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GNDU Question Paper-2021
Bachelor of Commerce
(B.Com) 5
th
Semester
INSURANCE SERVICE MANAGEMENT
Time Allowed: Three Hours Max. Marks: 50
Note : Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Define the term life insurance. What is the importance of life insurance ?
2. Deline the term endorsement. What are the different types of insurance
endorsements?
SECTION-B
3. What are the training methods for becoming an agent ?
4. What are the different agency regulations ?
SECTION-C
5. What is underwriting? What are the considerations in deriving gross premium?
6. Discuss the principle in underwriting and features aflecting insurability.
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SECTION-D
7. What are the different Rigidities in the present pricing system ?
8. What is the impact of legislation and competition on pricing?
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GNDU Answer Paper-2021
Bachelor of Commerce
(B.Com) 5
th
Semester
INSURANCE SERVICE MANAGEMENT
Time Allowed: Three Hours Max. Marks: 50
Note : Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Define the term life insurance. What is the importance of life insurance ?
Ans: The Story of Arjun and the Promise That Lived On
Long ago, in a small, bustling town, there lived a man named Arjun. He wasn’t a king or a
warrior — just an ordinary shopkeeper who sold spices in the local market. But Arjun had
something far more precious than gold: a loving family — his wife Meera and their two
children, Aarav and Anaya.
Every morning, Arjun would open his shop, greet his customers with a warm smile, and
work hard to earn enough to feed his family, pay for the children’s schooling, and save a
little for the future. Life was simple, but it was good.
One evening, as the family sat together after dinner, Aarav asked, "Papa, what will happen
to us if… if you’re not here one day?"
Arjun smiled, but the question stayed in his heart. He knew life was uncertain. What if an
accident or illness took him away too soon? Who would pay for the children’s education?
Who would keep food on the table?
That night, Arjun decided to make a promise — a promise that even if he wasn’t there, his
family would never be left helpless. And that promise… was life insurance.
Definition of Life Insurance — In Simple Words
Life insurance is like a financial promise you make to your loved ones. It is a contract
between you (the policyholder) and an insurance company. You agree to pay a small
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amount regularly (called a premium), and in return, the company promises that if you pass
away during the policy period, they will give a lump sum amount (called the death benefit)
to the people you choose (your beneficiaries).
In short:
Life insurance = A safety net that catches your family when life throws them into
uncertainty.
Why Is Life Insurance Important? — The Heart of the Story
Let’s go back to Arjun. Imagine two scenarios:
Scenario 1 — Without Life Insurance
One day, tragedy strikes. Arjun passes away unexpectedly. His shop closes, income stops,
and Meera struggles to pay school fees, rent, and daily expenses. The family’s dreams start
to fade.
Scenario 2 — With Life Insurance
When Arjun passes away, the insurance company gives Meera the promised amount. She
uses it to pay for the children’s education, keep the house running, and even invest for the
future. The family grieves his loss, but they are not crushed by financial hardship.
That’s the power of life insurance — it turns a personal tragedy into a manageable
challenge.
Breaking Down the Importance — Like a Story Map
1. Financial Security for Loved Ones
Life insurance ensures that your family can maintain their standard of living even if your
income stops. It’s like leaving behind a financial umbrella to protect them from the storm.
2. Debt Protection
If you have loans — home loans, car loans, or business debts — life insurance ensures your
family doesn’t inherit your financial burdens. Imagine Arjun’s shop loan being paid off
instantly, freeing Meera from stress.
3. Education and Future Goals
Children’s education is expensive. Life insurance can act like a time capsule of money —
ensuring your kids’ dreams don’t die with you.
4. Peace of Mind
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Knowing that your family will be taken care of allows you to live with less worry. It’s like
having a silent guardian watching over them.
5. Long-Term Savings and Investment (in some policies)
Some life insurance plans also act as savings tools, giving you a lump sum if you survive the
policy term. This can help with retirement or big life goals.
A Simple Analogy — The Bridge Over the River
Think of life as a journey where you and your family are walking together. Ahead, there’s a
wide river — the uncertainty of the future. You don’t know when you might reach it, but
you know it’s there.
Life insurance is like building a strong bridge in advance. If you’re there, you’ll guide your
family across. If you’re not, the bridge will still carry them safely to the other side.
Types of Life Insurance — Told Through Arjun’s Choices
When Arjun went to the insurance office, the agent explained two main types:
1. Term Life Insurance — Pure protection for a fixed period (like 20 years). If Arjun
passed away during this time, his family would get the money. If he survived, there
would be no payout — but the premiums were low. (Think of it like renting a safety
net for a certain time.)
2. Whole Life or Endowment Plans — These not only provide protection but also give a
lump sum at the end of the term if Arjun survived. (Think of it like owning a safety
net that also turns into a treasure chest later.)
