conduct is available upon request.

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Nature of Insurance Broking Services

Insurance brokers

Brokers as we understood, are a set of intermediaries who can solicit and

procure insurance business of life insurance, general insurance, or both. They
are essentially independent contractors. A broker can be a proprietor,
partnership firm or a company form under the provisions of Company Act
1956.

The brokers work with number of insurance companies and remain well
positioned to obtain a good deal for the prospects on favourable terms. The
broker is an independent intermediary will act on behalf of the prospect and
the policyholders i.e. at the time of recommending the risk plan and also will
continue to serve the client till the settlement of the claim. Contrary to this,
the insurance agent acts on behalf of insurers / insurance companies. The
broker has to identify his client’s risk needs and will have to do shopping by
contacting different insurance companies to search for an adequate product
with a competitive price which will be most suitable to his clients. Therefore
the broker has to be a well-versed professional adequately trained to operate
as a market mover in the insurance industry.

The agent represents supply side (acting on behalf of suppliers) whereas the
broker represents the demand side in the insurance market in view of the
fact that he is the person who knows about what the prospective clients need
and what type of insurance cover both life and general can satisfy these ever
changing customer needs. As such brokers’ role will be much supportive to
the growth of insurance industry. On the basis of the broker’s solicitation the
product development will be much faster as the insurance companies will
have a dependable data feedback for product designing and arriving at the
decision on pricing, etc.

The type of brokers are classified as under:

1. General Insurance Brokers

2. Life Insurance Brokers
3. Composite Brokers
4. Reinsurance Brokers

The broker will have to obtain the license from the IRDA. The applicant has
to have minimum of two persons employed having the minimum
qualifications of an Associate of Insurance Institute of India or its equivalent
or any other professional qualifications from an institution recognised by
government, in finance, law, engineering, or business management, and has
undergone theoretical and practical training to be conduc ted by National
Insurance Academy, Pune on the basis of syllabus finalised by the IRDA.
However, a person carrying on reinsurance broking and other insurance
consultancy for a period of more than 10 years and having required
experience of carrying on insurance business, the authority may grant
exemptions as regards qualifications and training. The broker’s application
will be reviewed by the authority in regard to infrastructural aspects i.e.
whether he has sufficient office space, equipments and manpower to
discharge his duties. The principal officer should not have violated the code
of conduct, the applicant should not be engaged in any other business, & the
issue of license is in the interest of the policyholders.

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 BROKER REGULATION AT A GLANCE
Category of Type of Broker Minimum Capital
Insurance Required
Broker
Category I Direct General Rs. 50 Lakhs
Insurance Broker
Category II Direct Life Insurance Rs. 50 Lakhs
Broker
Category III Reinsurance Broker Rs.200 Lakhs
Category IV Composite Broker Rs.250 Lakhs
Source IRDA Regulations

Simultaneously with the application for license the applicant has to satisfy
the capital adequacy requirements that has been notified by the IRDA. A
similar requirement will be notified for renewal of the license issued.

Every Insurance broker shall have to arrange for professional indemnity

cover throughout the validity period of his license. This is because he has to
provide for the risk in case of breach of duty while transacting business or
any damage caused because of his negligence.

As suggested earlier the Authority taking note of market trends will

determine the brokerage payable. The insurer will pay the brokerage as
decided by the Authority and notified to the broker.

Insurance Money Segregation

In addition to observation of code of conduct the insurance broker is required

to maintain separate accounts in respect of Insurance Money and his
earnings. For that purpose he has to treat all money i.e. premiums and
claims received from or on behalf of an insured as insurance money and
should ensure that it is held in an Insurance Bank Account with one or more
scheduled banks.

Every insurance broker will have to maintain solvency margin as notified by

the IRDA in the regulations

There are also rules in regard to indemnity payable by the broker in addition
to any additional penalty imposed by ombudsman or authority.

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FUNCTIONS OF A DIRECT BROKER

The functions of a direct broker shall include any one or more of the
following:

§ Obtaining deta iled information of the client’s business and risk

management philosophy
§ Familiarizing himself with the client’s business and underwriting
information so that this can be explained to an insurer and others;
§ Rendering advice on appropriate insurance cover and terms;
§ Maintaining detailed knowledge of available insurance markets, as may
be applicable;
§ Submitting quotation received from insurer/s for consideration of a
client;
§ Providing requisite underwriting information as required by an insurer
in assessing the risk to decide pricing terms and conditions for cover;
§ Acting promptly on instructions from a client and providing him written
acknowledgements and progress reports;
§ Assisting clients in paying premium under section 64VB of Insurance
Act, 1938 (4 of 1938);
§ Providing services related to insurance consultancy and risk
management;
§ Assisting in the negotiation of the claims; and
§ Maintaining proper records of claims;
Source IRDA Regulations

FUNCTIONS OF A RE-INSURANCE BROKER

The functions of re -insurance broker shall include any one or more of the
following:

§ Familiarising himself with the client’s business and risk retention

philosophy;
§ Maintaining clear records of the insurer’s business to assist the re-
insurer/(s) or others;
§ Rendering advice based on technical data on the reinsurance covers
available in the international insurance and the reinsurance markets;
§ Maintaining a database of available reinsurance markets, including
solvency ratings of individual re-insurers;
§ Rendering consultancy and risk management services for re-insurance;
§ Selecting and recommending a re -insurer or a group of re -insurers;
§ Negotiating with a re-insurer on the client’s behalf;
§ Assisting in case of commutation of reinsurance contracts placed with
them;
§ Acting promptly on instructions from a client and providing it written
acknowledgements and progress reports;

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§ Collecting and remitting premiums and claims within such time as
agreed upon;
§ Assisting in the negotiation and settlement of claims;
§ Maintaining proper records of claims; and
§ Exercising due care and diligence at the time of selection of re-insurers
and international insurance brokers having regard to their respective
security rating and establishing respective responsibilities at the time
of engaging their services.

Source IRDA Regulations

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Chapter –2

Risk Analysis / Life Insurance Selection

Identifying and assessing client needs

Process and methods of risk analysis
Portfolio Analysis
Risk identification techniques
Risk management
Examining financial position of an organization
Organisational activity and process
On site inspections
Statistical record analysis
Contract analysis
Loss frequency
Severity
Risk control & risk finance techniques
Identification of uninsured risks

Risk management

The a pproach to risk management in the United States has until recent times
been somewhat dogmatic in that the risk manager has been regarded as the
man who manages pure or static risk within the company. In Europe the
approach has always been that the risk manager acts in a broker capacity to
line management and coordinates insurance and risk management activity.
The European view, which is certainly more practical and less onerous for the
risk manager, is currently gaining much ground in the United States and is
now probably the more common approach both there and throughout the
world.

DEFINITION

To speak in general terms, risk is about the negative or undesirable events

which may happen in the future. Risk management is about recognising
what these events are, how severe they may be and how they can be
controlled. A working definition of risk management could be :

The identification, analysis and economic control of the events, which can
threaten the life, assets, or earning capacity of an individual or an enterprise.

The definition mentions life, assets and earning capacity. All the three are
important, and risk management must be seen to have a part to play in all of
these. Whenever a risk strikes life or assets it may have its implications on
the earning capacity of the individual/enterprise and for this reason the
definition mentions the earning capacity of an enterprise.

The definition uses the word individual as well as enterprise rather than
restricting itself to commercial enterprise. This means that the principles of
risk management are just as applicable to the individuals as to the
commercial enterprise. The threat to life is relevant mainly to individuals but

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may be applicable to commercial enterprise also in a limited sense, in that a
risk may threaten the very existence of an enterprise.

The emphasis of the definition is on economic control. There is no point in

spending more on controlling risk than can be justified by the losses that are
being prevented or the reduction in possibility of a major loss. This 'trade-off'
is a major factor in risk management and needs to take account of social,
political and environmental cost factors, as well as the physical cost of loss.

The three-fold approach to risk management is quite evident. Risks must

be identified before they can be measured and only after their impact has
been assessed can we decide what to do with them.

Risks the client may face

The objective of a brokers plan is to put in place a program that will provide
for the client ’s future financial security, and endeavor to take into account
and allow for the risks that are encountered over time.

Since the focus is on a specific types of risk, and the management of it. It is
therefore first necessary to obtain an understanding of pure risk, and how it
differs from other forms of risk a client may be exposed to, before examining
risk management.
In all that we do, there is risk. Risk is something that everyone faces in each
day of his or her lives. Recognising this, we take steps to avoid or reduce the
risks encountered. For example, when we drive, there is the risk of an
accident. If we walk, a bus might run over. If we invest money, the company
may go into liquidation. When developed into a systematic approach, this is
referred to as risk management.

Risk can be divided into many different categories, and before risk
management is considered, some of the different types of risks need to be
examined. This examination will be confined to those classifications that
directly relate to the areas relating to risk management. The categories
examined are:

• ‘Financial ’ as distinct from ‘Non-Financial ’ risk; and

• ‘Pure ’ as distinct from ‘Speculative ’ risk.

Financial and non-financial risk

Primarily the distinction is between financial and non-financial risk. In its

broad sense the term ‘risk ’ includes all situations in which there can be
exposure to adverse or harmful circumstances. In some cases, these
adverse, harmful circumstances may involve financial loss. In other cases,
there may be a risk of pain or inconvenience. Here we are concerned with
only those risks with which financial loss is associated.

Pure risk and speculative risk

The possible outcome of a risk event is the second distinction.

Speculative risk
Funds are invested to set up business ventures, and the desire is for the
venture to succeed and generate gain. Since a speculative risk involves the

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Possibility of a loss or a gain, a business venture may also be a speculative
risk. It may not succeed and some or all of the funds may be lost; thus, the
possibility of a gain or a loss. Gambling is an example of speculative risk;
you place your bet and will either win or lose.

The risk of losing money or cash flow due not to peril, but to default, is a
speculative risk. Speculative risk includes economic factors, market factors
and general business risks, including poor management.

Since Investment risk is part of speculative risk, the risk here relates to the
risk of an investment not achieving the expected return. It may result in a
loss. Investment risk may arise in relation to some insurance products, which
may contain a savings element in them, such as the whole life policy. Here
the need is to be seen as involving a speculative risk.

Managing of Investment risk involves the understanding of the risks

themselves, and avoiding unwanted risks, and then by reducing risk through
spread. The operative words here are ‘understanding the risks’; meaning, a
comprehensive understanding of the most important factors surrounding the
choice of investment or insurance medium. This will require more than just a
cursory glance at a balance sheet.

Pure risk

The term ‘Pure Risk ’ is used to describe a situation where there can be either
a loss or no loss i.e., those situations, that involve only the chance of loss or
no loss. For example pure risk is associated with the ownership of property.
A building is exposed to the risk of damage by fire or storm. The damage
may never occur, but if it does occur then a loss is suffered —.

The type of risks with which risk management is concerned is pure risks that
also has financial risk element.

Pure risks can be subdivided as follows

Personal risk

This involves injury, incapacity or some type of impairment to the individual. This could
result from death, old age, sickness, medical trauma or disability. For example, it may
involve the potential loss of income or assets as a result of an individual’s loss of ability
to earn an income. It may also involve direct financial loss through medical expenses
and so on. Personal risks will vary in importance according to the individual ’s particular
life stage.

15
We can identify the major stages from young adult to pre-retiree/retiree:

• Adult (18 –25 year old);

• Family -Young (25 –35 year old);
• Family - Over forties (35 –45 year old);
• Family – Over fifties (45 –55 year old); and
• Family – Pre -retiree/retiree (55 –65+year old).

Basing on these categories, the different risk potentials for each life stage to
demonstrate the aspect of pure risk.

Young adult

This age group usually covers individuals between 18 and 25. They include
people who are starting in the workforce and beginning to acquire assets.
The acquisition of these assets often means going into debt. The pure
personal risks faced would come under three headings.

• Medical

In the event of illness or injury, direct medical expenses will be

incurred. The public health system provides free treatment to a limited
extent, which may not be sufficient. In this age group, illnesses tend
to be un-common, but for sporting activities it is common and injuries
invariably result from such activities. And major traumas such as
severe head injuries and severe burns may occur, leading to loss of
income and unexpected high costs not covered by health insurance.

• Disability (total and temporary or permanent)

Young adults embarking on their first stage of adulthood often enter

into their initial financial commitments during this period, through
credit cards, personal loans, etc., as a means of establishing their
identity. Interruption to income at this stage, as a direct result due to
disability, whether short term or long-term, can be devastating at this
stage. An ongoing income is vital to ensure that they are able to meet
the commitments in addition to their weekly rental and general living
expenses.

For those who live in families will be able to fallback to a certain extent
on parental support during a period of disability, their disablement can
still have a detrimental effect on a family ’s financial resources, and
any accumulated savings can be quickly depleted. Usually it will often
be the family, which has to shoulder the financial responsibility, despite
their own financial commitments. The cost of ongoing health care
becomes another expense that must also be now factored into the
family ’s budget, which has a bearing on disposable income.

16
 A long-term disability, where it is unlikely that a return to work is
possible, will be financially crippling. The unfortunate fact about
disablement is that it actually has more far-reaching consequences on
many than just the person it happens to.

• Death

Even though they do not usually have dependents to provide for, but would need
to repay their personal debts. These could include credit cards, periodic bills s uch
as phone accounts, and larger debts such as personal loans or lease agreements
for big purchases such as cars etc.

Family -Young (25 –35 year old)

Both partners will generally be employed, except where there is a

young family —in which case one may stay at home with the young
children. This group will often have substantial debt.

The three areas where personal risks are faced are as follows.

• Medical

Any disability or serious illness will bring medical expenses. The degree
of these will depend on the severity of the disability. With severe
disabilities, apart from the medical expenses, costs relating to
prostheses may also be incurred. Children have a tendency to sustain
illnesses and injuries frequently; so medical costs may be incurred as a
matter of routine by them.

• Disability

Even though there is disability, all routine family expenses will be

incurred in addition to depending on the nature of the disability, there
may be continuing medical expenses to be met. Here again the
question of one or two incomes needs to be considered and the effect
the loss of one of those has on the family. While many of the
considerations are similar to those where there is a death, they are not
identical. Due to death there is one person less to provide for. The re
may be other expenses depending on the disability —such as the
installation of aids to help with the disability, wheelchair ramps,
support bars and the like. A family may be able to cope for a limited
period without an income, but could not withstand a long-term
disablement without a dramatic lifestyle change.

• Death

The family suffers in the event of death of either of the partners.

Where there are two incomes, part of the income will be lost. This
creates difficulty, the degree of which depends on the extent to which
the family relies on the deceased income. Where there is a substantial
mortgage and both incomes are needed to service it, the loss of one
income may be critical.

Not only will funds are needed to support the family, but they will also be needed
to service any loans, repay debts, provide for funeral expenses and any

17
 remaining medical costs. Provision needs to be made for support of the surviving
spouse. Where the surviving spouse is able to provide an income, funds will be
needed to provide for the cost of having the children cared for while that income
is being earned. Where an income is not earned, and then funds will be needed
to support both the spouse and the children —the children until they are self-
supporting and the spouse, probably for life. By the time the children are self-
supporting, the spouse would have been out of the workforce for such a length of
time that it might prove difficult for a job to be obtained. Where there are children
and only one income, the loss of deceased persons income will be critical. The
need for family support is not a short-term matter but will continue until such time
as the children are self-supporting.

Family - Over forties (35 –45 year old)

By this stage the children will be approaching the end of their secondary school
years. They could be going on to university, which means they will remain
dependent for a few years longer. Debt would have reduced, unless there has
been an upgrading of the house (through renovation or purchase of a new home).

• Medical

For the same reasons, as mentioned above, the risk of illness,

including critical illness, increases with age —for example, the risks of
cancer, heart attack, head trauma, stroke and the like. There could be
an increase in medical expenses and they could be for ailments that
are expensive. Improvements in medical science have led people to
survive many of these life -threatening events. Those people are then
faced with lost income and unexpected high costs, either not covered
or only partially covered by traditional health and disability insurance
policies.

• Disability

As with death, the risk of illness increases in this age bracket. Again
the importance of planning increases.

• Death

In this age bracket the health risks can start increasing. From this
point on, the risks associated with death increase. While death can
occur at any time and should be planned for, the importance of
planning increases as the risk increases.

Family – Over fifties (45 –55 year old) & Family – Pre -retiree/retiree (55 –65+year
old).

The concerns with regard to increasing risk of premature death and

disablement through serious illness continues to increase in this age
group. The risk of physical impairments (back, hip problems etc.) is
also on the rise.

On the other hand, these people may be better able to handle at least
some of the risks themselves. They may have substantial assets such

18
 as superannuating and other investments in place for retirement, and
only the spouse/partner as dependant.

Business owners

We have limited each of the above segments to personal risk and

how it can impact on both individuals and families from a financial
perspective.

Similarly, business owners and their businesses can find themselves

in financial difficulty in the event of death, disablement or critical
illness of a key person.

Other categories

In addition, two other groups are identified:

• Self-employed/business owner; and

• High-income earner.

Further categories of potential clients can be listed, for middle ages including
Self-employed and High-income earners. All the comments above apply to those
categories as well. The same needs for death, disability and serious illness
covers as existed in the earlier categories also exist here:

• For death: provision needs to be made to meet outstanding debts and provide
for dependants.

• For disablement and serious illness/medical trauma: to replace the lost income
and meet any large expenses that may arise as a result of the disability or
trauma. In Topics on “ascertaining client’s needs” and quantifying insurance
needs” of this unit, the risks and their associated costs will be explored in greater
detail.

It ’s important that the broker and his clients fully appreciate the
potential losses that may be incurred by a person, and hence the need
for appropriate cover. We will make these costs evident as we progress
through the topics of this unit, but here are a few illustrations:

• A person aged 25 is unable to work again due to a sickness or injury. Assuming a

retirement age of 60,and a current salary of Rs.1, 80,000 p.a., the potential loss
just in terms of forgone income is: 35 X Rs. 1,80,000 = Rs.63, 00,000/- (in today
’s terms). In addition, other losses could include lack of retirement funds due to
inability to contribute to superannuation, and so on.

• A person aged 40 dies leaving three dependants —spouse and two young
children. The estimated costs to clear all debts and adequately provide for the
dependants until they are self-supporting (or deceased) is Rs.40, 00,000/.

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Property risk

The ownership of property carries with it risk, since property may be damaged,
destroyed or stolen. There are two distinct types of losses that can occur in relation to
property risks. These are referred to as ‘direct ’ or ‘indirect ’ losses. A direct loss is one in
which the property in question is damaged or stolen; for example, a car crashes, a
building burns down or goods are stolen. Indirect or consequential losses are those that
follow on from that initial loss. If the building burns down, a manufacturer is unable to
produce his product or a shop owner is unable to sell his goods. As a consequence they
suffer a loss of income. In addition, in trying to get back into a position where they are
earning an income, they may be involved in additional expenses. For example, the shop
owner may rent temporary premises to conduct the business. The rental of these
premises may be at a greater rental than was paid previously. Another example of
indirect losses arises where, following a fire in the premises, the refrigeration equipment
is damaged, but not the cool store that the refrigeration equipment serves. As a result,
the goods in the cool store become unusable, as the refrigeration equipment is not
operating.

To summarise, property risks can involve loss from three different areas:

1. Damage to the property itself;

2. Loss of use of the property or loss of income derived from it; and
3. Indirect losses as a result of damage to property.

Liabilities can arise when our actions or inactions result in loss, damage or injury to other
people or their property. There are three broad areas of law under which a liability risk
arises:

• Under statute;
• Under common law; and
• Under contract.

Liability Under Statute

Statute liability arises not only under the Acts of Central or State Governments, but also
under delegated legislation, such as local government council by-laws and regulations.
For example, in the case of product liability, theConsumer Protection Act, 1986 imposes
on manufacturing companies liability in certain circumstances to compensate consumers
for damage or financial loss caused by defects in a company ’s products.

Liability under common law

Liability may also arise under common law. This is the law developed over
centuries by judges of the English Court and subsequently introduced into
countries colonised by England. The concept of liability has since developed
independently in those countries. The law relating to contracts, to torts, and
civil wrongs, is governed primarily by common law.

The law of tort states that persons and organisations have a duty of care towards others
in certain circumstances, and can be held liable for harm or loss caused by failure to
observe an appropriate standard of care. This is known as negligence .For a business;

20
this may involve liability to customers, employees and to the public at large. Typical
examples of the tort of negligence are the careless driving of a motor vehicle and the
careless giving of professional advice.

Liability under contract

Contractual liability arises out of liability under a contract, which is voluntarily assumed
by the parties entering into the agreement. For example, in a contract or the lease of
premises, a tenant may agree to be liable for any damage to the premises caused by
fire. Coming under the same heading are risks arising from failure of others under
contract. If another party agrees to perform a particular service for you, you anticipate
that the performance of that service will be carried out. If, however, that other party fails
to perform that service or only partially performs it, this may result in a financial loss for
you. For example, let us say you arrange for a contractor to erect a building. Three
quarters of the way through the contract, the contractor goes into liquidation. You are
faced with the additional expense of having to re-let the remainder of the contract to
complete the building. This additional expense results in a financial loss to the client.

RISK MANAGEMENT TECHNIQUES

The essence of risk management is a systematic approach that contains the

following factors:

1. Awareness of the threats facing the company, family & individual

2. Preparation and planning for events that could occur.
3. Recording of decisions and data on which plans have been developed.
4. Ongoing monitoring of the results of the decisions and subsequent events.

The ultimate objective of risk management is to make this approach an

integral part of the day-to-day activity of all management, so that it becomes
one of their responsibilities and is a factor in judging performance.

There are four main techniques used in the risk management process:
1. Risk identification
2. Risk evaluation
3. Risk control.
4. Risk financing.

These are discussed in the following paragraphs.

Risk identification

Step 1:Identify risks

The purpose of doing this is that, each loss occurring events can be considered and a
means of providing for the consequences of the risk, should a loss occur, is put in place.
With this step in the process, the objective is to identify as many of the potential risks as
possible. Those that are not identified will emerge when (and if) a loss occurs. This
could be disastrous, as provision for the consequences will not have been made

21
The risks that are to be identified are pure risks that have a financial cost to them. If the
cost for providing for the loss is large, then it may be beyond the person ’s means to
meet the loss.

The different types of risk were separated into several categories:

• Personal;
• Property; and
• Liability.

For the purpose of this discussion, we will focus on the exposures presented by family –
youngster, Husband and Wife & business. In identifying these, the headings used to
Classify pure risk will be used and they will be considered at their different life stages.

For single Personal

The purpose of this exercise is to analyse the risks that exist and what the effects are, if
any, of those risks. In relation to ‘Personal ’, the exposures that exist are:

• Medical, which will result from death or disability.

• Disability; and
• Death;

Medical

While illnesses can arise, in this age group their occurrence is not frequent. The
exposures here would relate to the matters discussed under death and disability below.
The principal needs under this heading would relate to accidents. His cricket would
present a greater exposure. A serious injury here could result in a sustained time off
work and possible loss of income. Wife’s illness while mountaineering and the
associated medical expenses show how costs can arise. When considering costs, you
are invariably dealing with a situation where not only are the costs not known, but the
ability of the facilities available to handle different situations is also often unknown. If, for
example, a heart problem arises and the facilities at the place cannot provide the
necessary treatment, it may be necessary for an air ambulance to fly the patient to a
destination where there are such facilities. The costs involved can be very high.

Disability

This would result in loss of income and consequent inability to support themselves. As
he appear to be living at home at present, this would not appear to present a major
problem. If the incapacity were to last for a lengthy period of time, or was accompanied
by a permanent disablement that necessitated special assistance, this may well present
a continuing financial burden on the family. If the incapacity arises from a workplace
disability or motor accident, then some compensation may be forthcoming from workers ’
compensation or compulsory third party schemes.

22
Death

At this stage the youngster appears to be living at home. Any expense would seem to be
confined to funeral costs, final medical expenses and the repayment of any debts (credit
cards for example).

Property

When the youngster was transferred to Chennai, he acquired furniture for his/her leased
flat. Little in the way of property would have been accumulated at this stage. Personal
articles would be the main item. Damage to these, needs to be considered. It is not
mentioned, but a car purchase would not be unusual. Each of these items could sustain
damage.

Liability

Exposures in this stage would be limited. Liability arising out of the use of a motor
vehicle, if there were one, would be the most significant.

For married Personal:

The exposures mentioned in the ‘When single ’ section is applicable. In this section,
additional exposures are covered. The titles remain the same.

Medical

The important difference is that there are maximum people who need to be covered
under this heading. Illness in children is common, so there is a need to ensure access to
the treatment when needed (and by access we mean not only the availability of
treatment, but also the capacity to meet the costs of such treatment). In later years,
there will be a need so far as Husband and Wife are concerned. Once again, the need is
to ensure that access to treatment is available.

Disability

In the earlier paragraphs, the dependency in the event of the death of Husband or Wife
was considered. Thos e same needs would exist in the event of a disability, except that
the disabled income provider is still living and also needs to be provided for. The
provision here is for the future needs of the whole family.

Death

The child after marriage has incurred a substantial debt in the form of a housing loan.
Their income is being used to reduce the debt. The loss of an income would interfere
with the ability to service the debt and may even make it impossible. As the children are
born, the incomes reduce further as the dependencies increase. Not only is there a need
for wife to be provided for, but also the children. This provision needs to be for the
duration of the dependency. A young child would be dependent until at least their late
teens, when secondary school would be finished, but the child may very well go on to

23
university and thus continue to be dependent for several more years. Once the children
cease to be dependent, the need for the provision for future dependency will reduce.

Discussion has been related to the death of the income earner. If un-earning spouse
were to die, earning spouse would still need to work to provide an income for the family.
The children would need to be cared for while spouse is working. Provision needs to be
made for this expense.