Arjun chose a plan that fit his budget and needs — because the best plan is the one you can
keep paying for without strain.
The Human Side — Why Examiners Love This Explanation
When you write about life insurance in an exam, don’t just throw definitions. Paint a
picture. Show that you understand it’s not just about money — it’s about love,
responsibility, and foresight.
Here’s how you can make it examiner-friendly:
• Use relatable examples (like Arjun’s story).
• Keep the language simple but emotionally engaging.
• Show practical benefits with mini-scenarios.
• End with a memorable takeaway.
Final Takeaway — The Promise That Outlives You
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Life insurance is not about fearing death — it’s about respecting life. It’s about saying: "Even
if I’m not here tomorrow, my love and care will still protect you."
Just like Arjun, anyone can make this promise. And that’s why life insurance is one of the
most important financial decisions you can ever make.
2. Deline the term endorsement. What are the different types of insurance
endorsements?
Ans: The Story of Priya’s Policy Twist
Priya was a young entrepreneur who had just opened her dream café in the heart of the
city. She had insured her café — the furniture, the coffee machines, even the little bookshelf
in the corner — because she knew life can be unpredictable.
One rainy afternoon, as she was serving cappuccinos, a thought struck her: "What if I start
hosting live music nights? That means more people, more equipment, maybe even a small
stage. Will my current insurance cover that?"
When she called her insurance agent, he smiled and said, "Priya, you don’t need a whole
new policy. You just need an endorsement."
And that’s where our story — and your answer — begins.
Definition of Endorsement (In Simple Words)
In the world of insurance, an endorsement (also called a rider or amendment) is a written
change made to an existing insurance policy. It’s like adding a new chapter to a book you’ve
already written — you keep the original story, but you add, remove, or modify certain parts
to suit your new needs.
Formally:
An endorsement is a legal document attached to an insurance policy that alters its terms,
coverage, or conditions, with the mutual consent of the insurer and the insured.
It can add coverage, remove coverage, or change details — without creating an entirely
new policy.
Why Endorsements Exist — The Real-Life Logic
Life changes. Businesses grow. Risks evolve. If insurance policies were rigid, you’d have to
cancel and rewrite them every time something changed. That would be expensive, time-
consuming, and impractical.
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Endorsements solve this problem by acting like customisation tools — they let you tweak
your policy so it stays relevant.
Priya’s Example — How It Works
Priya’s original café policy covered her seating area, kitchen, and equipment. But now she
wanted to host live music nights. That meant:
• More visitors (higher liability risk)
• New sound equipment (new assets to insure)
Instead of buying a whole new policy, her insurer simply added an endorsement to her
existing one:
• It extended liability coverage for events.
• It included the new sound system in the insured items list.
This small change kept her protected — and saved her money.
Key Features of an Endorsement
1. Legally Binding — Once added, it becomes part of your policy and has the same legal
weight as the original contract.
2. Mutual Agreement — Both insurer and insured must agree to the change.
3. Flexible — Can be temporary (for a short event) or permanent (for the rest of the
policy term).
4. May Affect Premiums — Adding coverage usually increases the premium; removing
coverage may reduce it.
5. Documented — Always issued in writing, often as a separate page attached to the
policy.
Types of Insurance Endorsements — Told as Mini Stories
Let’s meet a few more characters to understand the different types.
1. Additional Insured Endorsement
Story: Raj runs a catering business. He’s hired to work at a hotel, and the hotel asks to be
covered under his insurance in case something goes wrong during the event. What
Happens: Raj’s insurer adds the hotel as an “additional insured” — meaning the hotel is now
protected under Raj’s policy for that event.
2. Coverage Extension Endorsement
Story: Neha is going on a road trip and renting a car. Her auto insurance doesn’t normally
cover rentals. What Happens: She adds a temporary coverage extension endorsement for
the rental period. Now, she’s covered if something happens to the rental car.
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3. Exclusion Endorsement
Story: A homeowner, Mr. Sharma, has a swimming pool. The insurer sees it as a high liability
risk. What Happens: They add an exclusion endorsement that removes coverage for pool-
related injuries. This keeps the policy active but limits the insurer’s risk.
4. Increased Limits Endorsement
Story: A small bakery wins a big corporate contract. The client demands higher liability
coverage. What Happens: The bakery’s insurer issues an increased limits endorsement,
raising the coverage amount to meet the client’s requirements.
5. Policy Modification Endorsement
Story: Ananya moves her boutique to a new location. What Happens: Instead of writing a
new policy, the insurer issues a policy modification endorsement updating the address,
insured property details, and coverage terms.
6. Schedule of Property Endorsement
Story: Vikram owns valuable jewellery not covered under his standard home insurance.
What Happens: He adds a scheduled property endorsement listing each item and its value,
ensuring full coverage.
7. Deductible Change Endorsement
Story: Meera wants to lower her premium. What Happens: She agrees to a higher
deductible through an endorsement — meaning she’ll pay more out-of-pocket in a claim,
but her monthly premium drops.
Why Endorsements Are Important — The Human Angle
Think of an insurance policy as a tailored suit. When your life changes — you gain weight,
lose weight, change jobs, move cities — you don’t throw away the suit. You alter it.
Endorsements are those alterations. They keep your coverage fitting perfectly without
wasting money or time.
Exam-Ready Definition
An insurance endorsement is a written amendment to an existing policy that changes its
terms, coverage, or conditions, with the consent of both insurer and insured. It can add,
remove, or modify coverage without replacing the original policy.
Final Takeaway — The Promise of Flexibility
Priya’s café thrived. She hosted music nights, poetry slams, and even art exhibitions. Each
time her business evolved, her policy evolved with it — thanks to endorsements.
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That’s the beauty of endorsements: They’re not just paperwork. They’re living promises
that your insurance will grow, shrink, and adapt with your life.
SECTION-B
3. What are the training methods for becoming an agent ?
Ans: The Story of Kabir’s New Journey
Kabir had always been the “people person” in his group. Whether it was convincing his
friends to try a new café or helping his uncle choose the right health plan, Kabir had a knack
for explaining things in a way that made people feel confident and understood.
One day, his cousin said, "You know, Kabir, you’d make a great insurance agent."
Kabir laughed at first. But the idea stuck. The more he thought about it, the more he
realised — being an agent wasn’t just about selling policies. It was about guiding people
through important life decisions.
So, Kabir decided to become a licensed insurance agent. But before he could start helping
others, he had to go through training — the process that transforms an ordinary person into
a trusted professional.
Definition — What Does “Training Methods for Becoming an Agent” Mean?
When we talk about training methods for becoming an agent, we mean the different ways
in which a person learns the skills, knowledge, and ethics required to work as a licensed
insurance agent.
It’s not just about memorising rules — it’s about learning how to:
• Understand insurance products
• Communicate effectively with clients
• Follow legal and ethical guidelines
• Build trust and long-term relationships
Think of it like learning to drive: you don’t just read the manual — you practice, get
guidance, and pass a test before you’re allowed on the road.
Why Training Is Important — The Heart of the Matter
Kabir’s mentor explained it perfectly: "Selling insurance without proper training is like sailing
without a compass — you might move forward, but you won’t know where you’re going."
Training ensures that:
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• Agents understand the products they’re selling
• Clients get accurate and honest advice
• The agent follows legal regulations
• The profession maintains credibility and trust
The Main Training Methods — Told as Kabir’s Journey
Let’s walk through the different training methods as if we’re following Kabir’s real-life steps.
1. Classroom Training (Foundation Stage)
Story: Kabir’s first step was joining a classroom training session organised by the insurance
company. It was like going back to school — but this time, the “subjects” were things like:
• Basics of insurance (life, health, general)
• Understanding policy terms and conditions
• How to calculate premiums
• Legal and regulatory framework (IRDAI rules in India)
Why It Works:
• Face-to-face interaction with trainers
• Opportunity to ask questions instantly
• Group discussions that make concepts clearer
Exam Tip: Mention that classroom training builds a strong theoretical foundation.
2. Online Training (Flexible Learning)
Story: Kabir’s schedule was tight, so he also took some modules online. These were
interactive — with videos, quizzes, and case studies.
Why It Works:
• Learn anytime, anywhere
• Self-paced — perfect for working professionals
• Often includes simulations and role-plays
Example: Kabir practised explaining a health policy to a “virtual customer” in an online
simulation.
3. On-the-Job Training (Learning by Doing)
Story: After his initial lessons, Kabir shadowed a senior agent. He watched how the senior
greeted clients, asked questions, and handled objections. Then, Kabir tried it himself — with
the senior guiding him.
Why It Works:
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• Real-world exposure
• Immediate feedback from experienced mentors
• Builds confidence in handling actual clients
4. Role-Playing and Simulation Exercises
Story: In one training session, Kabir had to “sell” a policy to his trainer, who pretended to be
a difficult customer. At first, Kabir stumbled. But after a few tries, he learned how to stay
calm, listen, and respond effectively.
Why It Works:
• Safe environment to make mistakes
• Improves communication and persuasion skills
• Prepares agents for different customer personalities
5. Product-Specific Training
Story: Kabir’s company launched a new retirement plan. Before selling it, all agents
attended a special workshop explaining:
• Features of the plan
• Target customers
• How it compared to competitors
Why It Works:
• Keeps agents updated on new products
• Ensures accurate information is given to clients
6. Regulatory and Compliance Training
Story: Kabir learned that in India, the Insurance Regulatory and Development Authority of
India (IRDAI) sets strict rules for agents. He had to complete mandatory 25-hour training
and pass the IRDAI exam before getting his license.