Property

A house is now added to the couple’s assets by way of purchase of construction. In due
course of time, furnishings and personal effects will be added to this. Other assets such
as motorcars may be added over time, and possibly even an additional house in a hill
station. Any of these assets/belongings may suffer loss or damage.

Liability

Liability can arise out of the ownership or occupation of a house. So the introduction of
new assets may bring with it, increased liabilities. Cars and holiday homes increase the
chance of liabilities arising. Liability can arise even if the house is not owned but rented.
A carelessly left hose tripped over by a visitor resulting in injury could leave you liable for
injury or damage.

Business

While this unit is primarily concerned with personal insurance, you should be aware of
the various business risks that exist so that you can direct clients to appropriate
professional expertise when needed.
The risks that exist are:
• Death of the owner (partner);
• Disability of the owner;
• Death or disability of other key people in the business (that is, people with
crucial skills or positions that cannot be easily replaced);
• Damage to property; and
• Various liabilities.

Death

In the early stages of setting up a business, capital receipts need to be invested and
contacts established and nurtured to ensure a constant revenue stream. Husband’s
growing business also needs to be considered since in the event of Husband ’s death,
creditors will still require the repayment of any debt the business has incurred.
Consequently, debts could be significant.

24
Disability

The future of the business could be placed in jeopardy in the event of Husband ’s
disablement, if the business is no longer able to generate activity due to disablement,
valuable clientele will be lost as they go elsewhere for business. In addition, any ongoing
expenses will still need to be met.

Death/disability of key people

Loss through death or disability of a key man -his partner, or a senior accountant may
threaten the survival of the business. The replacement and training of new personnel
may take time and put constrain on the business; for example, because of the need to
redeploy people or otherwise direct important staff to training and mentoring.

Property

The premises and office infrastructure involves a significant investment, and loss due to
fire, theft etc., could be devastating without appropriate insurance. Loss or damage to
the premises will mean temporary relocation to another building, with consequent rental
and relocation costs or cessation of activities.

Liability

There are a number of liabilities that the firm of faces because of its activities:
professional liability associated with the services it provides to its clients; liability to its
employees through workers ’ compensation claims; possible liability to those that enter
their premises (as a result of owning/occupying the property); and liabilities in
association with any business debts and loans.

Risk evaluation

Evalu ation of risks:

Risk evaluation involves two elements:

• The probabilities of loss-producing events occurring; and
• The potential losses.

A major problem for the individual is that even if he knows the probabilities
of any of the risks to which he (or members of his family) are exposed, such
knowledge is of severely limited value when it comes to planning how to
handle the risks. In effect, probabilities are mean values conveying useful
information when the decision taker controls a large number of exposure
units, but the smaller the number of units the larger will be the variation in
outcomes from that expected on the basis of probability.

For example, a mortality rate expresses the probability of a person of a given

age dying before his next birthday: if an insurance company insures 100,000
individuals all aged y years for which the mortality rate is 0.006, then there
is only a 1% chance that during the year fewer than 527 or more than 673 of

25
its policyholders will die. However, although there is a g ood chance that an
individual policyholder will survive, he may be one of the unlucky ones who
would not be alive twelve months hence. For the individual, risks are more
in the nature of unique events.

The same problem arises when considering the sizes of potential losses.
Apart from death, if a loss –producing event does occur usually the outcome
will be a partial loss – for example, damage to a car, house or other
property, rather than total loss. But total losses do happen and must be
planned for, even if their probabilities are small. Therefore, a part of a risk
evaluation exercise must be to itemise and value assets exposed to loss, and
the size of potential income and liability losses, allowing for the potential
impact of inflation on future income and replacement costs of assets.

Identification of risk this is inherently difficult owing to the uncertainties that

exist about the future. It is usual to separate 'pure' risk into property,
earnings and liability threats. Using available information sources, physical
inspections and verification by interview and discussion, it should be possible
to work with management and others to produce a list of the assets and
earnings that are at risk in the company.

Property risk can be relatively easily identified by inspection and records

analysis but needs to include non-physical factors such as goodwill. Earnings
exposures can be isolated by the use of flow-charts which indicate the key
areas at risk, bottlenecks, loss of market possibilities and opportunities for
easing loss situations by system improvement or proper contingency
planning.

Fire Explosion Flood Riot Theft Malicious Etc

Damage
Building
Machinery
Raw Metal
Stock
Packaging
Motor Car
Money
Good will
Documents

Fig: Property risk identification chart

Liability can best be identified by careful analysis of the activities of the

company and consideration of the possible consequences, including a
breakdown of the threats to which the company is exposed, how the threats
arise and how they are increased or reduced.

Identification process is often recorded on charts. Examples of charts, which

can be used for property earnings and liability work, are shown in chart
below

26
 Earning exposure Circumstances Alternate Plans
etc
Local Supply
Design
Forming
Packaging
Storage
Key Customer
Etc
Fig: Earning exposure chart

Bottling Filling Delivery Shops

Nature of
exposure
Circumstances
Other Prop
Exposed
Other People
exposed
Loss control
measure
Fig: Liability exposure chart

Measurement of risk

For property and earnings exposure, risk measurement is fairly easy. There
is access to historical loss data in relation to the company, its industry and
the country of operation. This information needs to be used as a guide to
which changing factors, such as inflation, change in structure of the business,
alterations to the spread of risk and so on, are built in. It is also important to
consider the exposure change that may occur on a day-to-day or hour-by-
hour basis.

Property measurement will take account of the total value of risk adding to
the likely cost of rebuilding and additional expenses. The total exposure will
be reduced by the effectiveness of factors that will limit risk such as
separation of buildings and fire protection. However, in evaluating a
maximum foreseeable loss figure it should be assumed that the worst will
happen and that the protection hardware will not function. An example of
recording measurement data for property loss is shown in Fig below
Risk Circumstances Values exposed Limiting factors Aggravating
factors
Fire Accidental All of main Inception Difficult to
Electrical building enforce rule 100%
Process Electrical
Smoking installation All fire walls have
modern & self-closing doors
Checked which might jam
Process flames or be wedged
enclosed open

No smoking Fire brigade strike

Spread Annual shut-down

for 3 weeks

27
 Fire walls
between blocks
(primary
processing is
biggest value
cost)

Sprinkler system
Works fire
brigade
Local fire brigade
at 2 minutes call
time
24 hours working

Deliberate As above As above Sprinkler system:

(1) could be
Security guard disabled;
(2) Designed to
deal with single
ignition source.
False alarm could
increase
attendance time 7
minutes
Fig: Sample chart for recording risk measurement data

Earnings can be measured by utilising the flow-charts developed in the

identification process and applying values at risk in particular bottleneck
situations. If machinery is involved, replacement time, availability of spare
parts and capability to manufacture in-house are some of the factors that
need consideration. Such studies can involve analysis of the company's
reliance on key suppliers or customers whose own loss could seriously affect
the company's earnings.

The increasing cost of liability awards, the impact of consumerism and

changes in legal attitudes make liability measurement extremely hard. The
potential in many products liability cases can be astronomic and the effect of
pollution on major cities beyond comprehension. It is necessary for
management in these situations to recognise that the potential at risk is the
total assets of the company and that the only practical solution is to buy as
much liability insurance as can be afforded while introducing liability loss
control measures.

Risk control
Risk control has often been regarded as synonymous with risk management,
but it is in fact one of the techniques used as part of the overall process.
Work on risk evaluation enables a company to assess the circumstances that
are involved in risk situations and determine the control needed. As an
example a fire requires a source of ignition, flammable materials and a
source of oxygen if it is to grow without containment.
A company can help to control the fire situation by a pre-loss action, which
would very often involve separation of the fire risk and control of the ignition
sources by limiting the availability of flammable materials and oxygen. The

28
control activity can be continued during the loss by use of fire protection
devices such as sprinklers and fire extinguishers.

In the post-loss situation measures can be available to salvage materials,

stock and property, which have been subject to fire, and any contingency
plan can also be implemented.

The process of control involves the analysis of the loss potential, the
implementation of prevention methods and, very importantly, training and
motivation of staff to ensure. That in the event of an incident action is taken
to limit its spread.

It is important to recognise that decisions affecting the introduction of loss

control are trade-off decisions. The intention is to spend a specific amount of
money now to reap benefits later. Therefore the benefits that can be
expected from loss control action need to be calculated both in terms of
reducing the probability and the size of loss and by asking what it is worth to
the company to reduce the expected possibility of loss when viewed against
the cost of the risk control measures that have been recommended.
Risk control work will often involve a risk factor analysis which is similar to
the work carried out in the evaluation process but is a extended to consider
methods of risk control, including changes in design, introduction of protection
systems, and training, ~ motivation and monitoring systems for employees and
outside people. A specimen chart is given in Fig below.

RISK FACTOR ANALYSIS SITE:

DATE:
Activity Equipment Operations Hazards Comments
involved involved

Prepared: Checked:
Fig: Sample chart for risk factor analysis

The use of loss experience is also valuable as an aid to loss control: it can
enable the company to analyse losses to discover' multiple factors that could
have made such losses more serious and help it to develop means of
controlling loss in an economic way.
In assessing the cost of losses and the cost of loss control: measures the
estimate for. The fo rmer can very easily be under- '0 estimated. The main
factors in the property loss can include not' only the replacement and repair
of the property but also any earnings lost by the non-availability of the item
of property, the loss of management and other time both when the loss
occurs and in subsequent investigation, reporting and replacement, and; the
loss of sales through non-availability of equipment.

29
Where one is involved in a major loss the delay factors can be excessive due
not only to rebuilding time but also to changes in the social and political
scene that may involve the company in complying with new regulations and
standards, which did not exist when the property was originally built.

In trying to calculate the cost of losses one needs to lo ok at these direct and
indirect factors, estimate the future cost and then calculate the cost of each
loss control measure that is being considered. By balancing these costs
against the estimated future benefits in the form of losses avoided and losses
reduced, the company can begin to come to conclusions on whether the
measures are economic and will therefore give it a good economic pay-off in
both the short and the long term.

Risk financing and insurance

The last process in the risk management activity is the financing of the
residual risks that have not been dealt with by risk control measures.
Although one can do a certain amount to eliminate uncertainty it is not
possible to eliminate loss and the company therefore needs to be able to
cope with the financial consequences.
Advantages Of insurance in handling risks:

Although insurance is only one of the techniques available for dealing with
the pure risks that the individual of the firm faces, many of the risk
management decisions boil down to a choice between insurance and non-
insurance. The following benefits flow out of the mechanism of insurance:
Reduction of Uncertainty: Before purchasing insurance, the potential insured
bears the risk associated with possible losses. As a result, the perso n is
uncertain about the outcome. The insurance transfers financial
consequences of loss to the insurer, who then becomes responsible for
compensating the insured for the loss and providing other loss related
services according to the provisions of the insurance contract. This is
expected to reduce the insured’s anxiety and uncertainty.

Loss Control: After insuring the various risks of the organisations, insurance
companies take interest in controlling the losses by providing loss reduction
education and advices by trained experts, which result in lesser losses even
in cases where losses have occurred. The organisations would have had to
spend heavily for getting such loss control and loss minimisation expertise if
they were not to go in for insurance.
Indemnification: The direct advantage of insurance is indemnification for
unexpected losses. Organisations / Individuals suffering loss are restored or
at least brought closer to their former economic position. The advantages to
the organisations / individuals having the insurance protection, as well as the
benefits to the society by this are obvious.
Funds for investment: Insurance premiums are normally payable in advance
and held by the insurer till the time of payment of claims. This enables the
insurers to invest these funds, which is always sizable, and earns attractive
returns on the investments made. The returns on the investments go on to
reduce the premium required to be paid for the contract. Though the
individual insured can also earn returns on their premium amounts, had they
not purchased insurance, the investment expertise available with the
insurers, the opportunities for investing available to the insurers and the size
of the investible funds that the insurer have will make the re turns earned by

30
the insurer much more attractive than what individuals can think of. Also,
since the Government governs the way the insurers invest the funds, most of
the accumulated funds are invested in the development of infrastructure of
the nation and also the development of capital markets, which is beneficial to
the society as a whole.

Disadvantages:
Although the advantages of purchasing insurance as a tool in management of
risks are numerous, insurance has a few disadvantages also:
Operating Expenses: The Insured pays more than what is his share in the
losses that the group is likely to experience because of the expenses listed
below. Insurers incur expenses in loss control measures, in acquisition of
insurance business, claim settlement activities, in risk inspections and rating
activities, and other general administrative works. These expenses and a
reasonable amount of profit for the insurer must be charged to the premium
payable by the insured. Thus the premium paid by the insured is more than
expected value of losses.
Moral Hazard : Insurance coverage reduces the insured’s incentives to
prevent loss or to contain the amount of damage due to the loss when it
occurs. In certain cases, there can be intentional damages created by the
insured themselves, such as arson or staging accidents or hospitalisation
when not required etc. In some other cases, there can be attempts to
overstate the damage due to the loss in order to get higher compensations
than what would have been allowed. Thus moral hazard increases the
amount of losses experienced by the group in relation to what would have
been in the absence of insurance arrangement. This also gets provided for in
the insurance premium calculations, which the insured will have been, pay.

Overall, the advantages that the insurance mechanism provides are much
more than the effects of the disadvantages discussed above, in most of the
cases.
Financial methods available involve meeting losses out of normal budget
operations, the creation of special funds to pay for losses as they occur, the
use of insurance, and the use of credit and government grant. In determining
the methods of particular situations the overall cost needs to be calculated,
taking full account of the time value of the money that is involved.

Risk transfer

The most common form of risk transfer is insurance. By payment of a

premium, the financial consequences of the risk are effectively transferred to
another party, the insurer. A less common form of risk transfer is through contract;
for example if you lease a property, you may contractually transfer the risk of fire
insurance to the lessee.
In considering the insurance methods the options generally open to the
company involve the direct regular market, the reinsurance market and the
establishment of an insurance company, often called a 'captive'. The risk-
financing objectives to be able to meet after-loss expenses by replacing
assets lost, replacing earnings that would have otherwise been achieved and
paying for any additional special expenses.

Risk Financing

31
 Here one is concerned with the manner in which those risks that remain
after the risk control measures have been implemented, shall be financed.
It has to be recognized that in the long run an individual, organization will
have to pay for its own losses. Therefore the primary objective of risk
financing is to spread more evenly over time, the cost of risks in order to
reduce the financial strain and possible insolvency, which the random
occurrence of large losses may cause. The secondary objective is to
minimize risks costs.

Essentially an organization can finance its risk costs in the following ways:

• Payment out of current expenses

• Through a funded or unfunded reserve
• By debt or equity financing
• By pre or p ost-loss credit
• By forming a captive, a trust, by pooling, or through a spread-loss plan.

The probability and severity of possible losses play an important part in the
structuring of a risk-financing programme. It is axiomatic that in practice
high probability of loss generally goes hand in hand with relatively low
severity, and vice versa. If it were otherwise, exposure to a high probability
of catastrophic losses would place any individual/enterprise in an untenable
position. For example, if one stays in an area which has a high exposure to
floods and every year at least one flood has to occur, then the probability of
occurrence of a flood loss and its severity both are very high and the person
should immediately abandon that place.
In developing a risk financing and particularly a self-insurance strategy it is
important for the company to decide how much loss. It can afford to retain
within its own operations. It is useful to approach this problem by firstly
calculating the total amount of losses that are not insured and retained
within the company and then applying the company's risk-taking approach to
the potential amount of risk. For a normal company which is neither
conservative nor a risk-taker a starting-point could be 1 per cent that it
enables the insurance buyer to gain access to the reinsurance market, which
operates more economically than the direct insurance market because of its
lower overheads and organisational structure. In addition, in any
environment where the direct insurance industry is unwilling to give enough
credit to the insurance buyer with a good record in the form of either reduced
premiums or good discounts for deductibles or excesses, the captive provides
a mechanism where these benefits can be achieved.

32
 Fig.3: The interrelationship of Risk analysis, Risk control and Risk financing

Is there a risk?

No Yes Has it been measured?

Yes No

Is it significant? Analyse
No Risk
Yes
Can it be avoided or
Dis regard eliminated?

Avoid/eliminate Yes No

Can it be reduced?

No Yes

Is residual risk significant?

No Is it a catastrophe risk? Yes

No

Can it be retained?
Yes
Disregard

Yes No

Transfer
Ignore

Insure Other

33
Risk retention

Where the cost of the potential loss is large, retention would not be a good
alternative, as the individual would not have the resources available should a
loss occur. Here, the cost of the risk is borne by the individuals themselves.
Where retention can be effectively put to use, is for small amounts that have
the effect of reducing the insurance premium. For example, on a motor policy
the premium may be Rs.6, 000/- for a policy with Rs.1000/ excess. If that
excess were increased to Rs.2500/- then the premium may reduce to
Rs.5000/. Assuming Rs.2500 is within the means of the person, then the
point to consider is that by agreeing to bear an extra Rs.1500 in the event of
an accident, the person can save Rs.1, 000 each year. If the person does not
have accidents very often, then this may be an attractive proposition.

It should be explained to clients that the decision to retain risk ought to be

on the basis of being able to afford the financial consequences of the related
event occurring, and not on the basis of being unable to afford suitable
cover. Unfortunately, many people are caught out by retaining risk, and
either they and/or their families suffer financial loss and hardship. As the
adviser, your role is to assist clients sort out their insurance priorities and the
types and levels of cover they can afford. It is important that the client fully
understands the consequences of failing to implement an appropriate
insurance program and that risks ignored are not risks that have gone away!
The notion of affordability needs to be considered in the context of life values
and the sacrifice that the client is willing to make in order to protect their
particular situation.

What risk costs have you retained? Have you cost the consequences of
retention? (This unit may very well serve as a review of your own personal,
insurance situation, as well as prepare you for your role as a professional
adviser. You might consider using a notebook to record questions, issues,
and possible ‘things to do ’ with regard to your own personal or family
insurance situation.

THE ROLE OF THE INSURANCE BROKERIN RISK MANAGEMENT

As risk management has developed, the insurance-broking industry has

recognised that additional technical services are needed by its clients as well
as more innovative solutions to insurance buying. Brokers have responded to
this need by the establishment of risk control departments specialising in
technical engineering skills, the establishment of management companies
that can look after the captive insurance companies of their major clients,
and the transition from the conventional commission- earning basis to a fee
basis which reflects much more accurately the work and professional advice
supplied by the broker rather than relating directly to the amount of
insurance that is being sold.

The insurance buyer in looking for the broker that can help him with his risk
management will require one who is prepared to spend a considerable

34
amount of time becoming familiar with the client's operations and risk
exposures, who can help to plan a programme for handling such exposures
including the buying of insurance, and w ho can offer advice on the creation
of risk retention levels and the implementation of loss-prevention schemes.
The broker's general role in this context is therefore to ensure that the
client's risk exposures are properly handled, and in the financial area this
means by insurance and non-insurance measures. In addition the broker
should, through his skilful negotiating, volume of profitable account and
innovation, pro- duce more effective insurance buying programmes and, last
but by no means least, help the client to reduce losses.

Monitor the strategy

Monitoring is the final step, but it is the one that keeps the whole process going. Once a
program is put into place to protect the client, you have merely reached the start.
Individuals, families, clients are dynamic —their circumstances are continually changing.
Any program should be robust, so that it is effective in a range of circumstances.
Inevitably some changes will occur that the program cannot deal with, and the program
needs to be changed. This is the process of monitoring and review, and is covered in
detail in Topic on “Reviewing the Insurance Situation”.

The overall objective is therefore to improve the clients/company's financial

performance by helping to reduce expenditure and avoid potential loss
situations.

35
Life Insurance underwriting
Need for selection
Methods of Selection
Factors of Insurability
Numerical rating method
Standard Life and Extra Mortality
Extra Mortality rating
Methods of rating sub-standard risks
Extra Premium
Lien
Decline
Postpone
Medico actuarial investigations

The underwriting of life and critical illness insurance

This section deals with the process of underwriting, including the relevance of
both personal and family history, financial evid ence, smoking and alcohol.
The intention here is not to train brokers as underwriters, but to give them
an insight into the underwriting process. By providing them with an
understanding of how the underwriter goes about his/her job, they will be in
a better position to understand and appreciate the need for the underwriting
process and the requirements necessary to fairly assess the risk.

The basics of underwriting

The insurance industry aims to provide insurance at standard premium rates

to as wide a cross -section of the community as possible. To be able to do so,
each insurer seeks information about the present state of health, the medical
history, pastime activities and occupation of the customer, using this
information; the insurer assesses the risk and decides the terms of
acceptance it will offer to the customer.

Insurance companies generally try to offer standard rates of premium to as

many people as possible. Non-standard assessments are few and far
between for life and critical illness insurance. In determining whether a
loading should be applied the underwriter uses a number of risk assessment
tools including ‘the reinsurance manual’ which is a summary of medical
conditions and their recommended mortality and morbidity extras.

The vast majority of customers (95 per cent wanting life insurance and 90
per cent wanting critical illness insurance) are offered standard premium
rates. A small minority is accepted with a loading or exclusion. In a few
cases (less than 2 per cent), an insurer will decline the risk outright or defer
it to a later point in time. For example, when surgery is pending the risk may
be deferred until surgery has been successfully performed and a full recovery
made.

36
If there were no underwriting process, most people would leave the purchase
of life insurance until the last minute then seek high levels of cover. The
basis for the underwriting of life, critical illness and disability insurance is
statistical information relating to mortality and morbidity experienced
amongst different categories and age groups of people.

The underwriting process aims to protect the insurer by reducing the anti-
selection factor. Accordingly, the underwriter attempts to identify persons
who are suffering from or who may suffer a life-o r-health-threatening
medical condition or engage in a dangerous occupation or activity. The life
insurance industry could not operate viably in those circumstances.

The underwriter will consider the application from a number of perspectives

in relation to the type of cover being sought:

Firstly, whether the sum proposed is consistent with the current needs and
circumstances of the applicant? Consideration of the amount of cover sought
underlines one aspect of the underwriter’s job —financial underwriting.

Secondly, The degree of risk to the insurer will usually depend on the age of
the client and the nature of the medical condition(s)—medical underwriting.
Does the applicant’s medical history present any degree of risk?

Thirdly, what level of risk does the particula r type of occupation present to
the insurer? This is referred to as occupational underwriting.

Finally, while certain pastimes will be accepted without any restrictions on

the policy, other activities may either attract a premium loading or
alternatively an exclusion of the activity. For example, recreational flying of a
light aircraft (of more than 100 hours annually) will attract a small premium
loading. This is known as pastimes underwriting. Are there particular risks
associated with the pastimes and p ursuits of the applicant?

These different facets of underwriting relate in various ways to not only life
and critical illness insurance, but to other aspects of personal insurance. For
example, occupational underwriting especially relates to TPD and income
protection insurance; medical underwriting to all forms of personal insurance.

LIFE INSURANCE POLICY SELECTION

In all contingent events money is required to meet cost of living and

maintain current standard of living. For securing present and future a t a very
small cost and enjoying life, life insurance must have first claim on savings.
Life insurance provides complete, balanced and perfect hedge against the
economic threat, which confronts everybody, i.e. premature death, disability
and living too lo ng. Therefore selection of policy is a very important task.

37
 • Factors influencing selection of life insurance policy

Choice of life insurance policy differs from person to person which depends
on age and needs of the person i.e. it also depends upon life cycle stages,
attitudes, expectations and financial well being of an individual. Broadly
choice of life insurance can be made according to a) stages of life cycle
stages and b) income earners in the family viz. one income family, two
income families. In the families where there are two income earners, money
is certainly more plentiful. -Interest and yields of typical savings and
investments are much higher. -Family income is much higher. In such
cases if income stops due to disability or death it will be difficult for
dependants to maintain their standard of living.

In tune with changing insurance needs Insurers have devised innovative new
products and today it boasts of basket of plans.

1. Security for family

Security for Couple
Joint Life Policy

Security for the family in case of requirement of lump sum at periodical

intervals
Endowment
Money Back

Security for family in case of death – risk cover

Term Assurance Plan
Whole life plan
Convertible whole life

2. Security for Children

Children Deferred Assurance Contracts
Educational annuity

3 Security for self and family after active working life

Immediate Annuity
Immediate annuity single premium
Deferred Annuity
Deferred Annuity Single premium
Joint life annuity with last survivor benefit

4 For Special Needs

Limited Payment Endowment Plan (Limited income)
Mortgage Redemption Plan / Term Assurance Plan (for housing loans)
Endowment plan for irregular and low-income group
Key Man Insurance
Health Insurance
Endowment plan for Handicapped d ependents

38
Making a wise life insurance purchase decision is not easy. Firstly one has to
decide whether any life insurance is needed? This of course depends upon
the subjective probabilities of death in the minds of individuals. If yes, then
the amount m ust be decided.

This decision has become very important question after the liberalisation of
insurance sector, as to what kind of insurance to buy and from whom?
Careful shopping leads to sound decisions regarding type and amount of life
insurance to buy and from whom. Before purchasing a policy one should
assess as to how much to invest for life insurance as well as cost of life
insurance. Sometime an individual may find it difficult to estimate the cost
of insurance but one should purchase a life po licy that is reasonably priced in
relation to the other life products available in the market from other insures.
Often little awareness of detailed information about the available products
can result in sizeable savings over the years.

How an individual makes a choice of policy.

Life insurance policies are generally designed to meet a variety of needs.

Some life insurance policies are designed to give pure protection while other
life insurance policies are designed to serve primarily as investments. Some
life insurance policies also cater to special needs in the life cycle. Therefore
choice of life insurance plan by an individual depends on a number of factors.
Important among these are the following:

• Basic needs - Needs in terms of the extent and the period of time over
which the protection is required.
• Special needs - Special needs are generally depending upon status and
occupation of an individual. In some occupations mortality risk or risk
of disability is more
• Premium of Life Policy - Affordability of premium outgo in relation to
disposable income on an individual. E.g. an industrial worker who
earns Rs. 5000/- per month and his family consists of wife and two
children. He definitely needs insurance cover but after deduction for
compulsory savings like Provident fund, etc. he gets net salary around
Rs. 4000/- After deducting household expenses (Rs. 2500/-) and
emergency expenses (like medical expenses, educational expenses Rs.
1000/-) the disposable income in his hands is very small i.e., Rs.500/-.
From this he wishes to purchase a life policy the sum assured for which
he can insured himself is very small than his insurable value and in
case of any other emergency occurs he may not be able to pay further
premiums also.
• Proceeds on Life Insurance Plans: In case of early death of life assured
life insurance policies give high rate of return but in case of maturity
they give more or less same returns as that of savings deposits.
• Tax benefits of Life Policies: Life insurance premiums paid by life
assured are eligible for tax rebate under Income Tax act.
• Risk Bearing capacity and wealth of individual:

39
E.g. consider a one income family case.

Family data
A man - age 35, good health, employed as sales executive for BPL a growing
company. He has taken housing loan of Rs. 1,40,000. His wife: Age 32,
good health, and housewife. They have two children, son age 9 and
daughter age 4 both are healthy.

Needs:
In this case the primary consideration of this sole earner is financial security
of his family. After marriage one assumes the additional responsibility for
providing one’s spouse a comfortable life throughout her lifetime. One has to
ensure a perennial income for one’s wife keeping in mind that one may die
before she does. At this stage one’s income too would have increased as
compared to when one started earning so this is the time to purchase a
sizeable policy.

An Endowment policy is suitable but if premiums are not affordable then the
Term assurance plan or a convertible whole life policy are fitting very well. If
resources permitting one can go for Money back plan which will also fulfill the
insurance needs as well as pay back periodical lump sums during the term of
policy which may be used for children’s education expenses.

In case one lives to a normal age these policies will yield a substantial
amount of money for old age.

Since he has taken housing loan amounting to Rs. 1,40,000/- he must go for
Mortgage redemption policy or pure term assurance plan covering his full
liability towards housing loan.

Second consideration for this family head is his financial responsibility

towards his children viz. their living during dependency period and their
education. His son aged 9 therefore his dependency period is 9 years and
daughter 4 years old has yet to start her schooling and her dependency
period is approximately 14 years.

Endowment policy for a sizeable amount is the best fit upon the birth of each
child. This will serve two purposes first in the event of death of the father
each child will have a maintenance income out of the proceeds of the policy.
On the other hand the money, which becomes available upon the maturity of
the policy after it’s full term can be utilized for child’s higher education or
marriage.

Generally by the time one has two children one’s age would be about 32 to
35 years. His second choice will be educational annuity for children. In the
event of his death, Life Insurance Company will pay his child annuity as soon
as he/she completes the specified age under the contract. This annuity will

40
help the child to pay his fees or educational expenses. At this stage one
would also have been working for more than 10 years and one’s income
should also have grown substantially compared to when one started earning.
Therefore one should consider buying one more policy to be used as a
contingency clean up fund in case of premature death for meeting hospital
bills, outstanding taxes, etc. should such expenses arise, these could then be
easily met from the proceeds of this policy without the family having to touch
the money available from the others. In order to keep premium low this
could be a long term policy maturing at sixty. In case one has a normal full
life the money from the maturity of this policy c an be used in one’s old age.
He can also consider purchasing a Joint life deferred annuity plan, which will
pay annuity till the death of surviving spouse.

1. Cost comparison:

There exists great variation in the policy costs. Many of us always confuse
between premium and cost. The premium is annual outlay for the policy and
not its cost. Cost includes all elements i.e. premium, death benefits, bonuses
for with profit policies, other benefits, etc. and not just premiums. These
variations are due to company’s Management expenses, marketing
overheads i.e. agency commission costs, underwriting policies or investment
performance or profit margins or such other factors.

There are various methods available to compare costs. The objective of any
method is to guide a prospect to a competitively priced policy. Actually the
cost of life insurance to any person is dependent on that particular
individual’s typical circumstances and the actual cash flows experienced
under the policy. This can be determined o nly after the contract has been
terminated by death, maturity or surrender and then only in terms of the
time value of money to the individual. Even so attempts to estimate costs
prospectively are useful and desirable.

None of the methods of comparing life insurance costs take into

consideration all possible factors that a consumer should consider in the
purchase decision. It is solely dependent on the product features that
consumer wants to buy.

2. Return on Savings Element:

Life insurance is contingent financial product. It pays the benefits only when
the contingency occurs. Contingency may be premature death or disability
or living too long. In case of Term assurance plan, the benefit is payable if
the death occurs during the specified period and n othing will be payable after
the term of the policy is over i.e. the return on Term assurance at maturity is
–100%. Now consider, Endowment Assurance Plan. In endowment the
benefits are payable in the event of death as well as in the event of survival

41
at the maturity. Therefore premium of Endowment consists of the following
factors:

Premium = Risk Premium + Savings premium + expenses

There are two ways in which one can estimate the appropriate risk premium
for the death payment. The first way is as the market price of term
insurance in any specific year and the second is internal rate of return on
survival. Both approaches have been used. To illustrate the point, for
example, two life insurance plans viz. 15 year Endowment Assurance plan
with profits and Pure Term Assurance plan are considered. A man aged 35
has a pure term plan and Endowment Assurance plan. The premium for pure
term plan (P T ) is Rs. 14.00 and that of endowment assurance (PE) is 71.65.
Assuming that the expenses for both the plans are same. P T = Rs. 14.00 is
the risk premium and P E – P T = 57.65 gives us yearly savings portion in the
premium per thousand sum assured.

The equation of value can be written as,

57.65 57.65 57.65 57.65 2005 **
− 57.65 − − − − ..... − + =0
(1 + r ) (1 + r )2 (1 + r )3 (1 + r )
14
(1 + r )
15

The amount of Rs.2005 is inclusive of a bonus of Rs.1005/- taken from the current
bonus rate (of Rs.67/- per thousand sum assured) declared by the insurer
concerned, viz., L.I.C. of India.

By solving the above equation, we get the value of r (which is the rate of
return on saving element) to be 0.0994452

Therefore the rate of return on savings element is 9.9%.

And the second approach is the average rate of return of an insurance plan
i.e. Return to death + Return to survival. We know that endowment
assurance plan pays in case of death as well as in case of survival at
maturity. Therefore, Internal rate of return on survival is regarded as return
to survival.

3. Practical considerations in taking out life cover

The term life policy and premature death

One area of personal need arises in the event of premature death. In our
country, insurers do not normally allow pure term insurance policies to be
taken by people who are above age 50 at the time of proposing for
insurance. These life policies will meet those needs. With the term life policy,
the premium levels to age 35 are quite low. From age 35 to 50, there is a
rise in the premiums, but after age 50,that rise becomes quite sharp. When
the policy is purchased at an earlier age, normally the companies allow these

42
policies to cover up to age 60. It is up to age 50 where, in a family situation,
there is a greater need to provide for the risk of premature death. For the
over 50s, as one’s children have ceased to be dependent or are close to
being self-supporting, the amount of needed cover reduces. F urthermore, at
this age, there may well be significant retirement savings in the form of
superannuation and other investments that can provide for any dependants
(such as spouse or partner) upon their death. However, generalisations can
be misleading. Families do not always cease to be dependent when parents
reach the age of 50. In some cases families are started later — the wife
builds a career first, or a new family starts in a second marriage, for
example. The term life policy will still be available to provide the necessary
cover in those situations.

Whole of life and endowment policies

With respect to whole of life and endowment insurance policies, they are
strictly long-term policies, and brokers would need to carefully consider other
death protectio n and savings options before recommending these products.

However, you may find clients with these policies already in place, and the
issue arises as to whether these policies would be better cashed in and the
funds invested elsewhere, and / or used to purchase cheaper term life
insurance. Any recommendations to cash in such policies must consider a
number of factors:

• The increase in cash value if the policy was maintained;

• The after-tax returns that would be expected from the sum if invested;
and
• The relative cost of the whole of life premium to the term premium for
a similar amount of cover (if that is to be more or less maintained).

In addition, the capacity to borrow against the policy could be a

consideration.

For the high-income taxpayer who has had a whole of life policy for some
considerable years, the effective cost of maintaining the policy is minimal, as
the following example shows. (Note: the figures are arbitrary and for
illustrative purposes only.)

Example

A client purchased a whole of life policy providing Rs.100, 000 cover some 10
years ago, with an annual premium of Rs.1800.

Assume a cash value of Rs.20 000,and an after-tax return of 6 per cent if

that money was invested.

43
If the policy is kept

Interest foregone: 6 per cent of Rs.20 000 Rs.1200

Next premium due Rs.1800
Rs.3000
Less increase in cash value over the coming year Rs.2900
Net cost: Rs. 100

If the policy is cashed (and term life insurance for the balance —i.e. sum
insured under the whole of life, plus bonuses, minus cashed in value —is
taken out)
Interest gained Rs.1200
Premium (first year) Rs. 300
Increase in cash value foregone Rs.2900
Net cost: Rs.2000

Note: Though it may sometimes look attractive to surrender an existing

endowment policy and purchase a cheaper term insurance cover, the
regulations governing agents’ code of conduct strictly prohibit agents from
encouraging policyholders to surrender an existing policy and taking new
policies within 3 years of such surrender.

Death of the business owner

If the business owner is a partner in a partnership firm, each partner can

insure the life of self or that of the other partners if the partner’s death is
likely to place a financial strain on the business. Such contracts are called
“Joint life policies”. In this context, term life insurance policies may be
taken by limited companies on the lives of its employees who contribute to
the profitability of the company considerably. In case of their sudden death,
the company will be put to a financial strain to find a replacement for such a
person, if at all readily available, or train some one else to take over his
position. The company may lose profits in the meantime and also spend
heavily in finding / training a replacement person. This kind of insurance
contracts is termed as ‘key person’ insurance.

Life insurance and superannuation

A superannuation fund can consist of death cover plus a savings element,

which is the investment accumulation account. There are a number of
advantages in having insurance within superannuation fund, including
benefits of rebates under taxation.

44
Ensuring adequate funds in case of death

Insurance within superannuation can serve to ensure that there are adequate
funds for the member or his or her dependants, particularly when
accumulation benefits are low If membership of a superannuation scheme is
subject to an industrial award, there may be an automatic requirement in the
award that members of different ages should be provided with certain levels
of life cover. These levels of cover are usually purchased at a set price,
which provides perhaps Rs.2, 00,000/- for the younger members, reducing to
nothing by age 60. Without such cover, if a member had only Rs.10, 000/-
in their superannuation account and died, then their family would only
receive the Rs.10,000/-. Adding cover self-evidently increased the
dependants’ payout, but it had the effect of making up for savings that had
yet to accrue. In other words, if the member wanted to provide their family
with Rs.200, 000/- in the event of their death, but only had Rs.10 000
accumulated now, they could add Rs.190,000/- of cover to meet the
shortfall, and as their savings grew; the amount of cover could reduce. Some
superannuation plans are based specifically on that theory, whereby the
cover reduces automatically within a limit, as savings grow.

Physical considerations (health etc)

Due to the ‘pooled ’ nature of insurance through superannuation, the

premiums charged are often independent of a member’s state of health, but
this will usually depend upon the number of members in a fund. As the
number of members in a fund increases, health information requirements
may become less demanding, sometimes depending upon how much cover is
being sought. This relaxed health information requirement works on the basis
of economy of scale —the more members, the greater the ability of the fund
to absorb the risk. For larger funds, a member may only need to be at work
on the date of joining the fund to qualify for membership. With larger funds,
if the actuarially calculated premium pool has a low claims history in a given
year, the superannuation fund may even receive a bonus refund of overpaid
premiums.

Where premiums are independent of health, they may favour the o lder
members of the fund, or those with pre -existing health problems that would
otherwise attract a premium loading on any individual application for cover
through an insurance company. In effect, the young and healthy members
are cross subsidising the older, less-healthy members, and may find it more
cost-effective to seek individual cover through an insurance company.

45
Ownership of policies

In planning for a life policy, the two key questions are, firstly, whose life is to
be insured and, secondly, who is to receive the benefits. An application form
will seek details of:

• The person(s) to be insured;

• The name(s)of the policy owner (person or company)—the owner could
be the life insured or a third party; and
• Those persons to be nominated as beneficiaries upon the death of the
insured (for example, dependants).

The policy owner could be the insured, in which case the benefits flow to the
estate upon the insured ’s death if no beneficiary has been nominated, and
from there distributed to the estate beneficiaries in accordance with the will.
If there are no beneficiaries nominated, the benefits automatically go to the
policy owner. Furthermore, if a nominated beneficiary pre-deceases the
person insured, then the nominated beneficiary ’s benefit will be paid to the
policy owner (or their estate). If the owner is other than the insured, the
benefits will flow to that owner.

It may not be desirable, for a number of reasons, for the policy benefits to
flow to the estate. For example, imagine a creditor who is seeking to protect
his/her loan by having an insurance policy taken out by the borrower for the
amount of the loan. If the estate had a number of other liabilities, there may
be insufficient funds to pay out the loan. On the other hand, if the creditor
takes out a policy on the life of the borrower, the creditor is the owner of the
policy, not the insured. In the event of the death of the borrower, the policy
proceeds are paid directly to the policy owner (the creditor), and do not form
part of the estate at all.

As another example, if the insured is keen for a particular beneficiary to

receive the full sum insured, then it may well be preferable to have the
proceeds pass directly, as proceeds, if passed through the estate, may be
subject to creditor action.

Medical underwriting of life and critical illness insurance

The function of medical underwriting is to group together people of the same

age, health and gender. Those considered standard, will on average,
livelonger than those considered to have so me form of medical impairment.
It is therefore commercially realistic to put applicants into appropriate
mortality or morbidity groups if a life office is to remain competitive and
profitable.

46
Fortunately, most applicants are, in fact, standard, and most life office
underwriters try to accept applicants on standard terms, if at all possible.
The underwriter must determine whether or not the applicant can be
considered eligible to be within the homogeneous pool of standard risks, as
anticipated by the actuary, or should it be placed in some agreed
substandard pool. The underwriter will call for the minimum evidence
necessary to judge the risk and will not call for further information unlikely to
affect the decision. Thus, if a reassessment is to be made, it usually only
arises because the evidence is not clear or additional factors have become
apparent. In establishing an underwriting pool, the actuary must certify the
premiums. In doing this, the actuary will have had discussions with the
underwriter to determine the basis of mortality to be used. These
discussions will center on the manner in which standard applicants are to be
judged. The underwriter then judges new proposals on the basis agreed with
the actuary.

The underwriter receives information about the applicant from the

application, which also incorporates a personal statement. The personal
statement gives details about the client, rather than the type of cover
sought. It will include information about the client’s health, occupation and
the like. The underwriter may request further evidence in the form of a full
medical report, or ask for various questionnaires or tests to be completed. In
the personal statement, the insurance company will usually ask for authority
to obtain medical information from the applicant’s present and past doctors,
and consent from the applicant to undergo medical tests as required.

Many companies have simple rules on obtaining additional information. But

these rules will never cover all situations, and there will be tim es when an
underwriter feels some extra information that is not specifically covered by
the rules is required.

Another guiding principle determining the amount of information to be

sought relates to the proposed amount of cover and the age of the applicant.
As we mentioned earlier, the higher the cover sought, the more there is a
concern for medical information. For example, consider a 40-year-o ld
applicant seeking Rs.2, 00,000/- life cover: a personal statement alone would
probably be considered sufficient. However, if that individual were to seek
Rs.5, 00,000/- cover, further evidence would be requested in the form of a
medical examination. Similarly, if a 47-year-old individual applies for Rs.15,
00,000/- life cover, apart from the personal statement and medical
examination, a few other medical tests like Blood tests, ECG etc, also be
required.

47
The Numerical Rating System

Underwriters have developed a system for determining the classification of

people into mortality groups, which is known as the Numerical Rating
System. The system provides the underwriter with guidelines to ensure
consistency of ratings between applicants. This system is based on the
assumption that each factor influencing mortality can be represented by a
debit (or a plus) for unfavorable features and a credit (or a minus) for
favorable features.

Standard mortality is considered to have a value of 100%; each factor that

influences mortality is then given a value. Thus, an impairment that is
deemed to have an adverse effect on mortality is expressed as a percentage
extra mortality, such as ‘ ++100%extra mortality ’ or ‘+100 ’. What the
underwriter is saying is that, because of the disorder, the life expectancy is
reduced by a relative amount indicated by the percentage figure. A favorable
feature would then be expressed as say ‘minus 50% or – ‘ 50 ’, which
represents an improvement in mortality of 50%. However, as normal
mortality is assumed to include all favorable features, only exceptional
factors would be taken into account, and then only to reduce a debit caused
by unfavorable features or impairments. For example, a normal
electrocardiogram (ECG) might cause a loading for raised blood pressure
(hypertension) to be reduced by 50, thus:

High blood pressure +200

Normal ECG – 50
Extra mortality +150

The mortality assessment is obtained by totaling the debit and credit items,
so that the final rating reflects the extra mortality. This is usually rounded off
to a convenient number for easy handling. The above example could then be
expressed as either 250% of standard premium rate, or as +150% extra
mortality, or just as +150’.

Once the underwriter has used the Numerical Rating System to determine
the extra risk (if any), the %extra mortality is then translated into a multiple
of standard rate of premium, so that the applicant can be quoted an extra
premium rather than a percentage extra mortality. An example table is set
out below, and shows the conversion of the %extra mortality to the multiple
of standard rate of premium. Using an e xample from the table, a 30 year old
with a +150% extra mortality loading would be charged a multiple of
standard rate of premium of 2.5 times. Subsequently, the standard premium
for a 30 year old is noted and then multiplied by 2.5 times (that standard
depending on sex, whether a smoker or non-smoker.

48
Conversion table to translate %extra mortality into a multiple of standard
rate of premium

%of Standard Multiple of Standard of Premium

% Extra Mortality
Premium Rate (x times standard rate of premium)
+0%
100% 1.0
(standard mortality)
+50% 150% 1.5
+100% 200% 2.0
+150% 250% 2.5
+200% 300% 3.0
+250% 350% 3.5
+300% 400% 4.0
+350% 450% 4.5
+400% 500% 5.0

Term life insurance annual premium table (the amounts shown are for each 1,00,000 of sum
insured)

(This is a specimen premium table used by an insurance company in a developed country; In

India, most of the insurers does not have a different premium rate for males and females and
smokers and non-smokers. Standard premium rates are prepared for non-smokers and in case of
smokers extra premium, depending upon the extent of smoking, is being charged)

Age next Male Non- Female Female Non-

Male Smoker
Birthday Smoker Smoker Smoker

20 167 186 80 114

25 89 133 73 103
30 74 140 68 108
35 80 165 71 127
40 103 223 87 170
42 123 259 99 200
45 156 337 119 254
50 261 572 200 397
55 506 987 325 622
60 932 1754 545 1091
65 1765 2895 991 2022

For traditional policies, such as whole of life and endowment assurance, the
method of conversion used (%extra mortality to multiple of standard rate of
premium) is not generally appropriate. Here, once the underwriter has used

49
the Numerical Rating System to determine the extra risk, the % extra
mortality is converted either by calculating an addition of years to the age
that is added to the client ’s current age or by preparing a chart of extra
premium for each such class of extra mortality under each type of insurance
plan. For this the underwriter creates classes of extra mortality (for e.g. the
classes can start from 1 to 5, with class 1 representing extra mortality from
15% to 50%, class 2 representing extra mortality from 55% to 100% and so
on). A full set of conversion tables is prepared by the actuary for the
purpose of translating the extra mortality to an appropriate addition of years
to the age or additional premium to be charged, as the case may be.

For example, a 42-year-old with a +100% extra mortality loading would

have eight years added to their current age. Therefore, the standard
premium rate for a 50 year old would be applied.

Commonly encountered impairments

In the following paragraphs, we shall examine at some commonly

encountered impairment that will normally lead to extra mortality ratings, or
even the declining of the application. Most attention will be given to the more
common disorders listed.

Family history

While it would be uncommon for an underwriter to rate an applicant solely

due to family history for life and/or disability benefits, it is common for
applicants to be rated for critical illness benefits where family history plays
an important role. Examples of significant hereditary conditions impacting on
the assessment of critical illness benefits include heart disease, breast
cancer, complications arising out of diabetic conditions, etc.

The applicant ’s family history is considered relevant by the underwriter, as

many characteristics and impairments are hereditary. Additionally, it is
possible for the underwriter to allocate a ‘debit’ or a ‘credit’ in relation to
other impairments where family history impacts. For instance, two or more
deaths in family members below the age of 65 years, due to heart disease,
may be considered by the underwriter to be cause for an additional rating in
the case of an applicant with high blood pressure. But if there are no signs or
symptoms of high blood pressure in the applicant, the family history may be
ignored.

On the other hand, if the family history shows that most members of the
family live to old age, and have been free from heart disease, diabetes, and
other similar impairments, it may be inferred that the applicant will not be
susceptible to such impairments and may even be entitled to ‘credits’ to
offset some ‘debits’ in the rating process.

50
Effect of smoking

It is a widely known fact that tobacco smoking disastrous to health and

reduces life expectancy. Deaths due to heart disease, lung cancer and
chronic obstructive airways disease have all been linked to cigarette
smoking.

Where the applicant has stopped smoking, for a minimum period of 12

months, and applies for non-smoker rates after having been issued a policy
while a smoker, the underwriter may inquire into the reason for stopping. It
may have been on medical advice following a heart attack or a bout of
chronic bronchitis or other smoking-related condition, in which event, inquiry
will be made into that history before considering the change to non-smoker
rates.

If the applicant is a heavy smoker (for example, 40 per day or more), the
underwriter may require a medical examination to ensure that there are no
signs of circulatory or respiratory disease.

Effects of alcohol consumption

It is usually the case with many heavy alcohol consumers that they
underestimate their intake. The amount of alcohol that can be consumed
without the risk of developing associated problems varies according to the
applicant ’s gender, build and alcohol tolerance.

There are, however, certain signals that a medical examiner will detect as an
indication of alcohol abuse, which includes overweight, florid complexion,
high blood pressure, raised heart rate, finger clubbing and fine tremor. Liver
enlargement, a pitted nose, digestive disorders, reference to alcohol in
medical and hospital reports, history of anxiety, tension or stress are also
good indicators.

An underwriter is entitled to make inquiries on these matters if considered

necessary, and indeed refusal to provide information would be regarded as
unfavorable. A medical examination would be requested, or a medical
attendant ’s report obtained, in all cases where alcohol abuse is known or
suspected. The medical attendant would be asked specifically to report on
the applicant ’s drinking habits and whether there have been consultations
about symptoms or disorders associated with alcohol abuse. Additionally, the
applicant may be requested to attend for blood tests to determine the extent
of damage to the liver.

Suggested extra mortality is as follows:

• No signs of physical disease due to alcohol, no intellectual

deterioration, +50 to +100 (a small extra premium)

51
 • No criticism other than excessive drinking. Signs of physical disease
arising from heavy drinking (e.g. enlarged liver, gastritis), psychiatric
symptoms, job loss, marital problems +100 to Decline (a substantial
extra premium)
• Evidence of excessive alcohol consumption, significant psychiatric
disorder, marital breakdown, job instability or loss, major physical
complication (e.g. Alcoholic hepatitis, cardiomyopathy). Usually
declined

Hypertension & Heart trouble

High blood pressure may be secondary to specific disorders, such as renal

disease or obesity, but it may also be present with no definable organic
cause, a condition known as essential hypertension.

The underwriter will always request full and current details to fairly assess
the risk. Generally, the underwriter will be concerned if the condition is
untreated or unresponsive to treatment. Additionally, a blood pressure
questionnaire would be sent to the applicant ’s usual medical attendant for
completion.

In practice, actuaries have prepared tables of extra mortality relative to

blood pressure readings and age. These tables form the basis of the ratings
for hypertension used by the underwriter. Some adjustments to the table
values will be made if the blood pressure is poorly controlled, through non-
compliance with treatment, or if there is any other cardiovascular impairment
or risk factor.

If an applicant indicates that there has been a history of heart disease, the
underwriter will call for a full report from the applicant’s cardiologist (heart
specialist). At best, a significant extra premium is likely.

Chest pain

It is important for the underwriter to look further into the applicant’s

response regarding chest pains, and whether a specific diagnosis has been
made. Chest pain can mean anything from insignificant musculo -skeletal
twinges to the pain of heart disease or other serious conditions. If there has
been no specific diagnosis, the underwriter must determine whether the pain
is only vaguely felt and therefore is of no concern to the underwriter, or is
such as to prompt a doctor to suspect that there is an undetected or
developing condition. To do this, a medical examination and medical
attendant’s report would usually be obtained.

Lung disorders

The cause of asthma may be allergy, infection, or stress. Asthma ranges

from a mild condition, similar to hay fever, to a severe condition where

52
attacks can be fatal. Asthma is a respiratory condition where muscle
contraction causes spasmodic narrowing of the bronchioles, resulting in acute
shortness of breath and wheezing.

For mild asthma or a history of asthma, most insurers will assess via an
asthma questionnaire, completed by the applicant, only. A medical
attendant’s report and asthma questionnaire, completed by the usual medical
attendant, is essential for the underwriter to assess the risk. Additionally, the
applicant will also be requested to complete an asthma questionnaire,
providing full details of the nature and treatment of the condition.

Ulcers

Gastric and duodenal ulcers are both common forms of ulcers that occur in
the gastrointestinal tract. Gastric ulcers are characterised by pain and
discomfort after eating. They may be aggravated by stress. Duodenal ulcers
also give rise to extended pain after meals , and seem to be more common in
men than women. Unless there is a further underlying disease, treated ulcers
may not in themselves be considered to greatly affect mortality, and may be
accepted with a small extra premium.

A medical attendant’s report will usually be obtained for a current ulcer

history. Additionally, the usual medical attendant and the applicant will also
be requested to complete an ulcer questionnaire, providing full details of the
nature and treatment of the condition.

Diabetes

Diabete s is a disease resulting from inadequate production or utilisation of

insulin produced by the pancreas. There are many consequences of diabetes.
With severe insulin deficiency, where diabetes is untreated or poorly
controlled, the liver can produce ketene bodies, causing vomiting,
dehydration and coma. This condition can be rapidly fatal unless treated with
insulin. Other effects are long-term and varied.

In all cases, the underwriter will usually require a medical attendant’s report,
including a diabetic questionnaire. A diabetic questionnaire is also required
from the applicant to ascertain whether he or she understands the severity of
their condition and is compliant with treatment.

The underwriter will be seeking to assess the risk through knowledge of the
type of treatment; degree of control and period of time diabetes has existed.

Malignant tumors or cancer

In all such cases, a medical attendant ’s report and a tumors questionnaire

are essential. The underwriter will ensure that he or she has obtain ed reliable
information concerning the type, site and extent of any tumors, the results of

53
investigations, the nature and adequacy of any treatment and the results of
follow-up checks. Terms for life cover may be available and depend on the
duration since arrest of the tumor, which is usually performed by surgical
excision. Any treatment that is considered less than potentially curative will
lead the underwriter to decline the application. Acceptance is generally
unavailable for critical illness applications, unless restricted to tumors with
the most favorable prognosis, at which time a limited acceptance may be
considered subject to cancer being deleted from the policy as an insured
event.

Mental illness

It is very difficult to assess the risks for mental illness because it occurs in
many forms and degrees of severity, and the prognosis is often difficult to
predict. Mental illness is classified as being organic (that is caused by or
associated with diseased brain tissue) or functional (that is lacking any
clearly defined cause). Many organic mental diseases render the person
uninsurable. A medical attendant’s report will always be required, to identify
the type and degree of disorder.

Functional disorders are sometimes classified as personality disorders, which

exhibit various patterns of social behaviour. Important underwriting issues
will be the type of treatment, the response to treatment and, of course,
attempts at suicide.

Epilepsy

Epilepsy is caused by irregular electrical activity in the brain, and manifests

itself in the form of disturbances of consciousness and sometimes
convulsions. The underwriter will request a medical attendant’s report to be
able to classify the type of epilepsy and degree of control. Additionally, both
the usual medical attendant and the applicant will be requested to complete
an epilepsy questionnaire, providing full details of the nature and treatment
of the condition. Mild forms of epilepsy, confirming evidence of effective
control, will generally be accepted at standard rates or with a small extra
premium loading.

Medical underwriting and AIDS

It is reported that India is one of the countries, which has a higher incidence
of AIDS infection. It is also reported that there is no cure for the infection
and infection wit h HIV/AIDS result in death sooner or later. As of now,
insurers take a very high precaution against this infection and hence, they
decline applications for insurance from individuals testing positive for HIV
and similarly, most benefits under the riders a lso exclude conditions relating
to HIV/AIDS infection.

54
Chapter 3

MARKETING & PLACEMENT OF INSURANCE

Market Sectors
Marketing Process
Marketing strategies
Financial security of Insurer
Selection Criteria
Channels of distribution
Service standards of Insurers
Products and services
Placement & Hold cover procedure
Co insurance & Reinsurance procedure
Duties of broker in placing business
Information to be disclosed to clients
Insurers & re -insurers
Functions of a broker’s placing slips
Standard brokers placing slip

The marketing of insurance broking

A logical starting-point for a discussion of the marketing of insurance broking

is the role of the broker. Is he an intermediary or a professional adviser, or
both? To his client he tends to be seen in a dual role: firstly, as the skilled
buyer of insurance - someone who understands the market and can produce
a better deal for the client than he could arrange on his own - and,

Secondly, as the skilled adviser and interpreter of a complex market and a

complex subject. The advice given in this area would be concerned not only
with the selection of policies but more usually with which cover is needed and
often with managing or controlling the risk.

To the insurer, the broker tends to appear primarily as a producer of

business, although this role is almost invariably seen as much wider than
selling. The insurer normally relies on the broker to interpret the client's
needs and to assist the insurer in underwriting. While complete delegation of
underwriting powers is still rare, the underwriting of many risks can involve
consider- able joint work between broker and insurer.

Perhaps the most meaningful guide to the role of the broker is the method of
remuneration. It remains overwhelmingly on a commission basis, and this is
unlikely to change substantially for most of the business handled by brokers
in the near future.

So far the insurance broker has been talked about as though he were a
single clear-cut type. In practice the word 'broker' applies to a wide range of
firms from the multinational organisations covering 20 or more countries and

55
providing all classes of insurance, to the smaller specialist brokers and what
is popularly known as the 'High Street broker'. For each of these, the
marketing will have some common elements and some different elements.
Before looking at the segments of marketing for insurance brokers and the
need for the different types of broker, it might be helpful to look at the
market in which the brokers find themselves.

Market Dynamics And The Underwriting Cycle

There is relatively fixed demand for insurance because so many people buy it
because law requires them, as is the case in vehicle insurance and workers’
compensation, or out of a need that (nearly) absolutely must be met. They
buy it because a lender requires them to. For example, term insurance on
one’s own life, fire insurance for the house, vehicle insurance against physical
damage, and commercial property insurance are all coverage’s that lenders
require borrowers to purchase. Some coverage’s for businesses such as
general liability, are not required by law or any third parties, but not buying
them could result in a drain on an individual’s/company’s financial resources
in case of liability lawsuits. So there is a certain amount of insurance that
will be bought whatever the price is. That creates a demand curve that is
relatively flat with respect to price. Thus, supply, in the form of statutory
surplus of insurance companies, effectively determines the price of
insurance.

Is Insurance a Commodity?

Insurance may be viewed as a commodity because, in many respects, all

insurance companies selling a particular line of insurance are selling the
same thing. Insurance regulation of most countries require that, in many
lines such as vehicle third party insurance, the policy forms and certificate of
insurance that are purchased are identical from company to company. Even
in lines that are less strictly regulated, such as commercial property and
casualty insurance, there is often a propensity to use standardized forms. In
fact before the opening of the insurance market in India when there were
only four Non-life insurance companies under the umbrella of General
Insurance Corporation of India, all the policy forms of the four companies
were exactly same. That can lead customers to believe that all insurance
companies’ products are identical.

De-commoditising Insurance Products

In a competitive market, individual sellers have no control over price. Since

having no control over price can depress profits, companies will seek to
create ‘brand names’ for their products. In a sense, brand names are
created when product suppliers succeed in creating special, beneficial
attributes of their individual products that distinguish their product from
those of other product suppliers. One result of branding is that the customer
may view one product as more valuable than those of another product. This
causes different suppliers to have different demand curves. Those with

56
higher demand curves are able to command a higher price. Examples of
insurance product attributes that can create a brand name would be: the
extent to which coverage will be extended by the claims department for
marginal claims, the extent to which the insurer offers coverage extensions
in the policy that other companies do not; the financial strength of the
insurer, the insurer’s flexibility in customizing insurance programes to meet
individual customer’s needs; the ability of the insurer to successfully fight
third-party claims; the accessibility of the insurer’s claims-handling setup,
and the quality of the loss control offer by the insurer.

It is important to note that different insurance companies have different

supply curves overall. That is primarily because of underwritin g selection.
Claims (losses, in the actuarial lexicon) form the lion’s share of the costs of
supplying an insurance product. While one customer’s future claims are
relatively fixed, the claims associated with a portfolio of insurance policies
can be reduced considerably by only selling to those customers that are
expected to have few claims. Conversely, the costs of supplying an
insurance product can be reduced considerably by refusing to sell to
customers that are expected to have an above-average frequency or severity
of claims.

Applying some form of loss control or a form of claims adjusting can also
reduce the costs or claims management that reduces claims costs. This
results in the paradoxical truth that selling to low claims cost insured’s at a
lower price (at least compared to the average price for all insured’s) can lead
to a greater proportion of sales to low claims cost insured’s, and hence
selective price reductions can lead to greater profitability. In fact, arising out
of this truth most insurers employ highly refined risk classification systems
where they can segregate good exposures from medium and bad exposures
and rate them differentially.

Besides claims cost, the other share of the costs of supplying insurance is the
cost of company expenses, taxes and commissions. Different insurers have
different degrees of success at controlling expenses. Further, when all
insurers use the same degree of underwriting, classification and selection,
and no branding is present (a very hypothetical case), control of expenses is
the primary success factor for insurance suppliers. To the extent that
insurance is a pure commodity, expense control is very important.

The Activity of the Commodity Market leads to a Business Cycle

The result of the commodity -type nature of the insurance marketplace leads
to a business cycle. The cycle begins when the fluctuations in the market
place result in low supply. The root cause of the low supply may be (and
usually is the result of the cycle itself resulting in insurers losing money.
Insurers may then raise prices and a period of high profitability results. The
high profitability in insurance industry leads to many new firms entering the
market. The large number of new firms creates ‘excess capacity’ in the

57
marketplace and prices are consequentially depressed. The falling prices
yield low profitability, so firms leave the market. After that, there is low
supply, and the cycle starts again.

The cycle is exacerbated when underwriters (and hence the insurance firms
employing the underwriters) are not aware of the true claims costs created
by their insured’s. Insurance claims for some lines of insurance are not paid
until long after the policy is sold. If a company takes an overly optimistic
view of the claims costs it is assuming when it sells policies, it will continue
selling insurance when it is not making a profit. That exacerbates the period
of excess supply of insurance (the ‘soft market’).

Insurance Market is Easy to Enter and Exit (perfect Competition)

The length of the cycle is shortened somewhat by the case of entry and exit
in the insurance business. Insurance does not involve many highly
expensive manufacturing facilities as assets; rather the primary assets are
highly liquid stocks, bonds, and real estate. Stocks and bonds may be sold
immediately at the going market price. Real estate is buyable and sellable
within a reasonable timeframe. Only data processing systems, furniture and
the intangible ‘goodwill’ are illiquid. Fortunately data processing systems and
furniture are only a small part of an insurance company’s assets. Goodwill
may be more substantial. The result is that it is relatively easy to start or
shut down an insurance company.

There are non-financial considerations that could conceivably delay an

insurer’s exit from the insurance business. Regulators will either require a
loss portfolio transfer with assumption of liabilities to transfer the loss and
loss adjustment expense liabilities to another company with surplus, or else
require the exiting company to maintain some level of capital and surplus
until the liabilities are paid off. Also, some regulatory jurisdictions, especially
unprofitable personal auto jurisdictions, may erect some form of regulatory
hurdle in an attempt to maintain availability in conjunction with inadequate
rates. Further, if an insurance company has based its brand on willingness
to provide service to agents or policyholders, no matter whether it is
profitable or not, there will be marketing implications for any related lines of
business if an insurer only withdraws from some lines or business. So, there
may be some delays or roadblocks to insurer exit, with the degree of delay
being inversely related to an insurer’s willingness to accept some
consequences.

Reserve Management Extends the Cycle

Reserve management refers to a situation where in an insurance company
provides excessive reserve (or understated assets, or overstate liabilities)
during profitable periods, thus lowering reported profits. Conversely, when
insurance is unprofitable, reserves will be stated less and less adequately.

Note that the prices will only respond to deteriorating profits if company
underwriters (who make pricing decisions) and capital providers (the
investors) are aware of the true profitability of the insurance product.

58
Reserve management has the effect of extending the cycle by causing profits
to be reported when the business is no longer profitable. This acts to prolong
periods of profit and loss, extending the cycle. The result is very long cycle.

Loss Forecasting

In the earlier part of this chapter, when we were discussing the risk
evaluation for an individual, the biggest problem was the unpredictability of
the event capable of producing a loss and the p robable amount of loss. To
be able to predict this for an individual is well nigh impossible. We shall try
to understand this from the classic coin-tossing example. Using Probability
And Regression Analysis, Loss Distributions and Law Of Large Numbers

If you toss an unbiased coin either a head will come or a tail, i.e., out of the
two possible outcomes each outcome of head or tail has a chance of one out
of two. Alternatively, we can say that each outcome has a probability of ½.
A probability is a way of describing how likely (or not) “something” is to
happen. The maximum value of probability is 1 and an event with a
probability of 1 is called a “certainty”. The minimum value of a probability
is ‘O’ and an event with a probability of ‘O’ is called the impossibility. When
talking about a risk we are concerned with probabilities, which are greater,
than zero but less than one i.e. there are an element of uncertainty.

Going further in the coin tossing experiment we know that the probability of
getting a head or not getting a head is ½. Suppose the first toss, gave a
head, can we say with some degree of certainty that the second toss will give
a tail? Or if the coin is tossed 10 times, can we say that there will be
exactly 5 heads and 5 tails? But if we toss the coin 1000 times, we can say
with a reasonable degree of certainty that there will be 500+ 50 heads or
tails. If the number of tosses is increased to 1,00,000 or more we can fairly
accurately predict the number of heads and tails with very lit tle percentage
error. Similarly, as discussed in chapter one, predicting the loss for one
house may be near impossible, but predicting loss for 1000 houses is fairly
practicable. If this number is further increased, losses can be predicted fairly
accurately, in terms of number of losses and also the average amount of
each loss. This is law of large numbers. Probability theory can be applied to
a large number of loss exposures to predict future losses and this is the basic
principle on which insurance c ompanies operate.

In real life situations, probability of loss occurrence is not as simple as in the

coin tossing experiment. Firstly, there can be a large number of outcomes.
Secondly, the outcomes may be dependent on some other outcome and may
complicate the probability calculations. For a given event, different outcomes
will have different probabilities ranging between 0 and 1. Insurers are
interested in knowing the probability of each outcome or a set of outcomes.
This can be made available to in surers either through a table or a graph.
This table or graph can be called probability distribution. This will become
clear from the illustration given below

59
PROBABILITY DISTRIBUTIONS

Probability distributions will help us to carry out many of the estimates of

likelihood, which we will want to make. We move on now to a particular
application of probabilities.

Let us firstly create a simple example in order to illustrate some fundamental

points. A company has 100 vehicles in its motor fleet and over the past year
it has kept a careful record of accidents. Of the 100 vehicles, 50 were not
involved in any accidents, 25 were involved in one accident, 15 in two, 6
were in three and 4 were in four accidents during the year. This information
is displayed in a frequency distribution as follows:

Number of Accidents Number of vehicles

0 50

1 25

2 15

3
6

4
4

Total
100

It might, however, be useful for the manager of the fleet to express the
number of vehicles having accidents in relative terms rather than absolute
figures. A slight alteration to the distribution can bring this about as we see
below:

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 Number of
Relative Frequency
Accidents

0 50%

1 25%

2 15%

3
6%

4
4%

Total
100%

The manager can now see that 15% of his fleet had two accidents, 25% had
one accident and so on. The relative frequencies can also be looked upon as
probability statements.

Q Imagine a pool of 100 vehicles and pick one vehicle at random. What
is the likelihood, the probability, that it has not been an accident?

A 50% of all the vehicles were not involved in an accident, so the

probability of selection one is 0.5

By re-writing the distribution we now get:

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 Number of Accidents Relative Frequency

0 0.50

1 0.25

2 0.15

3
0.06

4
0.04

Total
1.00

This time we have defined the number of accidents as (x) and the frequency
column has been altered to show the probability of x, i.e. the probability of a
particular number of accidents. We could now use this historical data as the
base of our probability distribution. We have to assume, of course, that
there are no changes envisaged over the period for which we are calculating
probabilities.

We can also draw the probability distribution and we have done this in Fig

The vertical axis shows the probability with which particular values of x
occur. The variable (x) is the number of accidents each vehicle had. The
use of the word variable simply denotes the fact that (x) does not have one
particular value alone. The value can vary. In fact (x) is a random variable
meaning that the exact value of (x) is not known at the outset of any time
period. All we know is that there are a number of possible values which (x)
could assume.

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 P (X)

0.75

0.5

0.50

0.25

0.25 0.15

0.06
0.04

0 1 2 3 4
The benefit of such a probability distribution is that in one look one can find
that as the probability that a vehicle will not meet with any accident is very
high at 0.5 and goes on decreasing as the number of accidents increase.

The same distribution could be written in another way by using cumulative

frequency

Number of Accidents Cumulative Relative Frequency

0 0.50

1 0.75

2 0.90

3 0.96

4 1.00

Total 1.00

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Q Imagine a pool of 100 vehicles and pick one vehicle at random. What is
the probability that it has met with less than 3 accidents?

A The probability that it has met with less than 3 accidents is 0.9,
because it is the cumulative probability of a vehicle having met with either no
accident, one accident or two accidents.

Q Imagine a pool of 100 vehicles and pick one vehicle at random. What is
the probability that it has met with at least 2 accidents?
A The probability that a vehicle has met with 1 accident or less is 0.75.
Hence the probability that it has met with at least 2 accidents, i.e. 2
accidents or more is 1 – 0.75 i.e.0.25.

These probability distributions are built from the loss data obtained from past
experience and help the insurers to estimate the probability of occurrence of
losses in future. In a similar fashion probability distributions can also be
drawn for amount of loss. A typic al property loss distribution will look like
Fig below

Figure
Frequency

Severity of loss

It will be observed here that there are large numbers of claims of small
amounts but as the amount of loss increases the number of claims decreases
fast and then tapers very slowly. Insurers frequently use these probability
distributions to estimate the future losses on the risks they have accepted
and to fix future price of insurance on the basis of past experience as
evidenced by these distributions.

It is by and large a competitiv e market, mainly because the rewards can be

good and until recently it has been comparatively easy to enter the market.
This over-capacity in brokers and the resulting competition lead to
considerable innovation as brokers devise new covers and alter the scope of
existing ones.

Within this broad pattern, there are two predominant broking approaches.
The first is of the essentially conservative broker (who is, however, capable
of innovation), who has an acknowledged market position producing a
relatively stable income and profit, and whose approach to marketing tends

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to be to go on doing what he has always done, while being ready always to
react to changes in the market and clients' needs. On the other hand, the
newcomer is faced with the problem of finding a share of the market he can
attack, and in attacking it, while he might not use the word 'marketing', he
uses marketing techniques and, in particular, segmentation and the
development of a new product or service. This uniqueness may be in terms
of a different approach to selling, different types of cover, different types of
service, or even concentration on a particular section of the market, in order
that he can show a special expertise. These innovatory broking approaches
occur in all areas of broking activity. A group of skilled brokers leave a
Lloyd's broker and form a new broking firm and in a few years they have
established a market position of their own. In the High Street broker market,
firms come and go.

In looking at the broker and marketing, a thought should be spared for the
customer. One buys in order to guard against a possibility that would
otherwise produce discomfort or danger, or to enhance one's position
internally or externally. It is often assumed that the motives of those buying
insurance are different; this is not in fact the case. Obviously when buying
insurance one is as apprehensive as when buying other products, and the
marketing approach involves arousing that apprehension while showing how
it can be handled.

The client's need for reassurance is met by the broker in many different
ways, some relating to the organisation and others to the individual. The
prime emphasis might be on high-quality technical service, so removing
uncertainty from several aspects of the client's operations. Alternatively, but
rarely, it might be on understanding the client's business in detail and using
solutions that fit effectively not only the client's technical needs but the
actual style and character of his business. Finally, and most important tothe
majority of clients, is still the personal and social relationship. This has not
been analysed publicly but cannot be overestimated. When faced with a
difficult and unpleasant subject, the presence of a friendly, understanding,
helpful and sociable insurance broker helps reduce the apprehension.

The marketing process for brokers can be considered fewer than five main
headings:

1. The selection of the market position. Which part of the market does
the broker wish to serve and how shall he serve it? His decisions in this
area create, if he is successful, the 'unique' position of his business
that gives it its particular appeal and share in the market.

2. The presentation of the broker to his clients and potential clients. This
would include any advertising but, more important, would also include
the whole public image of the broker, the aim being to equate the
market position selected with the general picture presented to that
market by the broker.

3. The selling process - involving the selection of individual prospects, the

approach to those prospects and the actual sale.

4. Delivery or the broking equivalent of delivery of the goods ordered.

This can take many forms and might be an analysis of the client's
insurance needs, a renewal discussion or the presentation of the
insurance policies.

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 5. After-sales service - primarily the provision of technical advice, and the
handling of changes and claims.

These five steps have been set forward as though they are a logical,
conscious process, but in fact a great deal of insurance broking is a matter-
of-fact response to events, with little overall planning or marketing except in
some of the major firms. In the author's opinion, the whole character of the
insurance market in fact encourages this reaction to events and day-by-day
activity rather than longer-term planning. While studies are often carried out
by the major brokers preparatory to opening new branches in different parts
of the United Kingdom and different overseas countries, in general these
marketing surveys do not have the same degree of detail and subsequent
accuracy that many industrial market surveys have, that a great deal of the
business walks in through the broker's door. Once he has established his
position, recommendations from existing clients will lead to a continuing, and
usually increasing, flow of business, provided he continues to do a good job.

In the industrial sphere, the position is quite different and it still seems a
most inefficient process. One could estimate that < one in ten of appro aches
to customers are successful and with a different definition of the word
'approach', we could produce a success rate down in the 2 or 3 per cent
category. It is fortunate that broking is basically a profitable business, or it
would be impossible to finance such ineffective selling. The reasons for this
ineffectiveness lie generally in lack of skilled marketing. The average broking
account executive analyses his own success in terms of technical ability,
personal charm, persistence or knowing the right people, and proceeds to
carry through the same approach to clients whom he does not yet serve. In
attacking an industrial account, there are two key factors. The first is timing
and the second is the network of people involved in the sales decision.

In relation to timing, the best potential prospects are either dissatisfied

customers - those who have become disillusioned with their existing broker's
service - or those clients where changes in personnel or organisation raise the
possibility of a change in insurance broker. By concentrating his attention on
this point, the average broker could probably quadruple his effectiveness.
Looking at the organisational network involved in selling, one can make use
of the work that has already been done in the field of industrial marketing
and trace out the people actually involved in the broking decision. In
industrial parlance, these will include at least three categories, namely the
buyer (the insurance manager or person who actually gives the order), the
user and the decision-maker. The user will be that part of the organisation
concerned with the subject matter of the insurance. For example, the
transport manager will be closely involved in most companies in marine
insurance, but will not often take the marine in surance decision, although he
can influence it considerably. The decision- maker may be a single individual,
but for the bigger companies it is likely to be a group of individuals.

The actual mechanism, by which companies make insurance buying decisions

or, more precisely, decisions to change their mode of insurance buying, is
quite complex. For the broking salesman, it is important to establish whether
he has a genuine prospect or, as is more often the case, he is being used as
a stick to beat the existing broker into providing better service. The
gathering of intelligence about buying intentions and buying decisions is part
of the skills of every industrial salesman, but the broking world tends to lag
behind in this respect. It may be that brokers' over-reliance on good social
and personal relationships leads them to assume that every piece of

66
information they are given is not only accurate but also the whole truth,
when in fact it is often anything but.
There is not space in which to look at the whole picture of sales motivation,
but quite often an inclination to change begins in an industrial company and
is not carried through owing to lack of persistence, lack of perception and
lack of imagination on the part of the broker attempting to sell his services. A
good marketing approach would resolve most of these problems by
encouraging the salesman to understand the market, his company's position
in that market, and his potential client's problems and needs as well as the
organisational structure and philosophy of that client.

The fourth part of the process is packaging. Many brokers might object to the
use of the word 'packaging' in relation to their product or service, but it
might be helpful to reflect on the importance of packaging in every other
decision they make. The way in which a product or service is presented is a
reflection of how the company feels about its customer or client. It can
enhance their relationship or it can damage or destroy that relationship.
Some years ago, a very large British industrial account changed hands in a
situation where there was complete satisfaction with the account executive,
but complete dissatisfaction with the quality of service provided by the office.

In packaging the broker is concerned with what the customer expects from
him, how it is presented and the timing of that presentation. A report on
changes might be the subject for discussion, in which case packaging does
not mean the inclusion of a superb glossy cover - although equally the report
should be tidily and confidently presented - but the manner of presentation.
In particular it means the extent to which the report takes account of the
preferences and problems of the client rather than the presenter's view of
the skills and importance of his own organis ation.
• Does the report take sufficient account of the short time available
to the recipient to study it?
• If the opportunity presents itself, are audio -visuals used and do
these audiovisuals reflect the character of the broker presenting
them rather than that of the agency employed in their
manufacture?

(The same approach can be used in the renewal process.)

• How serious is the preparation for the renewal discussions in terms of
understanding the changes, which are taking place in the client's
organisation and business as well as in the insurance market?
• Apart from providing the opportunity for a long lunch, does the
renewal discussion enhance the client's appreciation of the technical
and other qualities of the broker?
• Does the broker deliver the insurance policies on time, correct and in
good order?

One of the biggest problems in the broking world today is the increasing
separation between account executive and technician. The account executive
who masters the technicalities of the business will have a much stronger
position with his client than the one who sees himself as captain of the team
where everybody else does the work.

After-sales service is probably the weakest point of most broking operations

today. It is hoped, however, that this will improve once the Financial Services
Act comes into force, since a regular review of the client's needs in respect of
long-term insurances is one of the Act's requirements. There have, in the

67
past, been a number of reasons for this comparative weakness in many
brokers' after-sales service. Shortage of skilled technical staff may be one,
problems in insurers' offices may be another, but probably the main reason is
lack of attention. The best means of selling most products and services is
personal recommendation, and personal recommendation will be given on
the basis, not of whether the user liked the product when he first bought it or
whether he liked the salesman, but of how the product performed in service.
For insurance broking this involves the day-by-day provision of technical
advice and service, including the handling problems. Needless to say, in
making this comment, cost has not been ignored.

What, then, is the position of marketing in insurance broking? It can be

assumed that today most brokers know about marketing and have some idea
of its relevance to them, but it can at the same time be argued there is as
yet little conscious use of marketing techniques in insurance broking. The
Financial Ser- vices Act may change this, since one intention of the Act is to
enhance professionalism in the field of life assurance, unit trusts and
pensions and it should therefore assist the marketing of insurance broking in
these areas. There is very considerable scope for the organisations that take
advantage of a skilled marketing approach in what is still a highly profitable
market.

The slip
The slip has to be correctly compiled. This document is now in a standard
format which is intended to assist not only the under- writer giving
consideration to the risk but also the policy drafter and those responsible for
checking and accounting for the premium.

Binding authorities and line slips

A binding authority or a 'cover' provides the cover holder with authority to
accept risks within the limits and terms set out. The broking operation here is
to negotiate the binding authority, the limits and the terms agreed. No
reference is required to the underwriters once the arrangement has been set
up though the binding authority will need to be renewed annually.

Line slips, on the other hand, do not give full authority to the cover holder. If
a risk is to be placed under a line slip, it is normal that the two or three lead
underwriters have to be seen, and they have to accept the risk and its terms
and conditions. The remaining underwriters, however, abide by their
agreement under the line slip for their stated proportion.

Completion of the risk

Once an underwriter has signed as accepting the risk from a given date, then
the insurance is effective from that date. As soon as the placement is
completed, the client will be advised and the slip and its documents will go
through the policy issuing and accounting process.
Liability insurances, both public liability and products liability, which will
provide cover against liabilities incurred through products sold or supplied,
will be important, and the broker must ensure that his client has insurance
protection which is both adequate in amount and wide enough to cover all
the types of business in which he is engaged.

68
Subsequently, the broker must remind his client of the necessity of ensuring
that the limits of liability under his policies are reviewed periodically so that
they remain adequate as inflation and court awards rise.

Liabilities will also be very much in the broker’s mind in advising clients in
the professions. The major risk in this case will be that of professional
negligence. Substantial professional indemnity cover is now a condition of
being permitted to practice many professions, including that of an insurance
broker. The public is entitled to expect that persons or firms holding them-
selves out as possessing particular professional skills will in fact exercise
them, and the trend is towards the extension of liability to include persons
other than those with whom the professional person is in a contractual
relationship.

Placing the professional indemnity risk may call for the exercise of just such
a professional skill on the part of the broker, for the financial consequences
of an error may be far greater than any o ther risks the professional person
may face. Apart from professional indemnity, his insurances may be no more
complicated than those of a simple office risk.

It is in alerting his client to major risks of this kind which may be concealed
in what appears to be a comparatively risk-free occupation, as well as in the
skilful placing of insurances both complicated and simple, and in helping the
client to obtain a speedy and fair settlement when a claim comes along, that
the broker earns his money. Although he will normally be remunerated by
the insurer through a commission based on the amount of the premium, and
although he will be for some purposes the agent of the insurer, there is no
doubt where the broker's chief loyalty lies. Above all other considerations he
must put the interests of his client first.

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Chapter 4

INSURANCE CLAIMS SERVICE

Responsibility of broker to insured

Claim documentation
Procedure for claim settlement (Life & Non-Life)
Responsibility of Broker to Insurer
Claims procedure
Direct business claims procedure
Coinsurance & Reinsurance
Relationship between broker, Insurer, Surveyor
In claim management
Process of negotiation and settlement
Rights & Obligations of clients
Servicing Claims.

The reality is that few clients will make a claim, and there will be many who
will never make a claim except in case of endowment or whole life policies.
The very nature of insurance is to provide protection for events that don’t
happen frequently. If they did, the amounts ins urers would need to charge
would not be affordable. Your clients would have heard of the nightmare
tales of insurers not standing by their obligations. Such events do happen,
but considering the large volume of claims the industry handles, they are
very rare.

What you are looking to ensure is that if a client has reason to make a claim,
the experience is one that goes smoothly. Making a claim will, in most cases,
be a first-time experience for the client, so whatever help the broker can
provide will help ensure the matter goes smoothly. With most insurers, a
centralised claims department handles the claim, so if the policy were
negotiated with an agent, the claims department of the company would take
over and deal with the claim.

As the way in which claims are handled varies by class, each will be
considered separately.

Life policy claims

The claims that will arise in case of Life Insurance policies will be of two
types viz., those that arise on the death of the life insured and those arising
on the survival of the life insured till the stipulated date of maturity in case of
endowment type of polices and survival to the periodical due dates in case of
policies with periodical survival benefits. While the first type of claims is
referred to as Death Claims the other types are called Maturity claims.

70
The claims arising out of the life assured surviving till the end of an
endowment type of policy or to the various periodical payment due dates in
case of Money Back type or anticipated type of policies, are settled normally
by the insurers on their own, without the policy owner having to do anything.
The insurers will know the list of policies that come up for maturity payments
and periodical payments in advance and send the cheques to policy owners
or in case of final payment send a discharge voucher for the policy owner to
sign in advance. Thus, the policy owners get the amounts due on the
stipulated due date or ahead of that date by way of post-dated cheques.

Claims arising out of death of life insured during the currency of policy, in
case of Term Insurance policies and whole of life policies are those, which
require the actions to be initiated by the policy owners or the beneficiaries.
Here, the broker has a role to play and hence we shall be discussing this type
of claims in this topic.

In the case of policies owned by the deceased insured, these claims will be
handled by the beneficiaries. It may be the person(s), who are nominated
by the policy owner or those who are successors to the estate of the life
insured. On some occasions the legal advisor / executor handling the client’s
estate will be representing them in making the claim. The broker will have
details of the insurance covers, and should provide these to enable the claim
to be made.

The broker should also brief the legal advisor of the reasoning behind the
policies that were effected and how the provision of future income was to be
provided under the plan.

This information will assist the legal advisor in the administration of the
estate.

If the policy owner is other than the deceased, the policy owner will make
the claim directly to the insurer.

Disability claims

When the client advises the broker of a possible claim under a disability
policy, the broker should spell out the details of the cover provided by the
policy. These details include:

• The waiting period, if any —the period of time that must elapse before
the policy benefit will commence;

• The benefit period —how long the benefits are payable for; this may
vary for accident and illness;

71
 • The actual benefit —whether lump sum or monthly benefit, and if
monthly benefit, whether it will be increased in line with inflation each
year (assuming a long-term disability);

• Premium waiver, in case of life policies —generally, the client will n ot

have to pay premiums while the benefit is being paid;

• Any unusual policy provisions that may affect the claim —remember,
the broker will have a much better idea of the policy cover than the
client. For example, where an illness has occurred within a short time
after affecting the policy, there may be an ‘incubation ’ period in the
policy; that is, the policy will not respond to any illness that arises
within 21 days of the commencement of the policy.

The broker will arrange for a claim form to be completed and forwarded to
the insurer. This will include provision for a medical certificate from the
doctor. Generally, insurers have their own forms that they want the doctor to
complete. The reason for this is that they need specific information to ensure
the loss falls within the policy provisions and, by posing questions aimed at
obtaining this information it reduces the need for subsequent questions of
the doctor.

The insurer’s claims department will generally deal direct with the client
during the perio d of disablement and will seek subsequent medical reports
from the doctor. During this time, there is little need for the broker, but in
the interests of good customer relations, the broker should periodically check
with the client to see that all is progressing well. In this way, the client will
feel that their interests are being looked after and the broker, by keeping in
touch, will be able to head off any problems before they develop into quite
difficult ones.
The client cannot see the result of those insurances for which he has paid
until he makes a claim. He will expect and be entitled to immediate and
expert attention. He should receive guidance on how to make the claim and
how to deal with insurers and loss adjusters when they are appointed.

The limitations and extent of the client's policy must be fully explained to
him and the insurance broker should be active in safeguarding the
interests of his client.

Health insurance claims

As soon as a health disorder is noticed the insurer needs to be in formed.

Insured may contact the broker instead of directly contacting the insurer and
then the broker should help the client in lodging the claim and explaining the
documentary and other formalities so as to expedite the claim settlements.

Where the condition is likely to involve a larger claim (possibly a long

hospital stay), it may be advisable to check with the insurer as to the cover

72
provided, for there may be provisions in the cover that would affect the
client’s decisions. For example, the insurer may meet the full hospital cost if
certain hospitals are used, but only a portion of the costs if other hospitals
are used. The client may elect to use one of the hospitals where the full cost
is met, but to do this they need this information in advance. The broker’s role
with health insurance is one of guiding and advising the client.

General insurance claims

Property

Any claim would first be reported to the insurer, and the insurer would most
likely respond by forwarding a claim form. Most claims under this category
tend to be small contents losses. With those claims, the claim form will seek
details of the loss or damage and how it occurred. It will also seek details of
the item(s)such as their value, and seek some evidence of their purchase
and ownership by the client. The insurer will seek to establish the type and
model of the item.

In most of the losses, the insurer would appoint a loss assessor who would
carry out an investigation and would deal direct with the client.

Motor vehicle

These losses are generally for smaller bumps and knocks. The insurer is
advised and they will arrange for the vehicle loss to be assessed. This all
involves little on the part of the client, and even less on the part of the
broker.

Since there is no financial limit to the amount of compensation a plaintiff may

claim in law, ideally policies should be without limit. But that is not possible.
At the end of the day the indemnity selected will be based on the cost
involved. Where there is a products liability exposure it must be remembered
that the limit is an aggregate one.

Very high limits of indemnity are arranged either by coinsurance or by means

of excess-o f-loss policies. Since the early 1970s there has been an expansion
of the excess-of-loss market, but newcomers do not always have the
expertise. Correctly arranged, the excess-of-loss policy will cover exactly the
same liabilities as are covered by the primary policy, with no gaps in cover.
But in practice different wordings may be used for the excess-o f-loss cover
so that a gap may appear between the primary and the excess cover. It is
the responsibility of the broker to see that this does not happen.

The introduction of 'claims made' polices presents many problems and the
broker should understand the reasons why they are being used by insurers
and the implications to the insured.

The broker who has placed the risk may sometimes be required to negotiate
with the underwriter regarding a claim. However, except for the very
smallest broking companies, it is more usual for a special claims broker to be
appointed whose sole responsibility is to deal with these items. If loss

73
adjusters or other assessing and negotiating parties are employed by the
under- writer, then it may be the broker's duty to negotiate with them as
well.

Part of any broker's role is to analyse the previous claims experience if there
is one. If there is a run of small claims it may be worth the client's time in
considering the application of an excess to cut these out. There is no future
in continuing to make small claims on insurers if the effect is a premium
increase at each renewal date. That is simply the swapping of bank notes. If
an excess is to apply, it is important to decide who will handle the claims
under the excess. Sometimes the insured will wish to do this himself since it
involves his relationship with third parties and there is thus a public relations
exercise involved. Sometimes the insured will prefer insurers to do it on his
behalf.

There is a growing internationalism about liability claims. This is particularly

true of product claims. Goods exported from any country may cause injury or
damage anywhere in the world. The insured may be sued in foreign courts.
The parent company may find its overseas subsidiaries are drawn into long
drawn legal battles with huge costs.

For Other liability cover, the aviation broker needs to have a reasonably
detailed knowledge of several other aspects of liability cover. Airport owner's
and operator's legal liability is the liability arising from use by third parties of
premises owned by the airport authority or operator, and hangar keeper’s
liability arises from damage to aircraft and equipment stored in hangars.
Products legal liability is liability arising from any products sold or repairs
carried out on the airport precincts. This is a specialised area and can be
satisfactorily studied by analysis of the' Ariel Airport Owner's and Operator's
Liability Insurance' wording.

Refueling liability is once again a specialised area, which can be further,

studied by analysis of a suitable wording.

Aviation claims
The claims broker's job entails the need for an in-depth know- ledge of the
aviation policy wording. Initial advice of a claim is notified to the broker and
a great deal of time and effort can be saved if his knowledge is sufficient to
take the correct action at this stage. On large risks, for instance, the broker
may have set up a special procedure, which enables funds to be available to
the client within hours of the loss. Quick and efficient arrangements for
settlement of claims are a vital part of the service given to the client by
brokers. Failure to act quickly can mean lost business to the broker and
perhaps the market.

In aviation insurance the broker plays a strong intermediary role in that he

may deal with surveyors and adjusters on behalf of underwriters, although
the actual appointment of surveyors and adjusters is by underwriters.

Marine claims
The marine claims broker must, of course, have a detailed knowledge of the
policy forms and classes. He must also have a working knowledge of other
aspects of business, which affect the settlement of claims.

74
Hull claims

When the broker receives the notification of a loss, it is vital that this
information is passed on to the underwriters immediately. The main reason is
that the underwriters can then appoint a surveyor. Any delay can cause
problems concerning the possibility of further damage, the incurring of
unnecessary expenses and delay in actual payment.

The broker must then advise the client that he has lodged the claim with the
underwriters and that a surveyor is on his way to inspect the damage. The
broker should advise the client to appoint an 'average adjuster' to act on the
client's behalf. The average adjuster will then work in collaboration with the
surveyor.

In the case of almost any hull loss there are at least five interested parties -
the insured, the average adjuster, the claims broker, the surveyor and the
insurer. The broker's job is to link all the parties together. The final report
and recommendations are usually submitted to the broker, who will then
negotiate settlement with the underwriters.

In certain cases the insured may request 'payment on account'. In this

situation the broker must negotiate the payment with the underwriters. The
broker arranges this in conjunction with the average adjuster. When
considering a collision claim the broker must advise the client to instruct a
solicitor to act on his behalf and advise the hull insurers when this action has
been ta ken. It may not be necessary if it is a very straightforward case such
as collision with a moored ship or fixed object.
Cargo claims

From a broking point of view, cargo claims can be looked at under two
headings: (1) imports, and (2) exports.

1. Imports. The first thing that will happen is that the consignee will
receive goods in a damaged condition or find that some goods are
missing. Notification of the loss will be sent to the broker, who must
immediately advise the underwriters. The underwriters may accept the
claim at this stage or appoint a surveyor. The broker will then instruct
the surveyor accordingly. At the same time it is vital that the broker
instructs the client to advise all other parties involved that they are
being held liable for the loss or damage or part thereof.

The surveyor and consignee will agree how to approach the claim and
the surveyor's report and recommendations will be sent to the broker
so that settlement can be negotiated with the underwriters. In
controversial cases the re port may go directly to the underwriters.

2. Exports. In the event of a loss a consignee does not want long,

protracted negotiations with London, and so the broker will set up a
'claims payable abroad system'. This system gives the local Brokers
agent the right to act as surveyor and adjuster, and in many cases
actually to pay the claim. In these circumstances there is very little
action for the broker to take other than to mark up his records when
final details are sent.

A broker may have to become substa ntially involved when the local agent is
not authorised actually to pay the claim. If a dispute arises, the broker will

75
be involved because the subsequent discussion, negotiations and arbitration
will usually take place in London. Where a very large loss o ccurs overseas,
the underwriters will appoint a specialist surveyor to inspect the damaged
cargo and report back.
This completes this necessarily brief summary of the main features of the
aviation, motor and marine markets. It is hoped that the chapter has
succeeded in its aim of acquainting the reader with the main types of cover
encountered in each market and the negotiating factors that the broker
constantly has to take into account. In certain cases brokers have been
responsible for establishing a market organisation for the centralisation of
loss assessment and the availability of funds in the short term, and generally
for advising the smaller companies overseas in this field.

With the use of a large number of re-insurers often situated in many

countries spread across continents, there could be considerable delays
without the organisational backing that the broker is able to supply. This will
include the, distribution of information, negotiation of difficult claims and
arrangement of special settlements.

Frequently brokers are criticised for not financing claims. However, where
there is no dispute as to creditworthiness, they are often forced to provide
finance by the ceding company. This is despite the fact that the original
contract is between the ceding company and its re -insurer, and the most that
a broker is legally obliged to do is to expedite settlement within a reasonable
period of time. The practice between the marine and non-marine markets
differs in this respect, but this is largely a question of the type of claim; the
principle of expeditious settlement is the same in all markets.

76
Chapter 5

ORGANISATION OF BROKERS OFFICE

Essential features of Accounting Systems

Clients file & record
Accounting standards
Annual returns of IRDA
Structure – Specialist
General broking units
Information technology for Brokerage firm.

The organisation and systems of an insurance broker's office

While increased mechanisation is inevitable, affecting the broker's needs for

certain personnel, the underlying requirement of an efficiently organised
office with skilled and experienced staff will remain unchanged. This chapter
deals with some of the basic systems necessary to all brokers' offices
whatever their size and the many and varied matters requiring close
attention.

Many brokers' offices will have a computer to handle a large or small part of
their operations. Reference has been made later in this chapter to the ever-
increasing use of computers in the daily routine of a broker's o ffice. However,
it should be noted that the rapid advance of technology and the wide variety
of systems available makes comment on any specific system difficult.

The purpose of every system is efficiency. To allow for growth all systems
must be flexible and this chapter has been written so as to reflect this. It
does not attempt to define a rigid way of organising an office, but in drawing
attention to as many aspects as possible it is hoped that it will assist towards
basic efficiency.

Systems are organised personnel with defined duties working to

predetermined rules and it is therefore via these personnel as units that
practical observations can be indicated.

SPECIALIST DEPARTMENTS
In their application to any particular broker's office each unit referred to
under the following subheadings could be of several persons but equally in a
small office one technician may wear two or more hats. To have specialists
for every function of a broker's workload is impractical for all but the largest
organisation.
Evolution and direction of development will usually dictate the emphasis on
the particular skills required of each employee and whether the old divisions
of fire, accident, motor, life and marine are used or the more recent
categories of property, liability, transportation and the person.

General experience should be supplemented by personnel trained in a more

specific field. Each stage of growth or staff replacement should be used to

77
supplement or strengthen the team as required by changing practices in the
insurance world and the composition of the broker's business.

The available technicians may well be divided into mixed skills sections each
handling a range of clients, or in an office with a large connection in one
trade a section may be devoted solely to clients in that trade. Where
'scheme' business forms an important part of the income specific personnel
would probably be allocated to that work.

Using modern subdivisions, many of the particular matters relevant to

various classes of business are outlined in the following paragraphs.

The insurance of property and business interruption

A system must be established for the regular collection of clients' stock
declarations where required for fire and/or theft polices, not only to ensure
that annual premium adjustments are done but, more importantly to keep a
check on the adequacy of the sums insured. A similar system is needed for
declarations necessary under book debts policies.

To adjust business interruption policies, auditors' certificates must be sent for

after the known close of a client's financial year-end. With correctly arranged
cover there will no doubt be sizeable return premiums due to the client.

The insurance of liabilities

Declarations required from clients must be organised to comply with the
terms of the policies. With any policies subject to a bonus for no or low
claims, records must be kept to ensure such premiums are adjusted as
claims may be outstanding for some years.
A good system must be established for obtaining fresh proposal forms
annually for professional indemnity policies. Where a change of insurer is
envisaged or possible the client must be reminded of the need to record
potential claims with the current insurers before expiry of the cover.

Insurances of transpo rtation

A system must be established for the collection of monthly, quarterly or half-
yearly declarations on motor fleet policies. Any motor rating guides held on
behalf of insurance companies must be kept up to date.

A diary system is necessary for the issue of continuation motor cover notes.
Cover note books must receive particular attention: they should be locked
away when the office is unattended and a register kept of the receipt from
and their return to insurers.

An adequate supply of certificates of' marine open covers should be retained

for onward transmission to clients as requested. !

Insurances of the person

A system is necessary for obtaining annual recosting information for pension
schemes; the speedy submission of salary lists ensures that the life cover is
increased to the multiple of any higher salary agreed since the previous
recosting. Pursuing the premium for. ,passing on to insurers avoids any late
payment charges to the fund. Where individual pension arrangements have

78
been made on a non-annual basis, a procedure should be established for
making annual contact with the client to ascertain his ability and desire to
make further one-off payments for his retirement. Those with annual
arrangements must also be approached on increasing their provision for their
retirement.

Most brokers' offices will issue travel certificates on behalf of one or more
insurers and sufficient blank certificates must be kept for this purpose,
particularly during the summer months.

Credit insurance and bonding

Apart from the need to obtain annual declarations, a system must be
established to record the customers' credit limits agreed with insurers for
each client.

For those clients requiring regular solvency bonds, the broker should obtain
and submit to the surety company the annual accounts of the client as soon
as they become available to maintain the facility for future bonds.

Servicing and development

Each commercial client and many private clients will need visiting at least
once per year. This task may be undertaken by directors, partners,
account controllers or departmental managers. It is the responsibility of all
staff to keep the servicing executive advised of all matters relating to a
particular client.

Although one or more members of staff may be specifically engaged on the

development of new business, it is the duty of all employees to recognise and
grasp every opportunity arising in this regard.

Claims
The efficiency of a broker's business is more readily measured by the
effectiveness of the actions of staff in dealing with claims, and the basis of
such efficiency must be a good filing and recording system so that papers
and information are speedily extracted.

A simple but effective system is for each claim to be numbered from a

central record book and cross-referenced to a card index for clients
maintained in alphabetical order. Files can then be retained in alphabetical or
numerical order. For those clients with numerous incidents such as motor
fleets' or employer's liability accident advices it may be necessary to
establish a simple supplementary system.

Maintaining a record of settlement details has benefits in avoiding the need

to refer for such information to insurers' records when so often it is required
urgently. A diary system should be instituted to ensure requests for
information are followed up. Where a bordereau underwriting authority is
held, the appropriate records should be kept to recover settlements from
insurers.

79
The arranging of cover
Enquiries from clients must be dealt with speedily. The full facts must be
ascertained in order that a positive quotation for the correct cover can be
provided. The facts can be conveyed to insurers by the 'slip' method - mainly
used in the London market - or by letter, telephone or personal visit to the
insurers.

The client's request for cover must be acted upon quickly with a confirmatory
cover note or letter dispatched the same day where feasible. Telephone
advices to insurers that cover has commenced on the terms quoted should
be followed by a letter or broker form confirming the position.

All polices and endorsements must be checked to see that they provide the
cover as requested by the client and tailored by the skill of the broker.

Renewals
The core of a broker's office must be the record-keeping system, which
ensures that the renewal of each policy is attended to efficiently. It must be
kept in date order either on cards or in book form, preferably loose-leaf.
Basic information should be recorded and kept up to date as amendments
occur. This enables one to check that renewal papers are received from
insurers and, if not, their absence can be investigated. After any necessary
review of each policy the renewal notice should be sent to the client and an
appropriate reminder system organised to ensure speedy completion of the
operation.

With commercial and private clients who have several policies due on the
same date the renewal invitations should be gathered together and an
appropriate review procedure adopted including a consultation with the
client, following which he can be debited with the renewal premiums.

General Office Procedures

Reception and telephones
The first impressions gained by a client or potential client are important and
care must be taken to offer a polite greeting whether it is face to face or on
the telephone. Sufficient information should be obtained from a telephone
caller to ensure that the right person handles the enquiry.

How successfully telephones are used in an office will depend not only on t he
training of the telephonist but also on the training of the staff who deal with
enquiries.

Filing
Insurance broking being an industry involving large quantities of paper, the
need for an efficient and well-maintained filing system is paramount. The
simplest system is often the best and is more capable of being maintained
satisfactorily by inexperienced staff, although even the simplest system
needs to be supervised by someone with experience and common sense. An
alphabetical filing system fulfils the requirement for simplicity whether
maintained in drawers or on shelving or in more sophisticated furniture.

Sufficient space must be kept for growth, and regular but infrequent thinning
out is necessary under the control of an experienced member of staff.

80
Microfilming is a useful aid to the reduction of stored paperwork. The files on
outstanding matters should be kept separately to ensure that they could be
reviewed regularly.

Typing
Whether a shorthand or audio system is used, the typing facility in a broking
office needs control to ensure a smooth flow of the work. Either a supervisor
is required or a senior person given the responsibility for the efficient
processing of the workload.

All machinery must be regularly maintained and a steady replacement

programme established. Portable dictation equipment can be a valuable aid,
but such is the rate at which refinements in this and other types of
equipment are being introduced that it would be meaningless to attempt to
specify a typical system here.

Mail
It is not sufficient just to have the most junior member or members of staff
opening and dispatching mail. Not only is there an auditing need to account
for monies received through the post but also it is the area where inefficiency
can be most easily no ticed by the client. Supervision by an experienced
person must be exercised.
Incoming all incoming mail should be conveyed to the post desk or room
immediately on receipt. If a particular letter is awaited, the intended
recipient should have to seek it only in one place.

The main time for incoming mail will be the first thing each day when, after
personally addressed mail is extracted and, distributed, all envelopes and
packages should be slit open. The' supervisor should examine all post for
cash, cheques, postal orders, etc., before the contents are soned in
accordance with agreed distribution. Personally addressed mail may contain
important and urgent information. If the addressee is absent, an agreed
procedure for opening should be arranged.

Where a second postal delivery is usual it should receive attention at a

prearranged time and be dealt with in the same manner as the morning post.
Many towns and districts have a local collection box facility; deliveries to it
and collections from it should be timed to precede letter-opening
arrangements in the office.

Outgoing mail from the occasional special dispatch, all outgoing mail should
be made available to the postal staff in good time before the normal close of
business hours. Not only will this avoid the irritation of after-hours work but
also enable the duties to be performed with care.
Badly folded letters present a poor picture to the insuring public, and more
than one envelope addressed to the same client on the same day will often
result in some sarcasm. All mail intended by the sender to go first class must
be clearly identified, j and staff should be equipped with an appropriate
postal weighing machine and postal rates to ensure the correct postage is
affixed. Despite the disproportionate expense when compared with other
office machinery, a postal franking machine has advantages

81
Statement of monies due or by endeavoring to reconcile to insurers'
statements of account. Cash and cheques received should be entered in a
daybook, preferably as they are extracted from the post. All receipts should
be entered in a cashbook from which action is initiated to deal with cash
clients' payments and credit clients' settlements. The bank paying-in book is
prepared and the receipts banked daily or more frequently if appropriate. All
invoices should show the VAT number, and in cases where VAT is chargeable,
such as for statutory inspections of lifting tackle, the charge should be clearly
identified. A system must be set up for sending regular reminders for
premiums due. In particular, where credit has been given agreed time limits
should be enforced. Accounts personnel must also be equipped to handle
salary payments insurance deductions, and other salary-related matters.
Other expenses incurred by staff on the company's business must be
reimbursed in a manner designated by management.

Reference Material
Each broker's office should build up a library of textbooks for reference
purposes, ensuring that they are replaced periodically to reflect changes,
which have occurred.

There are many and varied journals which can be obtained; each office will
be aware of those from which it gives the greatest benefits. To be of value
they must be seen by the greatest number of staff in the shortest possible
time and should be circulated with this in mind.

Administration Staff
The employment of staff has become more of a precise art as a result of the
maze of employment legislation which more than ever before requires that
the right person be obtained for a vacancy. In order to foster good employee
relations it is essential that employers make themselves aware of what the
legislation stipulates and follow the necessary basic procedures that are laid
down.

Secretarial
The company secretary in an insurance-broking firm has many essential
duties common to all company secretaries. Responsibilities of recent origin
particular to insurance brokers are fulfilling the requirements of the
Insurance Brokers Regulation.

General administration
Apart from those matters specific to an ins urance-broking office, there are
many other procedures, which require careful organisation to ensure that the
facilities are available for the prime workload to be efficiently performed. The
Security of the premises and the protection of records must be considered plus fire
and accident prevention. A fire certificate' must be obtained and fire-
extinguishing equipment serviced, preferably by specialist contractors under
a maintenance agreement.

Fire evacuation procedures must be established and advised to all members

of staff, particularly new employees, and fire drills performed at regular
intervals.

82
Computers and electronic data processing equipment
Much of the routine and tedious work in a broker's office can now be handled
quickly and efficiently by a suitable computer system.

The efficiency of any electronic data equipment will depend as much on the
quality of the hardware (equipment) and software (programs) as the
personnel operating the system. A typical good office computer
administration system will contain full information on the broker's clients,
both personal and corporate. It should contain full details of the client's various
policies and be capable of handling all of the financial trans - c; actions that a
broker carries out between both his client and the insurer.

The system should be capable of producing the broker's own personalised

renewal documentation and at the same time automatically post the
transaction into the client's account and the insurer's account. Part of the
record system would be a diary facility. The advantage of the computer diary
over the desk diary for such things as cover notes and other follow up
transactions, is that it cannot be missed. The entry remains in the computer
until such times as it is physically deleted.
The automatic production of advice notes to insurers on changes within a
policy is a facility contained in many computer systems, together with
automatic letter writing facilities for routine memos between the broker and
his client and the insurer.

The production of statistical management information should be a matter of

routine, covering such areas as commission earnings by client, by insurer, by
class of business, or any combination, together with other wide-ranging
report facilities - all of which make the extraction of information for such
things as IBRC returns and Professional Indemnity insurance relatively
simple.

When considering computerisation, the broker should firstly analyse the type
of business that he operates, i.e. personal lines only, commercial only, a
combination of the two, life and pensions only, etc., as installing a computer
system not designed for the broker's type of business can be an expensive
error as there are numerous systems on the market, many with a bias
towards a p articular type of activity.

For members of the British Insurance Brokers' Association, one of the first
steps in computerisation would be to obtain copies of computer fact sheets
from the Association.

Equipment
A broker's office is no different from any other, being highly dependent upon
an increasing amount of electrical and mechanical a ids - e.g. calculators and
photocopiers - to provide the efficiency desired. Space has limited the extent
to which each aspect of the organisation and systems of an insurance
broker's office can be covered, but it is hoped that the above forms a good
insight into basic requirements on which each office can 'build with
experience.

83
Chapter 6
LAWS & REGULATIONS BEARING ON A BROKER
Insurance Act, Contract Act, IRDA Act, Marine Insurance Act, The carriage
of Goods by sea Act, The merchant Shipping Act, The bill of lading act,
The Indian Ports Act, The Carriers Act, Indian Railways Act, The Indian
Post Office Act, Carriage by Air Act, Multi-modal Transportation Act, Motor
Vehicles Act, The Islands Steam Vessel Amendment Act, Public Liability
Insurance Act, Workmen’s Compensation Act, Sale of Goods Act, The
Indian Stamp Act, Foreign Exchange Management Act, Consumer
Protection Act, Insurance Ombudsman Act.

1. INSURANCE ACT, 1938

The Insurance Act was passed in the year 1938 and was brought in force
from 1 st July 1939. It has been amended several times, the important
amendments being in the years 1950,1968, 1999, 2002. Till a couple of
years ago, the Act was serving the requirement of the nationalized insurance
business. With the opening up of the sector to the private players and
changing scenario in the insurance market, many of the sections have
become redundant and many others need amendment.

Important provisions of the Insurance Act 1938 can be enumerated as

follows:

a. Prohibition of transactions of Insurance Business by certain persons

b. Registration (of insurer)
c. Requirement as to Capital
d. Manner of divesting excess shareholding
e. Accounts and balance sheets
f. Register of policies and claims
g. Submission of returns
h. Investments, loans and Management
i. Obligation of insurers in respect of rural or unorganized sector
j. Power of investigation by Authority
k. Amalgamation and transfer of insurance business
l. Assignment or transfer of policies and nominations
m. Commission and rebates
n. Licensing of agents
o. Expenses of management
p. License to insurance intermediary
q. Licensing of surveyors
r. Advance payment of premium
s. Power of Authority to make regulations

The latest amendment to the Act has been made by way of Insurance
(Amendment) Act 2002. Some of the important clauses inserted through the
amendment are as follows:

84
 • Insurance Cooperative Society
• Defining Insurance intermediary as per IRDA Act 1999
• Authority to IRDA to make regulation with respect to manner of receipt
of premium

2. Contract Act, 1872

The Indian Contract Act, 1872, was an outcome of different systems

adopted in the form of legislation. This Act originally contained
eleven Chapters. Chapter VII of the Act headed as Sale of Goods' was a part
of Contract Act, which was repealed by the Indian Sale of Goods Act, 1930 (3
of 1930). The last Chapter XI was also repealed by Indian Partnership Act,
1932 (9 of 1932).

The Act deals with the manner of making valid agreements, contracts, its
kind, manner and possibilities and impossibilities of performance, parties
to such performance, quasi-contracts, breach of contract and its
consequences. Apart from the above, indemnity, guarantee, bailment
agency and the effect of contracts through agency are also defined in the act.

3. Insurance Regulatory and Development Authority Act 1999

Government of India had set up a high-powered committee headed by Sri

R.N. Malhotra, former Governor, Reserve Bank of India to study the existing
structure of Insurance Industry and to recommend changes to make it more
competitive and efficient. The committee, in its report, felt the need of a
strong insurance regulatory apparatus and recommended for establishing
Insurance Regulatory Authority on the lines of SEBI. Accordingly, Insurance
Regulatory Authority Bill 1998 was introduced in the Lok Sabha. The Bill
provided for setting a Statutory Insurance Regulatory Authority and
containing three schedules incorporating amendments to the Insurance Act
1938, The Life Insurance Corporation Act, 1956 and the General Insurance
Business (Nationalization) Act, 1972 to permit the entry of private Indian
companies into the insurance sector and to make certain amendments to the
Insurance Act, 1938 consequently.

With the objectives cited above, Insurance Regulatory and Development

Authority Act, 1999 was passed and was made effective from 19th April 2000.

4. Marine Insurance Act, 1963

A contract of Marine Insurance is an agreement whereby the insurer

undertakes to indemnify the assured, in the manner and to the extent
thereby agreed, against Marine losses, that is to say, the losses incidental to
marine adventure.

85
The Marine insurance Act, 1963 closely follows the U.K. Marine Insurance
Act, 1906. The Act codifies the laws relating to marine insurance in India.
Different sections of the Act are kept under the following headings:

• Marine Insurance
• Insurable Interest
• Insurable Value
• Disclosure and Representations
• The Policy
• Double Insurance
• Warranties Etc.
• The Voyage
• Assignment of Policy
• The Premium
• Loss and abandonment
• Partial Losses (Including salvage and General Average and Particular
Charges)
• Measure of indemnity
• Rights of Insurers on payments
• Return of Premium
• Supplemental
• Schedule (of the policy)

In addition to the Marine Insurance Act, 1963 some other laws govern the
practice of marine insurance contracts. A brief account of the Acts is being
furnished ahead.

5. The Indian Carriage of Goods by Sea Act, 1925

Minimum rights and liabilities of a ship owner in respect of loss or damage to

cargo carried are defined in the Act. Broadly, three aspects of the ship
owner’s liability towards the cargo owners are provided in the Act.

a. The circumstances when the ship owner is deemed to be liable for loss
or damage to cargo unless he proves otherwise.
b. The circumstances when the ship owner is exempted from liability
c. The limits of liability of a ship owner for loss of or damage to the cargo.

6. The Merchant Shipping Act, 1958

This Act deals with provisions in regard to division of loss or damage to the
ship or cargo in case of collisions between two or more ships. Damages
payable for personal injury is also provided. Duties of the Master of the ship,
statutory provisions after an accident and limitation of liability of the ship
owner are the other provisions of the Act.

86
7. The Bill of lading Act, (IX of 1856)

A bill of lading is the conclusive evidence of contract of carriage of the

shipment between the ship owner and the shipper. It is a document of title.
By the customs of merchants, a bill o f lading is transferable by endorsement.
All the rights and liabilities also get transferred in the name of the endorsee.
It is an important document required for settlement of marine cargo claims.

8. The Indian Ports (Major Ports) Act, 1963

The Port Authorities are liable for the loss or damage to the goods in their
custody. The Indian Ports (Major Ports) Act, 1963 describes the liability of
the Port Authorities as also prescribes the time limit for filing monetary
claims on the Port Trust authorities.

9. The Carriers Act, 1865

The Carriers Act 1865 was passed at a time when the profession of carrying
goods or passengers was growing and the carriers had an open opportunity
to contract out of liability even for negligence or misconduct. As a result the
consignors were left wholly at their mercy. The Act was passed not only to
enable common carriers to limit their liability for loss or damage to property
delivered to them to be carried but also to declare their liability for loss of or
damage to such property occasioned by the negligence or criminal acts of
themselves, their servants or agents.

10. Indian Railways Act, 1989

The original Act was passed in the year 1890, which was amended in 1989.
The Act came into force with effect from 1st July 1990. There are some
provisions in this Act, which are relevant to marine insurance in India. These
provisions relate to rights and liabilities of Railways as carriers of goods.

Railways Claims Tribunals were formed by way of Railways Claims Tribunal

Act, 1987. The Tribunal deals with settlement of claims in respect of cargo
claims, personal injuries, refund of freights etc.

11. The Indian Post Office Act, 1899

When there is damage, misdelivery or loss of any other nature occurring

during the transmission of a postal article or there is a delay in transmission
of the article, Government is liable for the loss. The Indian Post Office Act,
1899 defines the liabilities of the Government for such losses.

12. The Carriage by Air Act, 1972

The Indian Carriage by Air Act, 1972, applies to international carriage of

goods and passengers. There is no Act in force relating to home carriage by
air. Section 4 of the Act empowers the State Government to extend by
notification the provisions of the Act to carriage by air, which is not
international carriage.

87
The Carriage by Air Act, 1972 replaced the original Act of 1934. This became
necessary to incorporate the Hague Protocol, which made certain changes in
the Warsaw convention in the uniformity of rules. The Act defines the limits
of liability of the carrier for injury or death loss of or damage to goods.

13. Multi-Modal Transportation Act, 1923

The preamble of the Act describes it as “an Act to provide for the regulations
of the multimode transportation of goods, from any place in India to a place
outside India, on the basis of multimode transport contract and for matters
connected therewith or incidental thereto”.

International transportation of general cargo has undergone important

structural changes due to advances in the transport technology including the
advent of containers. The quantum of India’s general cargo moving in
containers is also increasing. The Government of India had set up a working
group to examine the prevalent situation and to recommend a law on
multimode transportation of goods for India. This group formulated proposals
for the said legislation, which were substantially based on the rules framed
by International Chamber of Commerce.

The Multimode Transportation of Goods Act, 1993 provides for regulations of

multimode transportation, defines multimode transport document and
codifies responsibilities and liabilities of the Multimode Transport Operator.

14. Motor Vehicles Act, 1988

The Motor Vehicles Act was passed in the year 1939 which was reorganized
and replaced by Motor Vehicles Act 1988. This Act provides for compulsory
insurance for motor vehicles in Chapter XI of the Act. No motor vehicle can
be used in a public place without having in force an insurance policy issued
by an authorised insurer. The statutory requirement of the motor policy is
restricted to cover the insured’s liability towards third parties in respect to
death, bodily injury and property damage. Own damage cover for the vehicle
is optional. Some of the important provisions of the Act are discussed below:

• No Fault Liability (Section 140)

“Where the death or permanent disablement of any person has resulted from
an accident resulting out of the use of motor vehicle, the owner of the vehicle
shall, or, as the case may be, the owne rs of the vehicle shall, jointly and
severally, be liable to pay compensation in respect of such death or
disablement in accordance with the provisions of this section.”

The amount of compensation payable is restricted to Rs.50000/- in case of

death and R s.25000/- in case of Permanent disability.

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Victim may claim compensation under any other section of the Act in addition
to the claim under No Fault Liability. However, if the compensation awarded
in other section were higher than the amount awarded under section 140,
the latter amount would be deducted from the award amount.

• Hit and Run Accident

Accidents arising out of use of motor vehicle, the identity of which cannot be
ascertained are named as hit and run accidents. Section 163 (1) of the MV
Act 1988 provides for the establishment of Solatium Fund for paying
compensation to the victims of such hit and run accidents. Accidents
resulting into death or grievous hurt only are compensated out of this fund.
Grievous hurt has been defined in the section 320 of Indian Penal Code.

Compensation payable in case of death is Rs.25000/- and Rs.12500/- for

grievous hurt.

• Limits of Liability (Section 147)

This section provides for setting out the limits of liability in an insurance
policy as described below:

1. Again st death of or bodily injury to any person or to any

passenger of a public service vehicle: “the amount of liability
incurred”
2. Liabilities if any under the Workmen’s Compensation Act 1923 in
respect of death or bodily injury to any such employee (a)
engaged in driving the vehicle, or (b) if it is public service
vehicle, engaged as a conductor or in examining tickets, or (c) if
it is a goods carriage, being carried in the vehicle.
3. T.P. Property damage: unto Rs.6000/- irrespective of the type of
vehicle.

15. Public Liability Insurance Act, 1991

The Public Liability Insurance Act has come into force with effect from April 1,
1991. The Act prescribes for immediate relief to victims of accidents in
hazardous industries or operations. Very often the people affected belong to
the weaker strata of the society with little capacity to secure compensation
for their sufferings.

16. Workmen Compensation Act 1923

This Act came into force on 1st July 1924 and has been amended time to
time. With the growing complexity o f industry and consequently more use of

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machinery, the workmen are more exposed to danger of accidents. The Act
provides for compensation for accidental injury or death of a workman out of
and in the course of employment. The compensation is payable by the
employer based on multiplier factors incorporated in the Act.

Factor-multiplier system was introduced by way of amendment of Sec. 4 (1)

of the WC Act, 1923. The actual amount of compensation is arrived at as
follows:

For Death – an amount equal to 50 % of the monthly wages of the deceased

workman multiplied by relevant factor or Rs.80000/-, whichever is more.

For Permanent total disability - an amount equal to 60% of monthly wages

multiplied by relevant factor or Rs. 90000/- whichever is more.

Where the monthly wages of the workman is more than Rs.4000/-, his
monthly wages would be taken as Rs.4000/- only for the purpose of
computation.

From the above two illustrations it can be inferred that the minimum
compensation payable in case of death is Rs.80000/- and in case of
permanent disability is Rs.90000/-. Multiplier factor reduces as the age of the
workman advances. Half monthly compensation is payable where the
disablement is temporary partial or total.

Section 3(2) of the Act fastens liability upon the employer to pay
compensation to the workmen for certain occupational diseases also, stating
“ contracting of the diseases shall be deemed to be an injury by accident of
the meaning by this section and unless the contrary is proved the accident
shall be deemed to have arisen out of and in the course of employment”.

17. Sale of Goods Act

Sale of Goods Act was passed to define and amend the law relating to the
Sale of Goods. Prior to the Act, the law relating to sale of goods was
contained in Sections 76 to 123 of the Indian Contract Act, 1872.This Act is
intended to deal exhaustively with the law as to sale of goods, except to
which, its provisions are made to depend on other Acts.

18. The Indian Stamp Act, 1899

The stamp duties are taxes on transaction levied in the shape of stamps on
instruments about them. The Indian Stamp Act, original enacted in the year
1899 was amended both by Central Legislature and by the State Legislature
under Devolution Act. The Indian Stamp Act, 1899 is in force in the whole of
India except the State of Jammu and Kashmir as regards the rates of stamp
duties in respect of instruments specified in entry 91 of the Union list.

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Article 47 of the Act deals with the amount of duty chargeable on the policies
of insurance. The Article divides entire insurance business in six parts as
follows:
A. Sea Insurance
B. Fire and other classes of insurance not included elsewhere in the article
C. Accident and Sickness Insurance
C. Insurance by way of indemnity against liability under WC Act, 1923
D. Life Insurance, Group Insurances, other insurances not specifically
provided for
E. Reinsurance

20. Foreign Exchange Management Act, 1999

The Foreign Exchange Management Act (FEMA) is a law to replace the

Foreign Exchange Regulation Act, 1973. FEMA extends to the whole of India.
It applies to all branches, offices and agencies outside India owned or
controlled by a person resident in India and also to any contravention
hereunder committed outside India by any person to whom this Act applies.
In exercise of the powers conferred by sub-section (2) of Section 47 of the
Foreign Exchange Management Act, 1999 (42 of 1999), the Reserve Bank
has made the following regulations with respect to the holding by a person
resident in India of a general or life insurance policy issued by an insurer
outside India, namely:

Prohibition on taking general or life insurance policy issued by an insurer

outside India: -

Save as otherwise provided in the Act, rules or regulations made or orders or

directions issued under the Act, no person resident in India shall take any
general or life insurance policy issued by an insurer outside India. Provided
that the Reserve Bank may, for sufficient reasons, permit a person resident
in India to take any life insurance policy issued by an ins urer outside India.

Permission to continue to hold a policy taken: -

1) A person resident in India but not permanently resident therein may

continue to hold any insurance policy issued to him by an insurer outside
India, if the premium on such policy is paid out of foreign currency resources
outside India.

2) A person resident in India may take or continue to hold a general

insurance policy
Issued by an insurer outside India, provided that, before taking the policy in
either case, he had obtained a no objection certificate from the Central
Government.

3) (i) A person resident in India may continue to hold any insurance policy
issued by an insurer outside India when such person was resident outside
India:

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Provided that the premium on the policy is paid out of his foreign currency
account maintained with a bank outside India or out of funds held in his
Resident Foreign Currency account maintained with an authorised dealer;

Provided further that where the policy is a life insurance policy in force for a
period of not less than three years prior to the policyholder’s return to India,
the premium due on the policy may also be paid by making remittance from
India.

(ii) The maturity proceeds/ amount of claim received in respect of the policy
referred to in sub-clause (i), may be credited to the policy-holder’s foreign
currency account maintained with a bank outside India or, as the case may
be, to his Resident Foreign Currency account maintained with an authorised
dealer in India;

Provided that where the premium due on a life insurance policy has been
paid by making remittance from India, the policy holder shall repatriate to
India through normal banking channels, the maturity proceeds or amount of
any claim due on the policy, within a period of seven days from the receipt
thereof.

21. The Consumer Protection Act, 1986

The Act provides for setting up of

a. The Central Consumer Protection Council
b. The State Consumer Protection Council
c. Consumer Disputes Redressal Agencies

The Central and State Consumer Protection Councils are vested with the
responsibility of protecting rights of consumers. A three-tier system of
Consumer Disputes Redressal Machinery has been established for the
purpose of this Act – District Forum, State Commission and National
Commission. These for an established under the Act are quasi-judicial
authorities. The important point to note here is that this Act operates in
addition to and not in derogation of any other law for the time being in force.

MACHINERY AND ITS COMPOSITION

DISTRICT FORUM President and two other members,

one of who shall be a woman.

STATE COMMISSION President and two other members,

one of who shall be a woman.

NATIONAL COMMISSION President and four other members,

one of who shall be a woman

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PECUNIARY JURISDICTION

DISTRICT FORUM Unto Rest. 5 lakhs

STATE COMMISSION i. Original: Above Rs. 5 lakhs and

unto Rest. 20 lakhs
ii. Appelate jurisdiction

NATIONAL COMMISSION i. Original: Above Rs. 20 lakhs

ii. Appelate jurisdiction

A consumer is a person belonging to following categories:

i. One who buys any goods for a consideration, which has been paid
or promised or partly paid and partly promised under any system of
deferred payment.

ii. One who hires or avails any services including any beneficiary
thereof for a consideration, which has been paid or promised or
partly paid and partly promised or under any system of deferred
system.

iii. It includes any user or beneficiary of goods or services other than

the person who actually buys goods or hires/ avails services where
such use is made with the approval of the purchaser/ hirer.

The relief available to consumers are enumerated below:

i. Removal of defects from the goods

ii. Replacement of goods
iii. Refund of the price paid
iv. Award of compensation to the consumer for any loss or injury
v. Removal of deficiency in service
vi. To discontinue (not to repeat) UTP/ RTP
vii. Not to offer hazardous goods from being offered for sale
viii. To provide for adequate costs to parties

A complaint may not be admitted unless it is filed within 2 years from the
date on which cause of action has arisen. Once a complaint is admitted, The

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District Forum/ State Commission / National Commission are required to
decide the cases, as far as possible, within 3 months where analysis or
testing is not required and 5 months where analysis or testing is required.
Appeal should be decided within 90 days from the first date of hearing.

Appeal against the order of District Forum lies to State Commission and
similarly appeal against the order of State Commission lies to National
Commission. Final Appeal lies to Supreme Court. Appeal has to be filed within
30 days from the order of the Forum or Commission as the case may be.

If no appeal is preferred against an order, the order is final. Consumer courts

may enforce their own orders or send the order to a civil court with
competent jurisdiction for enforcement in the event of its inability to execute
the order.

22. Insurance Ombudsman

In exercise of powers conferred by sub section (1) of section 114 of the

insurance Act, 1938, the central Government has framed rules for redressal
of public grievances. The rules are called The Redressal Of Public Grievances
Rules, 1998.

Section (6) of the said rule states that the government body shall appoint
one or more persons as ombudsman for the purpose of these rules. The
ombudsman selected may be drawn from a wider circle including those who
have experience or have been exposed to the industry, civil services,
administrative services, etc. in addition to those drawn from judicial service.

Besides other things, different sections of the said rules define the Term of
office, Removal from office, Remuneration etc. of Ombudsman, Territorial
Jurisdiction of Ombudsman and Powers of the Ombudsman. Names and
addresses of the existing ombudsmen can be seen on the IRDA’s web site
www.irdaindia.org .

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 To be published in the Gazette of India Extraordinary, Part III, Section 4
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY
NOTIFICATION
New Delhi, the 16th October 2002

INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (INSURANCE

BROKERS) REGULATIONS, 2002

F. No, IRDA/Reg/10/ 2002 —. In exercise of the powers conferred by section

114A of the Insurance Act, 1938 (4 of 1938) read with sections 14 and 26 of
the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999)
the Authority in consultation with the Insurance Brokers Committee, hereby
makes the following regulations, namely: -

1. Short title and commencement — (1) these regulations may be called the
Insurance Regulatory and Development Authority (Insurance Brokers)
Regulations, 2002.

(2) They shall come into force on the date of their publication in the
Official Gazette.

2.Definitions — (1) Unless the context otherwise requires, —

(a) “Act” means the Insurance Act, 1938 (4 of 1938);

(b) "Brokers Committee" means the Brokers Committee
constituted under section 25 of the Insurance Regulatory and
Development Authority Act (41 of 1999);
(c)"Authority" means the Insurance Regulatory and Development
Authority established under sub-section (1) of section 3 of
Insurance Regulatory and Development Authority Act, 1999 (41 of
1999);
(d) "Composite broker” means an insurance broker who for the time-
being licensed by the Authority to act as such, for a remuneration,
arranges insurance for his clients with insurance companies and/or
re-insurance for his client/s;
(e) "Direct broker" means an insurance broker who for the time-
being licensed by the Authority to act as such, for a remuneratio n
carries out the functions as specified under regulation 3 either in
the field of life insurance or general insurance or both on behalf of
his clients;
(f) "Enquiry officer" means an officer of the Authority, or any other
person having experience in insurance business, who is appointed
by the Authority under regulation 37, to hold an enquiry against an
insurance broker;

95
 (g) "Form" means the forms specified under these regulations;
(h) "Inspecting authority" means one or more of its officers
appointed by the Authority to discharge the functions stated in
regulation 29;
(i) "Insurance broker" means a person for the time-being licensed by
the Authority under regulation 11, who for a remuneration arranges
insurance contracts with insurance companies and/ or reinsurance
companies on behalf of his clients.

Explanation: The term “insurance broker” wherever it appears in

these regulations shall be deemed to mean a direct broker, a
reinsurance broker or a composite broker, as the case may be,
unless expressly stated to the contrary
(j) “Person” means
(i) An individual; or
(ii) A firm; or
(iii) A company formed under the Companies Act, 1956 (1 of
1956); or
(iv) A co-operative society registered under the Co-operative
Societies Act, 1912 or under any law for the registration of co-
operative societies; or
(v)Any other person recognized by the Authority to act as an
insurance broker;
(k)"principal officer" means — (i) proprietor, in the case of a
proprietary concern; or (ii) a partner, in the case of a partnership
firm; or
(iii) A director, who is responsible for the activities of the insurance
broking in the case of a body corporate;
(iv) The chief executive officer appointed exclusively to carryout the
functions of an insurance broker
(l) "Regulations" means Insurance Regulatory and Development
Authority (Insurance Brokers) Regulations, 2002;
(m) "Re-insurance broker" means an insurance broker who, for
remuneration, arranges reinsurance for direct insurers with
insurance and reinsurance companies.

(2) Words and expressions used and not defined in these regulations
but defined in the Insurance Act, 1938 (4 of 1938), or the Life
Insurance Corporation Act, 1956 (31 of 1956) or the General Insurance
Business (Nationalisation) Act, 1972 (57 of 1972), or Insurance
Regulatory and Development Authority Act, 1999 (41 of 1999) shall
have the meanings respectively assigned to them in those Acts or the
rules and regulations made there under, as the case may be.

3. Functions of a direct broker — The functions of a direct broker shall

include any one or more of the following:

96
 (a) Obtaining detailed information of the client's business and risk
management philosophy;
(b) familiarising himself with the client's business and underwriting
information so that this can be explained to an insurer and others;
(c) Rendering advice on appropriate insurance cover and terms;
(d) Maintaining detailed knowledge of available insurance markets,
as may be applicable;
(e) Submitting quotation received from insurer/s for consideration of
a client;
(f) Providing requisite underwriting information as required by an
insurer in assessing the risk to decide pricing terms and conditions
for cover;
(g) Acting promptly on instructions from a client and providing him
written acknowledgements and progress reports;
(h) Assisting clients in paying premium under section 64VB of
Insurance Act, 1938 (4 of 1938);
(i) Providing services related to insurance consultancy and risk
management;
(j) Assisting in the negotiation of the claims; and
(k)Maintaining proper records of claims;
4. Functions of a re -insurance broker — The functions of a re-insurance
bro ker shall include any one or more of the following:
(a) familiarising himself with the client’s business and risk retention
philosophy;
(b) Maintaining clear records of the insurer's business to assist the
re-insurer(s) or others;

(c) Rendering advice based on technical data on the reinsurance

covers available in the international insurance and the re-insurance
markets;
(d) Maintaining a database of available reinsurance markets,
including solvency ratings of individual re-insurers;
(e) Rendering consultancy and risk management services for
reinsurance;
(f) Selecting and recommending a re -insurer or a group of re-
insurers;
(g) Negotiating with a re-insurer on the client’s behalf;
(h) Assisting in case of commutation of reinsurance contracts placed
with them;
(i) Acting promptly on instructions from a client and providing it
written acknowledgements and progress reports;
(j) Collecting and remitting premiums and claims within such time
as agreed upon;
(k) Assisting in the negotiation and settlement of claims;
(l) Maintaining proper records of claims; and
(m) Exercising due care and diligence at the time of selection of re-
insurers and international insurance brokers having regard to their

97
 respective security rating and establishing respective responsibilities
at the time of engaging their services.

5. Functions of composite broker — A composite broker shall carry out any

one or more of the functions mentioned in regulations 3 and 4.

6. Application for grant of license — (1) An application by a person for

grant of a license as an insurance broker shall be made in Form A to the
Authority.

(2) The application under sub-regulation (1) shall be made for any one
or more of the following categories, namely:
(a) Direct broker;
(b) Re-insurance broker;
(c)Composite broker;
Along with the requisite fees as specified in regulation 18.

7. Application to conform to the requirements — An application, not

complete in all respects and not conforming to the instructions specified in
the Form A and these regulations, shall be rejected.

Provided that, before rejecting any such application, the applicant shall be
given a reasonable opportunity to complete the application in all respects and
rectify the errors, if any.

8. Furnishing of information, clarification and personal representation — (1)

The Authority may require an applicant to furnish any further information or
clarification for the purpose of disposal of the application, and, thereafter, in
regard to any other matter as may be deemed necessary by the Authority.

(2) The applicant or its principal officer shall, if so required, appear before
the Authority for a personal representation in connection with an
application.

9. Consideration of application — (1) The Authority while

considering an application for grant of a license shall take into account, all
matters relevant to the carrying out of the functions by the insurance
broker.

(2) Without prejudice to the above, the Authority in particular, shall

take into account the following, namely: -
(A) Whether the applicant is not suffering from any of the
disqualifications specified under sub-section (5) of section 42 D of
the Act;
(B) Whether the applicant has the necessary infrastructure, such as,
adequate office space, equipment and trained manpower to
effectively discharge his activities;

98
(C) Whether the applicant has in his employment a minimum of two
persons who have the necessary qualifications specified in clause
(F) below and experience to conduct the business of insurance
broker;
(D) Whether any person, directly or indirectly connected with the
applicant, has been refused in the past the grant of a license by the
Authority.
Explanation: — For the purposes of this sub-clause, the expression
"directly or indirectly connected" means a relative in the case of an
individual, and in the case of a firm or a company or a body
corporate, an associate, a subsidiary, an interconnected
undertaking or a group company of the applicant. It is hereby
clarified that these terms shall have the same meanings as ascribed
to them in the Companies Act, 1956 (1 of 1956) or MRTP Act, 1969
(54 of 1969), as the case may be.
(E) Whether the applicant fulfils the capital requirements as specified
in regulation 10 and deposit requirements as specified in regulation
22
(F) Whether the principal officer of the applicant -
(i) Possesses the minimum qualification of:
(a) Bachelors/ Masters degree in Arts, Science, or Social
Sciences or Commerce or its equivalent from any institution/
university recognized by any State Government or the Central
Government; or
(b) Bachelor’s degree in engineering or its equivalent from any
institution/ university recognized by any State government or
the Central government; or
(c)Bachelor’s degree in law or its equivalent from any institution/
University recognized by any State Government or the
Central Government; or
(d) Masters in Business Administration or its equivalent from
any institution/ university recognized by any State
Government or the Central Government; or
(e) Associate/ Fellow of the Insurance Institute of India,
Mumbai; or
(f) Associate/ Fellow of the Institute of Risk Management,
Mumbai; or
(g) Any post graduate qualification of the Institute of
Insurance and Risk Management, Hyderabad; or
(h) Associate/ Fellow of the Institute of Chartered Accountants
of India, New Delhi; or
(i) Associate/ Fellow of the Institute of Cost and Works
Accountants of India, Kolkata; or
(j) Associate/ Fellow of the Institute of Company Secretaries of
India, New Delhi; or
(k)Associate/ Fellow of the Actuarial Society of India; or
(l) Certified Associateship of the Indian Institute of Bankers,
Mumbai; or

99
 (m) Any other qualification specified from time to time by the
Authority under these regulations; and
(ii) The principal officer of the applicant has received at least one
hundred hours of theoretical and practical training from an
institution recognised by the Authority from time to time.

Provided that where the principal officer of the applicant:

(a) Has been carrying on reinsurance related activity or
insurance consultancy for a continuous period of seven years,
preceding the year in which such an application is made; or
(b) Has for a period of, not less than seven years prior to the
application made to the Authority has been a principal
underwriter or has held the position of a Manager in any one
of the nationalised insurance companies in India; or
(c) Is an Associate/ Fellow of the Insurance Institute of India,
Mumbai; or Associate/ Fellow of the Institute of Risk
Management, Mumbai; or Associate/ Fellow of the Actuarial
Society of India; or any post graduate qualification of the
Institute of Insurance and Risk Management, Hyderabad;

The theoretical and practical training from an institution

recognised by the Authority from time to time according to a
syllabus approved by the Authority shall be fifty hours.

(iii) Has passed an examination, at the end of the period of

training mentioned in the proviso above, conducted by the
National Insurance Academy, Pune or any other examining
body recognised by the Authority.
(G) Whether the principal officer has not violated the code of conduct as
specified in Schedule III to these regulations;
(H) That the applicant is not engaged in any other business other than
the main objects of the applicant; and
(I) The Authority is of the opinion that the grant of license will be in the
interest of policyholders.
Exception: In the case of applications made to the Authority
immediately fo llowing the notification of these regulations, the
requirements under sub-regulation (2)(C) shall stand modified to the
extent that instead of two qualified persons mentioned in the
requirement be scaled down to one person, who should have qualified
himself at the latest by the time of the grant of a license under these
regulations. This exception may be available only to applications made
to the authority unto 31st March 2003.

(3) Any employee responsible for soliciting and procuring insurance

business on behalf on an insurance broker shall also have to fulfill the
requirements mentioned in sub-regulations (1) and (2) above and a list
of such employees need to be provided to the Authority and
acknowledged by it.

100
10. Requirements of Capital— (1) Any applicant seeking to become an
insurance broker under these regulations should satisfy the following
conditions:
(i) It shall have a minimum amount of capital as mentioned below:
Category Minimum amount (Rupees)
(a) Direct broker fifty lakhs
(b) Reinsurance broker Two hundred lakhs
(c) Composite broker Two hundred and fifty lakhs

(ii) The capital in the case of a company limited by shares and a

cooperative society shall be in the form of equity shares
(iii) The capital in the case of other applicants shall be brought in
cash;
(iv) The applicant shall exclusively carry on the business of an
insurance broker as licensed under these regulations.

(2) No part of the capital of an applicant shall be held by a non-Indian

interest beyond 26% at any time. For the purposes of these
regulations, the calculations of non-Indian interest shall be made in the
same manner as specified in Insurance Regulatory And Development
Authority (Registration of Indian Insurance Companies) Regulations,
2000 for an insurer.

11. Procedure for licensing — The Authority on being satisfied that the
applicant fulfills all the conditions specified for the grant of license,
shall grant a license in Form B and send an intimation thereof to the
applicant mentioning the category for which the Authority has granted
the license. The license shall be issued subject to the insurance broker
adhering to the conditions and the code of conduct as specified by the
Authority from time to time.

12. Validity of license — A license once issued shall be valid for a period
of three years from the date of its issue, unless the same is suspended
or cancelled pursuant to these regulations.

13. Renewal of license — (1) An insurance broker may, within thirty

days before the expiry of the license, make an application in Form A to
the Authority for renewal of license.
Provided however that if the application reaches the Authority later
than that period but before the actual expiry of the current license, an
additional fee of rupees one hundred only shall be payable by the
applicant to the Authority.
Provided further that the Authority may for sufficient reasons offered in
writing by the applicant for a delay not covered by the previous
proviso, accept an application for renewal after the date of the expiry
of the license on a payment of an additional fee of seven hundred and
fifty rupees only by the applicant.

101
 (2) An insurance broker before seeking a renewal of license shall have
completed, at least twenty-five hours of theoretical and practical
training, imparted by an institution recognized by the Authority from
time to time.

(3) The application for a renewal, under sub-regulation (1) shall be

dealt with in the same manner as is specified under regulation 9.

(4) The Authority, on being satisfied that the applicant fulfills all the
conditions specified for a renewal of the license, shall renew the license
in Form B for a period of three years and send an intimation to that
effect to the applicant.

(5) An insurance broker licensed under these regulations for a specified

category may also apply for the grant of a license by the Authority for
any other category by fulfilling the requirements of these regulations.
However, such application shall be made only after a lapse of one year
from the grant of a license in the firs t instance.

14. Procedure where a license is not granted — (1) Where an application

for grant of a license under regulation 6 or of a renewal thereof under
regulation 13, does not satisfy the conditions set out in regulation 9,
the Authority may refuse to grant the license.
Provided that no application shall be rejected unless the applicant has
been given a reasonable opportunity of being heard.

(2) The refusal to grant a license shall be communicated by the

Authority within thirty days of such refusal to the applicant stating
therein the grounds on which the application has been rejected.

(3) Any applicant, if aggrieved by the decision of the Authority, may

apply within a period of thirty days from the date of receipt of such
intimation, to the Chairman of the Authority for a reconsideration of
its decision.

(4) The Chairman of the Authority shall consider such an application

and communicate his decision thereon to the applicant in writing
within six weeks of the receipt thereof.

15. Effect of refusal to grant license — Any applicant, whose application

for grant of a license under regulation 6 or of a renewal thereof under
regulation 13 has been refused by the Authority, shall, on and from the
date of the receipt of the communication under regulation 13(2) cease
to act as an insurance broker. He, however, shall continue to be liable
to provide services in respect of contracts already entered into through
him. Such a service shall continue only unto the period of expiry of

102
 those current contracts, details of which shall be disclosed to the
Authority on receipt of the communication under regulation 13.

16. Issue of a duplicate license — (1) In the event of a license being lost
or destroyed or mutilated, an insurance broker shall submit to the
Authority an applic ation along with a fee of rupees one thousand
requesting for the issue of a duplicate license and with a declaration
giving full details regarding the issue of the license and its loss or
destruction or mutilation.

(2) The Authority, after satisfying itself that the original license has
been lost, destroyed or mutilated, shall issue a duplicate license in
Form B with an endorsement thereon that it is a duplicate one.

17. Action against a person acting as an insurance broker without a valid

license—
(1) Notwithstanding and without prejudice to initiation of any criminal
proceedings against any person, who acts as an insurance broker
without holding a valid license issued under these regulations, the
Authority may invoke against such a person penal actio n under the
Act.
(2) Where the person falling under sub-regulation (1), is a company
or firm or body corporate, without prejudice to any other
proceedings which may be taken by the Authority against the
company or firm or body corporate, every director, manager,
secretary or other officer of the company or body corporate, and
every partner of the firm, who is knowingly a party to such a
contravention shall also be liable to be proceeded against.

18. Payment of fees and the consequences of failure to pay fees — (1)
Every applicant eligible for the grant of a license shall pay such fees in
such a manner and within such a period as specified in Schedule II.

(2) Where an insurance broker fails to pay the annual fees payable
under sub-regulation (1), the Authority may suspend the license,
whereupon the insurance broker shall cease to carry on business for
the period during which the suspension subsists.

19. Remuneration – (1) No insurance broker shall be paid or contract

to be paid by way of remuneration (including royalty or license
fees or administration charges or such other compensation), an
amount exceeding:

(A) On direct general insurance business -

(i) On tariff products:
a. 10 percent of the premium on that part of the business which
is compulsory under any statute or any law in force;

103
 b. 12½ percent of the premium on others.
(ii) On non- tariff products:
17½ percent of the premium on direct business.

(B) On direct life insurance business -

(i) Individual insurance
(a) 30 percent of first year’s premium
(b) 5 per cent of each renewal premium
(ii) Annuity
(a) Immediate annuity or a deferred annuity in consideration
of a single premium, or where only one premium is payable
on the policy:
2 percent of premium
(b) Deferred annuity in consideration of more than one
premium:
(i) 7½ percent of first year’s premium
(ii) 2 percent of each renewal premium
(iii) Group insurance and pension schemes:
(a) One year renewable group term insurance, gratuity,
superannuation, and group savings linked insurance —
7½ percent of risk premium
Note: Under group insurance schemes there will be no
remuneration for the savings component.
(b) Single premium -
2 percent of risk premium
(c) Annual contributions, at new business procurement stage -
5 percent of non-ris k premium with a ceiling of Rupees
three lakhs per scheme.
(d) Single premium new business procurement stage -
0.5 percent with a ceiling of Rupees five lakhs per scheme.
(e) Remuneration for subsequent servicing -
(i) one year renewable group term assurance -
2 percent of risk premium with a ceiling of rupees 50,
000/- per scheme.

(C) On reinsurance business-

(i) As per market practices prevalent from time to time.

Explanation: For purposes of the procurement of business, an insurer

shall not pay an agenc y commission, allow a special discount, and pay
remuneration to brokers for the same insurance contract.

(2) The settlement of accounts by insurers in respect of remuneration

of brokers shall be done on a monthly basis and it must be ensured that
there is no cross settlement of outstanding balances.

20. Ceiling on business from single client – (1) The business of the
insurance broker shall be carried in such a manner that, not more than

104
 50 percent of the premium (quantum, receipts, etc. as the case may
be) in the first year of business, 40 percent of the premium in the
second year of business, and 30 percent of the premium from the third
year of business onwards shall emanate from any one client.
Note: For the purposes of this regulation, the term “client” shall
include, in the case of a firm or a company, an associate or a
subsidiary or a group concern under the same management.

(2) The decision of the Authority as to whether a company, a business

or an organisation is under the same management shall be final.

21. Code of conduct — Every insurance broker shall abide by the Code
of Conduct as specified in Schedule III.

22. Deposit requirements — (1) Every insurance broker shall before the
commencement of his business, deposit and keep deposited with any
scheduled bank a sum equivalent to 20% of the initial capital in fixed
deposit, which shall not be released to him unless the prior permission
of the Authority is obtained

Provided that the Authority may impose a separate limit of deposit, in

any case not exceeding Rupees one hundred lakhs, for a person
covered by regulation 2(1)(j)(v).

(2) Every insurance broker shall furnish to the Authority as and when
called upon to do so a statement certified by the Bank in which such
fixed deposit is kept.

23. Segregation of insurance money — (1) The provisions of section 64VB of

the Act shall continue to determine the question of assumption of risk by
an insurer.
(2) In the case of reinsurance contracts, it may be agreed between the
parties specifically or as part of international market practices that the
licensed reinsurance broker or composite broker can collect the premium
and remit to the re -insurer and/or collect the claims due from the re-
insurer to be passed on to the insured. In these circumstances the money
collected by the licensed insurance broker shall be dealt with in the
following manner:
(a) He shall act as the trustee of the insurance money that he is
required to handle in order to discharge his function as a
reinsurance broker and for the purposes of this regulation it shall be
deemed that a payment made to the reinsurance broker shall be
considered as payment made to the re-insurer;
(b) Ensure that ‘insurance money’ is held in an ‘Insurance Bank
Account’ with one or more of the Scheduled Banks or with such
other institutions as may be approved by the Authority;

105
 (c)Give written notice to, and receive written confirmation from, a
bank, or other institution that he is not entitled to combine the
account with any other account, or to exercise any right of set-off,
charge or lien against money in that account;

(d) Ensure that all monies received from or on behalf of an insured

are paid into the ‘Insurance Bank Account’, which remains in the
`Insurance Bank Account’ to remain in deposit until it is transferred
on to the re-insurer or to the direct insurer.
(e) Ensure that any refund of premium which may become due to a
direct insurer on account of the cancellation of a policy or
alteration in its terms and conditions or otherwise shall be paid by
the re-insurer directly to the direct insurer.
(f) Interest on recovery/payment received shall be for the benefit of
the direct insurer or re-insurer;
(g) Only remove from the ‘Insurance Bank Account’ charges, fees or
commission earned and interest received from any funds comprising
the account;
(h) Take immediate steps to restore the required position if at any
time he becomes aware of any deficiency in the required
“segregated amount”.

24. Professional indemnity insurance — (1) Every insurance broker

shall take out and maintain and continue to maintain a professional
indemnity insurance cover throughout the validity of the period of the
license granted to him by the Authority.

Provided that the Authority shall in suitable cases allow a newly

licensed insurance broker to produce suc h a guarantee within fifteen
months from the date of issue of original license.

(2) The insurance cover must indemnify an insurance broker against

(a) Any error or omission or negligence on his part or on the
part of his employees and directors;
(b) Any loss of money or other property for which the broker
is legally liable in consequence of any financial or fraudulent
act or omission;
(c)Any loss of documents and costs and expenses incurred in
replacing or restoring such documents;
(d) Dishonest or fraudulent acts or omissions by brokers’
employees or former employees.

(3) The indemnity cover —

(a) Shall be on a yearly basis for the entire period of license;

106
 (b) Shall not contain any terms to the effect that payments of
claims depend upon the insurance broker having first met the
liability;
(c)Shall indemnify in respect of all claims made during the
period of the insurance regardless of the time at which the
event-giving rise to the claim may have occurred.
Provided that indemnity insurance cover not fully conforming
to the above requirements shall be permitted by the Authority
in special cases for reasons to be recorded by it in writing.

(4) Limit of indemnity for any one claim and in the aggregate for
the year in the case of insurance brokers shall be as follows:

Category of Limit of indemnity

insurance
broker
(a) Direct Three times remuneration received at the end
broker of every financial year subject to a minimum
limit of rupees fifty lakhs.

(b) Three times remuneration received at the end

Reinsurance of every financia l year subject to a minimum
broker limit of rupees two crores and fifty lakhs.

(c) Composite Three times remuneration received at the end

broker of every financial year subject to a minimum
limit of rupees five crores

(5) The un-insured excess in respect of each claim shall not exceed
five percent of the capital employed by the insurance broker in the
business.

(6) The insurance policy shall be obtained from any registered insurer
in India who has agreed to —
(a) Provide the insurance broker with an annual certif icate
containing the name and address, including the license
number of the insurance broker, the policy number, the limit
of indemnity, the excess and the name of the insurer as
evidence that the cover meets the requirements of the
Authority;
(b) Send a duplicate certificate to the Authority at the time the
certificate is issued to the insurance broker; and
(c)Inform the insurer immediately of any case of voidance, non-
renewal or cancellation of cover mid-term.

(7) Every insurance broker shall—

(a) Inform immediately the Authority should any cover be
cancelled or voided or if any policy is not renewed;

107
 (b) Inform immediately the insurer in writing of any claim
made by or against it;
(c)Advise immediately the insurer of all circumstances or
occurrences that may give rise to a claim under the policy;
and
(d) Advise the Authority as soon as an insurer has notified that
it intends to decline indemnity in respect of a claim under the
policy.

25. Maintenance of books of account, records, etc. — (1) Every

insurance broker shall prepare for every accounting year —
(i) A balance sheet or a statement of affairs as at the end
of each accounting period;
(ii) A profit and loss account for that period;
(iii) A statement of cash/fund flow;
(iv) The Authority may require additional statements on
insurance broking business as.
Note: For purposes of this regulation, the accounting year shall be a
period of 12 months (or less where a business is started after 1 st April)
commencing on the first day of the April of an year and ending on the
31 st day of March of the year following, and the accounts shall be
maintained on accrual basis.

(2) Every insurance broker shall submit to the Authority, a copy of

the audited financial statements as stated in sub-regulation (1)
along with the auditor’s report thereon within ninety days from
the close of the accounting year along with the remarks or
observations of the auditors, if any, on the conduct of the
business,
State of accounts, etc., and a suitable explanation on such
observations shall be appended to such accounts filed with the
Authority.
(3) Every insurance broker shall, within ninety days from the date of
the Auditor’s report take steps to rectify any deficiencies, made
out in the auditor’s report and inform the Authority accordingly.
(4) All the books of account, statements, document, etc., shall be
maintained at the head office of the insurance broker or such
other branch office as may be designated by him and notified to
the Authority, and shall be available on all working days to such
officers of the Authority, authorised in this behalf by it for an
inspection.
(5) All the books and documents, statements, contract notes etc.,
referred to in this regulation and maintained by the insurance
broker shall be retained for a period of at least ten years from the
end of the year to which they relate.

108
 26. Submission of half-yearly results — (1) Every insurance broker
shall before 31 st October and 30 th April each year furnish to the
Authority a half-yearly un- audited financial statement containing
details of performance, financial position, etc., along with a declaration
confirming the fulfillment of requirements of capital in accordance with
the provisions of regulation 10 and deposit requirements in accordance
with the provisions of regulation 22.

(2) Failure to comply with the regulation of sub-regulation (1) will lead
to an action, in accordance with the provisions of regulation 34 being
taken against the insurance broker.

27. Internal control and systems — Every insurance broker shall ensure
that a proper system of internal audit is practised in business and that
his internal controls and systems are adequate for the size, nature and
complexity of his business.

28. Disclosures to the Authority — (1) An insurance broker shall disclose

to the Authority, as and when required by it, in any event not later
than thirty days of a requisition, the following information, namely —
(i) His responsibilities with regard to the placement of an insurance
contract;
(ii) Any change in the information or particulars previously
furnished, which have a bearing on the license granted to it
(iii) The names of the clients whose insurance portfolio he manages
or has managed;
(iv) Any other requirement specified by the Authority from time to
time.
Provided that in case of a person specified in regulation 2(1)(j)(v) the
Authority may call for and obtain such information as it deems fit.

29. Authority’s right to inspect — (1) The Authority may appoint

one or more of its officers as an “inspecting authority” to undertake
inspection of the premises of the insurance broker to ascertain and see
how the business is carried on, and also to inspect the books of
accounts, records and documents of the insurance broker for any of
the purposes specified in sub-regulation (2).

(2) The purposes referred to in sub-regulation (1) may be as

follows, namely: —

(i) To ensure that the books of account are being maintained in the
manner required
(ii) To ensure that the provisions of the Act, rules, regulations are
being complied with;
(iii) To investigate the complaints received from any insured, any
insurer, other insurance brokers or any other person on any

109
 matter having a bearing on the activities of the insurance
broker; and
(iv) To investigate the affairs of the insurance broker suo motu in
the, interest of proper development of insurance business or in
policyholders’ interest.

30. Notice before inspection — (1) Before undertaking an inspection

under regulation 29, the Authority shall give a notice of ten days to an
insurance broker for that purpose.

(2) Notwithstanding anything contained in sub-regulation (1),

where the Authority is satisfied that in the interests of the
policyholders no such notice shall be given, it may, for reasons
recorded in writing, direct that the inspection of the affairs of the
insurance broker be taken up wit hout such notice.
(3) The insurance broker shall allow the inspecting authority to have
full access to the premises occupied by such insurance broker or
by any other person on his behalf and also extend all facilities for
examining books, records, documents and computer data in the
possession of the insurance broker.
(4) The inspecting authority, in the course of inspection, shall be
entitled to examine or record statements of any principal officer
or employee of the insurance broker and have the powers to
seize or make copies of documents/ records.
(5) It shall be the duty of every such person to give to the
inspecting authority all assistance in connection with the
inspection, which the insurance broker may reasonably be
expected to give.
(6) Failure to comply with the requirements of the Authority in this
regard or failure to cooperate with the inspecting officers shall
result in suspension of license.

31. Submission of report to the Authority — The inspecting authority

shall submit an inspection report to the Authority within 90 days of the
completion of the inspection.

32. Communication of findings, etc .— (1) The Authority shall, after

consideration of the inspection report, communicate its findings to the
insurance broker and give him a reasonable opportunity of being heard
before any action is taken by the Authority on the findings of the
inspecting authority.

(2) On receipt of the explanation, if any, from the insurance broker,

the Authority may direct the insurance broker to take such measures
as the Authority may deem fit.

33. Appointment of investigator — (1) The Authority may appoint a

chartered accountant, an actuary, or any qualified and experienced

110
 individual in the field of insurance to investigate the books of accounts
or the affairs of the insurance broker.
Provided that the person so appointed shall have the same powers of
the inspecting authority as are mentioned in regulation 29 and the
obligations of the insurance broker in regulation 29 shall be applicable
to the investigation under this regulation.
Explanation - For the purposes of this regulation the expression
“chartered accountant” shall have the same meaning as given in
Section 226 of the Companies Act, 1956 (1 of 1956), and the
expression ‘actuary’ shall mean a member of the Actuarial Society of
India.

(2) The expenses and costs of such an investigation shall be recovered

by the Authority from the insurance broker whose affairs had been
caused to be investigated.

34. Cancellation or suspension of license with notice — (1) The license of

an insurance broker may be cancelled or suspended after due notice and
after giving him a reasonable opportunity of being heard if he —
(a) Violates the provisions of the Insurance Act, 1938 (4 of
1938), Insurance Regulatory And Development Authority Act,
1999 (41 of 1999) or rules or regulations, made there under;
(b) Fails to furnish any information relating to his activities as
an insurance broker as required by the Authority;
(c) Furnishes wrong or false information; or conceals or fails to
disclose material facts in the application submitted for obtaining
a license;
(d) Does not submit periodical returns as required by the
Authority;
(e) Does not co -operate with any inspection or enquiry
conducted by the Authority;
(f) Fails to resolve the complaints of the policy holders or fails to
give a satisfactory reply to the Authority in this behalf;
(g) Indulges in rebates or inducements in cash or kind to a
client or any of the client’s directors or other employees or any
person acting as an introducer;
(h) Is found guilty of misconduct or his conduct is not in
accordance with the Code of Conduct specified in Schedule III;
(i) Fails to maintain the capital requirements in accordance with the
provisions of regulation 10;
(j) Fails to pay the fees or the reimbursement of expenses under
these regulations;
(k)Violates the conditions of license;
(l) Does not carry out his obligations as specified in the regulations;
(m) If the principal officer does not acquire practical training
and pass the examination within the stipulated period as
specified in regulation 9.

111
 (2) In the circumstances where the Authority feels that the
establishment of an insurance broker is only to divert funds within a
group of companies or their associates, it can after due enquiries made
by it cancel the license granted to the insurance broker.

35. Cancellation or suspension of license without notice — The license of an

insurance broker may be cancelled or suspended without notice, if he
—
(a) Violates any one or more of the requirements under the code of
conduct specified in Schedule III;
(b) Is found guilty of fraud, or is convicted of a criminal offence;
(c)Commits such defaults, which require immediate action in the
opinion of the Authority, provided that the Authority has
communicated the reasons for the cancellation in writing;
(d) The insurance broker has not commenced the business within six
months of being granted a license.

36. Manner of making order of cancellation/suspension with notice— The

license of an insurance broker shall not be cancelled unless an enquiry
has been held in accordance with the procedure specified in regulation
37.

37. Manner of holding enquiry before suspension or cancellation — (1)

For the purpose of holding an enquiry under regulation 36, the
Authority may appoint an enquiry officer

(2) The enquiry officer shall issue to the insurance broker a notice at
the registered office or the principal place of business of the
insurance broker, as the case may be, calling for such
information as he considers necessary for the conduct of an
enquiry;

(3) The insurance broker may, within fifteen days from the date of
receipt of such a notice, furnish to the enquiry officer a reply
together with copies of documentary or other evidence relied on
by him or sought by the enquiry officer;

(4) The enquiry officer shall, give a reasonable opportunity of

hearing to the insurance broker to enable him to make
submissions in support of his reply made under sub-regulation
(3);

(5) The insurance broker may either appear in person or through

any person duly authorised by him to present its case;

(6) If it is considered necessary, the enquiry officer may require the

Authority to present its case through one of its officers; and

112
 (7) The enquiry officer shall, after taking into account all relevant
facts and submissions made by the insurance broker, submit a
report to the Authority within 90 days of the completion of the
enquiry proceedings.

38. Show-cause notice and order — (1) On receipt of the report from the
enquiry officer, the Authority shall consider it and issue a show-cause
notice to the insurance broker if the contents of the report warrant
a suspension or cancellation of the license granted to him.

Provided that no such notice is required, in case the provisions of

regulation 35 are attracted.
(2) The insurance broker shall within twenty -one days of the date of
receipt of the show cause notice send a reply to the Authority.

(3) The Authority after considering the reply to the show cause
notice shall, as soon as possible, but not later than thirty days from
the receipt of the reply, pass such an order as it deems fit.
Provided, however, where the insurance broker on serving of the
notice under this regulation fails to furnish any reply within the
stated period, the Authority may after the expiry of such time
proceed to decide the case ex parte.

(4) The Authority shall send a copy of the order made under clause
(3) to the insurance broker.

39. Publication of order of suspension or cancellation — The order of

cancellation or suspension of the license made under sub-regulation
(3) of regulation 38, shall be published in one of the daily newspapers
in the English language and one newspaper in the regional language as
the Authority may consider fit.

40. Effect of cancellation or suspension of license— (1) On and from the

date of suspension or cancellation of the license, the insurance broker,
shall cease to act as an insurance broker.

(2) An insurance broker however shall continue to service the

contracts already concluded through him for a period of six
months within which suitable arrangements shall be made by
him for having the contracts attended to by another licensed
insurance broker.

(3) The Authority in such an event may pass such an order as it

thinks fit for the disposal of the deposit of the insurance broker
made under regulation 22.

113
41. General — (1) From the date of commencement of these regulations no
person can function as a broker or an insurance intermediary unless a
license has been granted to him by the Authority under these
regulations.

(2) Any disputes arising between an insurance broker and an insurer or

any other person either in the course of his engagement as an insurance
broker or otherwise may be referred to the Authority by the person so
affected; and on receipt of the complaint or representation, the
Authority may examine the complaint and if found necessary proceed to
conduct an enquiry or an inspection or an investigation in terms of these
regulations.

114
 SCHEDULE I
FORM A
[See regulations 6 and 13]
Insurance Regulatory And Development Authority (Insurance Brokers)
Regulations, 2002
APPLICATION FOR GRANT OF LICENSE/RENEWAL OF LICENSE

NAME OF THE APPLICANT:

________________________________________

ADDRESS: ________________________________________

________________________________________

________________________________________

CATEGORY APPLIED FOR: INSURANCE BROKER -

__________________
(Mention
category)

CONTACT ADDRESS: ______________________

TELEPHONE NO: ______________________

FAX NO: _______________________

E-mail: _______________________

Instructions for filling up the form:

1. It is important that before this application form is filled in, the

regulations made by the Authority are studied carefully.

2. Applicants must submit a duly completed application form together

with all appropriate, supporting documents to the Authority.

3. Application for license will be considered only if it is complete in all

respects.

4. Applicants should sign the applications themselves.

115
5. Information which needs to be supplied in more details may be given
on separate sheets, which should be attached to the application form.

6. If the applicant is not a proprietary concern, firm or a company, the

information called for in this Form shall be supplied by adapting the
requirements suitably.

116
 PARTICULARS OF THE APPLICANT

1.1 Name of the Applicant:

______________________________________

1.2 (A) Address - Principal Place of business / Registered Office.

__________________________________________________________

__________________________________________________________

__________________________________________________________
Pin code: ______________________ Telephone No:
________________

E-mail: ________________________ Fax No:

______________________

(B) Address for Correspondence:

__________________________________________________________

__________________________________________________________

__________________________________________________________

Pin code: ______________________ Telephone No:

________________
E-mail: ______________________ Fax No:
______________________

C) Addresses of Branch Offices:

___________________________________________________________

___________________________________________________________

D) Name and Designation of the Principal Officer

___________________________________________________________

______________________________________________________

117
 2. ORGANISATION - STRUCTURE

2.1 Status of the Applicant:

(e.g. limited company -Private/Public, partnership, proprietary,
others. If listed, names of Stock Exchanges and latest share
price to be given)

2.2. Date and Place of Incorporation:

Day Month Year Place

2.3 Scope of business as described in the Memorandum of

Association
(To be given in brief along with copy of Memorandum and
Articles of Associatio n or Partnership Deed).

2.4 List of major shareholders (holding 5% and above of applicant

directly or along with associates-applicable only to limited
companies)

Share holding as on:______________

Name of shareholder No. Of Shares held % Age of total paid up

capital of the company

2.5 Particulars of all Directors/Partners/Proprietor: -

Name Qualificati Experience in Share in Directorship in

on Insurance Broking applicant firm other companie s
services and related /company
areas

118
2.6 Name and activities of associate companies/concerns

Name of Address Type of Nature of Nature and

Company/ activity Interest of interest of
Firm handled Promoter/ applicant
Director company

Whether any one or more persons of the associate companies/ concern is

interested in the applicant's business.

2.7 Name and Address of the Principal bankers of the applicant

2.8 Name and address of the statutory auditors

3. BUSINESS INFORMATION

3.1 Three years business plan document with projecte d volume of activities
and income (including anticipated) for which license sought is to be
specifically given.

3.2 Organisation Chart separately showing functional responsibilities to be

enclosed.

3.3 Particulars of Key Management Personnel

Name Qualification Experience with Date of Functional

particular reference to appointment areas
Insurance
Broking/insurance
consulting activities

119
3.4 Details of infrastructure like office space, equipment and manpower
available with the applicant

3.5 Details of experience in insurance broking/ insurance consulting/risk

management and other services:
(History, major events and present activities (Experience outside India
may also be indicated):

3.6 Business handled during the last three years and list of re-insurers w ith
whom more than ten percent of the total reinsurance premium handled, was
placed.

Sl. Name Premium handled Services

No. Rendered
Amt. Percentage of
total
premium handled
by broker

3.7 Any other information considered relevant to the nature of services

rendered by the applicant.

4. FINANCIAL INFORMATION

4.1 Capital Structure (Rs. in lakhs)

Capital Structure Year prior to the Preceding year Current year

preceding year of
current year
a) Authorised Capital and issue capital
b) Paid-up capital
c) Free reserves (excluding re- valuation reserves)
d) Total (b) + (c)

Note: - 1. In case of partnership or proprietary concerns, please indicate

capital minus drawings and/or loans to partners/ owners.

120
 2. In case of partnership or proprietary concerns, please indicate the financial
position, means and net worth of the partners.

4.2 Deployment of Resources (Rs. in lakhs)

Particulars Year prior to Preceding year Current year
the preceding
year of current
year
a) Fixed Assets
b) Plant & Machinery
c) Office Equipment
d) Quoted Investments
e) Unquoted Investments
e) Details of Liquid Assets
f) Others
(Details of Investments, Loans & Advances made to Associate
Companies/Firms where Promoters/Directors have an interest is to be
separately given).

4.3 Major Sources of Income: (Rs. in lakhs)

Particulars Year prior to Preceding year Remuneration
the preceding received as % of
year of current premium
year
a) Direct Insurance remuneration
b) Reinsurance remuneration
c) Brokers fees
d) Insurance consultancy
e) Investment Income
f) Others
• As remuneration received by the insurance broker may vary from risk to
risk, please indicate range within which remuneration has been received.

4.4 Income and Profit Before Tax (PBT) (Rs. lakhs)

Particulars Year prior to the Preceding Current

Income Profit Before Tax preceding year of year year
current year

4.5 Dividend (Rs. In lakhs)

121
Particulars Year prior to the Preceding Current
preceding year of year year
current year
Amount

Percentage

Note: Please enclose three years audited annual accounts. Where unaudited
reports are submitted, give reasons. If minimum capital requirement has
been met after last audited annual accounts, audited statement of accounts
for the period ending on a later date should also be submitted.

5. OTHER INFORMATION, IF ANY

5.1 Details of all settled and pending disputes:

Nature of dispute Name of the party Pending/settled

5.2 Details, if any of any economic offences by the applicant/ proprietor

or any of the
Partners/ Directors, or key managerial Personnel in the last three
years.

DECLARATION
THIS DECLARATION IS TO BE SIGNED BY TWO OF THE DIRECTORS, TWO OF
THE PARTNERS OR THE SOLE PROPRIETOR AS THE CASE MAY BE.
I/We hereby apply for license.
I/We have gone through the Insurance Regulatory and Development
Authority (Insurance Brokers) Regulations, 2002 and am/are satisfied that I/
We am/ are eligible to apply for the insurance broker's license.

I/We state that I/We have truthfully and fully answered the questions above
and provided all the information, which might reasonably be considered
relevant for the purposes of my/our license.

I/We declare that the information supplied in the application form is complete
and correct.

122
I/We undertake that I/We shall not allow or offer to allow, either directly or
indirectly, as an inducement to any person, any rebate of the whole or part
of the remuneration earned by me/us during the license period.

I/We undertake to service the run-off business on the books at the time of
cancellation or non-renewal of license.

I/We declare that I/we do not possess an insurance agent license under
section 42 of the Act.

For and on behalf of

__________________________ __________________________

(Signature and Name of Applicant (Signature and Name of Applicant

{Block Letters}) {Block Letters})

Director/Partner or Sole Proprietor Director/Partner

Place:

Date:

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INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY
(Insurance Brokers) Regulations, 2002

FORM B
[see regulations 11 & 16]

LICENSE

1. In exercise of the powers conferred by sub-section (1) of section

42D of the Insurance Act, 1938 (4 of 1938) the Authority hereby
grants a license to

__________________________________________________

To act as
_________________________________________________ broker
(Mention details of category)

Under that Act.

2. License Code for the insurance broker is

_____________________________________

2. This license shall be valid from ____________ to ___________

3. This license is subject to the Act, Insurance Regulatory and

Development Authority Act, 1999 (4 of 1999) and Insurance
Regulatory and Development Authority (Insurance Brokers)
Regulations, 2002 and shall not be construed to be in compliance with
or in conformity to any other Act, rules or regulations.

Place:

By Order
Date:

For and on behalf of

Insurance Regulatory and

Development Authority

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 SCHEDULE II
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (Insurance
Brokers) Regulations, 2002
[see regulation 18]

FEES

Registration Fees:

1. (a) Every insurance broker at the time of being licensed shall pay
license fees as set out below:

Category of Amount of license fee

Insurance broker payable
Direct broker Rs.25, 000
Reinsurance broker Rs.75, 000
Composite broker Rs.1, 25,000

(b) The license fee as prescribed above shall be paid within 15

days from the date of receipt of intimation under regulation 11.

2. Every insurance broker at the time of renewal of license shall pay

license fees as set out below:
Category of Amount of license fee payable
insurance broker per annum
Direct broker A sum calculated at the rate of
0.50% of remuneration earned
in the preceding financial year
subject to minimum of Rs.25,
000 and maximum of Rs.100,
000 on every renewal.
Reinsurance broker A sum calculated at the rate of
0.50% of remuneration earned
in the preceding financial year
subject to minimum of Rs.75,
000 and maximum of Rs.300,
000 on every renewal.
Composite broker A sum calculated at the rate of
0.50% of remuneration earned
in the preceding financial year
subject to minimum of Rs.125,
000 and maximum of Rs.500,
000 on every renewal.

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3. The license fee shall be paid before the expiry of 15 days of the license
granted u nder regulation 11.

4. The fees shall be payable by an Account Payee draft in favour of “The

Insurance Regulatory and Development Authority” payable at Hyderabad.

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SCHEDULE III

INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY

(Insurance Brokers) Regulations, 2002

CODE OF CONDUCT

[see regulation 21]

1. Every insurance broker shall follow recognised standards of professional

conduct and discharge his functions in the interest of the policyholders.

2. Conduct in matters relating to clients relationship — Every insurance

broker shall:
(a) Conduct its dealings with clients with utmost good faith and
integrity at all times;
(b) Act with care and diligence;
(c)Ensure that the client understands his relationship with the broker
and on whose behalf the broker is acting;
(d) Treat all information supplied by the prospective clients as
completely confidential to themselves and to the insurer(s) to which
the business is being offered;
(e) Take appropriate steps to maintain the security of confidential
documents in their possession;
(f) Ho ld specific authority of client to develop terms;
(g) Understand the type of client it is dealing with and the extent of
the client’s awareness of risk and insurance;
(h) Obtain written mandate from client to represent the client to the
insurer and communicate the grant of a cover to the client after
effecting insurance;
(i) Obtain written mandate from client to represent the client to the
insurer/ re-insurer; and confirm cover to the insurer after effecting
re-insurance, and submit relevant reinsurance acceptance and
placement slips;
(j) Avoid conflict of interest.

3. Conduct in matters relating to Sales practices— Every insurance broker

shall: —
(a) Confirm that it is a member of the Insurance Brokers Association
of India or such a body of brokers as approved by the Authority
which has a memorandum of understanding with the Authority;
(b) Confirm that he does not employ agents or canvassers to bring
in business;
(c)Identify itself and explain as soon as possible the degree of choice
in the products that are on offer;
(d) Ensure that the client understands the type of service it can
offer;

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 (e) Ensure that the policy proposed is suitable to the needs of the
prospective client;
(f) Give advice only on those matters in which it is knowledgeable and
seek or recommend other specialist for advice when n ecessary;
(g) Not make inaccurate or unfair criticisms of any insurer or any
member of the Insurance Brokers Association of India or member of
such body of brokers as approved by the Authority;
(h) Explain why a policy or policies are proposed and provide
comparisons in terms of price, cover or service where there is a
choice of products;
(i) State the period of cover for which the quotation remains valid if
the proposed cover is not effected immediately;
(j) Explain when and how the premium is payable and how such
premiu m is to be collected, where another party is financing all or
part of the premium, full details shall be given to the client including
any obligations that the client may owe to that party; and
(k)Explain the procedures to follow in the event of a loss.

4. Co nduct in relation to furnishing of information — Every insurance broker

shall: —
(a) Ensure that the consequences of non-disclosure and inaccuracies
are pointed out to the prospective client;
(b) Avoid influencing the prospective client and make it clear that all
the answers or statements given are the latter's -own responsibility.
Ask the client to carefully check details of information given in the
documents and request the client to make true, fair and complete
disclosure where it believes that the client has not done so and in
case further disclosure is not forthcoming it should consider
declining to act further;
(c)Explain to the client the importance of disclosing all subsequent
changes that might affect the insurance throughout the duration of
the policy; and
(d) Disclose on behalf of its client all material facts within its
knowledge and give a fair presentation of the risk.

5. Conduct in relation to explanation of insurance contract — Every

insurance broker shall:
(a) Provide the list of insurer(s) participating under the insurance
contract and advise any subsequent changes thereafter;
(b) Explain all the essential provisions of the cover afforded by the
policy recommended by him so that, as far as possible, the
prospective client understands what is being purchased;
(c)Quote terms exactly as provided by insurer;
(d) Draw attention to any warranty imposed under the policy, major
or unusual restrictions, exclusions under the policy and explain how
the contract may be cancelled;
(e) Provide the client with prompt written confirmation that
insurance has been affected. If the final policy wording is not

128
 included with this confirmation, the same shall be forwarded as
soon as possible;
(f) Notify changes to the terms and conditions of any insurance
contract and give reasonable notice before any changes take effect;
(g) Advise its clients of any insurance proposed on their behalf which
will be effected with an insurer outside India, where permitted, and,
if appropriate, of the possible risks involved; and

6. Conduct in relation to renewal of policies — Every insurance broker shall:

—
(a) Ensure that its client is aware of the expiry date of the insurance
even if it chooses not to offer further cover to the client;
(b) Ensure that renewal notices contain a warning about the duty of
disclosure including the necessity to advise changes affecting the
policy, which have occurred since the policy inception or the last
renewal date;
(c)Ensure that renewal notices contain a requirement for keeping a
record (including copies of letters) of all information supplied to the
insurer for the purpose of renewal of the contract;
(d) Ensure that the client receives the insurer's renewal invitation
well in time before the expiry date.

7. Conduct in relation to claim by client— Every insurance broker shall: —

(a) Explain to its clients their obligation to notify claims promptly
and to disclose all material facts and advise subsequent
developments as soon as possible;
(b) Request the client to make true, fair and complete disclosure
where it believes that the client has not done so. If further
disclosure is not forthcoming it shall consider declining to act further
for the client;
(c)Give prompt advice to the client of any requirements concerning the
claim;
(d) Forward any information received from the client regarding a
claim or an incident that may give rise to a claim without delay, and
in any event within three working days;
(e) Advise the client without delay of the insurer's decision or
otherwise of a claim; and give all reasonable assistance to the client
in pursuing his claim.
Provided that the insurance broker shall not take up recovery
assignment on a policy contract, which has not been serviced
through him or should not work as a claims consultant for a policy,
which has not, been serviced through him.

8. Conduct in relation to receipt of complaints — Every insurance broker

shall: —
(a) Ensure that letters of instruction, policies and renewal
documents contain details of complaints handling procedures;
(b) Accept complaints either by phone or in writing;

129
 (c)Acknowledge a complaint within fourteen days from the receipt of
correspondence, advise the member of staff who will be dealing
with the complaint and the timetable for dealing with it;
(d) Ensure that response letters are sent and inform the complainant
of what he may do if he is unhappy with the response;
(e) Ensure that complaints are dealt with at a suitably senior level;
(f) Have in place a system for recording and monitoring complaints.

9. Conduct in relation to documentation — Every insurance broker shall:

—
(a) Ensure that any documents issued comply with all statutory or
regulatory requirements from time to time in force;
(b) Send policy documentation without avoidable delay,
(c)Make available, with policy documentation, advice that the
documentation shall be read carefully and retained by the client;
(d) Not withhold documentation from its clients without their
consent, unless adequate and justifiable reasons are disclosed in
writing and without delay to the client. Where documentation is
withheld, the client must still receive full details of the insurance
contract;
(e) Acknowledge receipt of all monies received in connection with an
insurance policy;
(f) Ensure that they reply is sent promptly or use its best endeavors to
obtain a prompt reply to all correspondence;
(g) Ensure that all written terms and condit ions are fair in substance
and set out, clearly and in plain language, client's rights and
responsibilities; and
(h) Subject to the payment of any monies owed to it, make available
to any new insurance broker instructed by the client all
documentation to whic h the client is entitled and which is necessary
for the new insurance broker to act on behalf of the client.

10. Conduct in matters relating to advertising — Every insurance broker

shall conform to the relevant provisions of the Insurance Regulatory
and Development Authority (Insurance Advertisements and
Disclosure) Regulations, 2000, and: —
(a) Ensure that statements made are not misleading or
extravagant;
(b) Where appropriate, distinguish between contractual
benefits which the insurance policy is bound to provide and
non-contractual benefits which may be provided;
(c) Ensure that advertisements shall not be restricted to the
policies of one insurer, except where the reasons for such
restriction are fully explained with the prior approval of that
insurer;
(d) Ensure that advertisements contain nothing which is in
breach of the law nor omit anything which the law requires;

130
 (e) Ensure that advertisement does not encourage or
condone defiance or breach of the law;
(f) Ensure that advertisements contain nothing which is likely, in
the light of generally prevailing standards of decency and
propriety, to cause grave or widespread offence or to cause
disharmony;
(g) Ensure that advertisements are not so framed as to
abuse the trust of clients or exploit their lack of experience or
knowledge;
(h) Ensure that all descriptions, claims and comparisons,
which relate to matters of objectively ascertainable fact, shall
be capable of substantiation.

11. Conduct in matters relating receipt of remuneration— Every

insurance broker shall: —
(a) Disclose whether in addition to the remuneration
prescribed under these regulations, he proposes to charge the
client, and if so in what manner;
(b) Advise the client in writing of the insurance premium and
any fees or charges separately and the purpose of any related
services;
(c) If requested by a client, disclose the amount of remuneration
or other remuneration it receives as a result of effecting
insurance for that client. This will include any payment
received as a result of securing on behalf of the client any
service additional to the arrangement of the contract of
insurance; and
(d) Advise its clients, prior to affecting the insurance, of their
intention to make any deductions from the amount of claim
collected for a client, where this is a recognised practice for
the type of insurance concerned.

12. Conduct in relation to matters relating to training — Every insurance

broker shall:

(a) That its staff are aware of and adhere to the standards
expected of them by this code;
(b) Ensure that staff are competent, suitable and have been
given adequate training;
(c) Ensure that there is a system in place to monitor the quality
of advice given by its staff;
(d) Ensure that members of staff are aware of legal
requirements including the law of agency affecting their
activities; and only handle classes of business in which they
are competent;
(e) Draw the attention of the client to Section 41 of the Act,
which prohibits rebating and sharing of commission.

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13. Every insurance broker shall display in every office where it is
carrying on business and to which the public have access a notice to
the effect that a copy of the code of conduct is available upon request
and that if a member of the public wishes to make a complaint or
requires the assistance of the Authority in resolving a dispute, he
may write to the Authority.

14. An insurance broker as defined in these regulations shall not act as

an insurance agent of any insurer under section 42 of the Act.
15. Every insurance broker shall abide by the provisions of the Insurance
Act, 1938 (4 of 1938), Insurance Regulatory And Development
Authority Act 1999(41 of 1999), rules and regulations made there
under which may be applicable and relevant to the activities carried
on by them as insurance brokers.

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