Why It Works:
• Ensures agents follow the law
• Protects customers from mis-selling
• Builds trust in the profession
7. Continuing Education and Refresher Courses
Story: Even after becoming an agent, Kabir attended refresher courses every year. These
kept him updated on:
• New laws
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• Market trends
• Advanced sales techniques
Why It Works:
• Keeps skills sharp
• Adapts to changing customer needs
• Encourages lifelong learning
A Simple Analogy — The Chef’s Training
Becoming an agent is like becoming a chef:
• Classroom training = learning recipes from a cookbook
• Online training = watching cooking videos at home
• On-the-job training = working in a real kitchen with a head chef
• Role-play = practising with friends before serving real customers
• Product training = learning a new dish before adding it to the menu
• Compliance training = following hygiene and safety rules
• Refresher courses = attending food festivals to learn new trends
Exam-Ready Definition
Training methods for becoming an agent are the structured approaches used to equip
aspiring insurance agents with the knowledge, skills, and ethical understanding needed to
sell insurance products effectively and legally. These methods include classroom learning,
online modules, practical fieldwork, role-playing, product workshops, compliance training,
and ongoing education.
Final Takeaway — The Transformation
When Kabir finally received his agent license, he realised something important: Training
hadn’t just taught him how to sell insurance — it had taught him how to listen, guide, and
protect people’s futures.
That’s the real purpose of these training methods: To turn someone with potential into a
professional who inspires trust.
4. What are the different agency regulations ?
Ans: The Story of the “License to Protect”
In a busy city, there lived a man named Dev, who had a gift for connecting with people. He
could explain complicated things in a way that made them sound simple — almost like
magic. One day, Dev decided he wanted to become an insurance agent.
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But when he walked into the insurance office, the manager smiled and said: "Dev, before
you can protect people’s futures, you need a license. And before you get that license, you
must follow the agency regulations."
Dev was puzzled. “Agency regulations? What are those?”
The manager leaned forward and said: "Think of them as the rules of the game — the laws,
codes, and guidelines that make sure agents act honestly, fairly, and professionally. Without
them, the whole system would collapse."
And so began Dev’s journey into understanding agency regulations.
Definition — What Are Agency Regulations?
In simple words:
Agency regulations are the official rules and laws that govern how insurance agents are
licensed, trained, and expected to behave while selling insurance.
They are designed to:
• Protect customers from fraud or mis-selling
• Ensure agents are qualified and knowledgeable
• Maintain trust in the insurance industry
In India, these regulations are mainly set and enforced by the Insurance Regulatory and
Development Authority of India (IRDAI) under the Insurance Act, 1938 and related laws.
Why Agency Regulations Exist — The Human Angle
Imagine if anyone could sell insurance without training or rules.
• People might be misled into buying the wrong policies.
• Agents could disappear after taking money.
• Customers would lose trust in the entire system.
Agency regulations are like traffic rules for the insurance world — they keep everyone safe,
organised, and moving in the right direction.
The Main Agency Regulations — Told as Dev’s Learning Journey
Let’s follow Dev as he discovers each regulation, one by one.
1. Licensing Requirements
Story: Dev’s first stop was the licensing office. He learned that no one can legally act as an
insurance agent without a valid license from IRDAI. Key Points:
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• Must be at least 18 years old.
• Must have completed the required education (usually Class 10 or 12, depending on
the type of insurance).
• Must complete mandatory training hours (e.g., 25 hours for life/general insurance).
• Must pass the IRDAI licensing exam.
Why It Matters: Licensing ensures only qualified people can sell insurance.
2. Code of Conduct
Story: Dev’s trainer handed him a booklet titled “Code of Conduct for Agents”. It was like a
moral compass. Key Points:
• Be honest and fair in all dealings.
• Provide correct and complete information to clients.
• Avoid twisting facts to make a sale.
• Maintain client confidentiality.
• Avoid conflicts of interest.
Why It Matters: This keeps the profession ethical and trustworthy.
3. Appointment by an Insurer
Story: Even after passing his exam, Dev couldn’t just start selling. He had to be formally
appointed by an insurance company. Key Points:
• An agent can usually represent only one life insurer and one general insurer at a
time.
• The insurer must issue an appointment letter and register the agent with IRDAI.
Why It Matters: This ensures accountability — the insurer is responsible for the agent’s
actions.
4. Training and Continuing Education
Story: Dev thought training was a one-time thing. But his mentor explained that agents
must keep learning. Key Points:
• Initial training before licensing (e.g., 25 hours).
• Refresher training for license renewal (e.g., 25 hours every 3 years).
• Updates on new products, laws, and sales practices.
Why It Matters: Keeps agents sharp and up-to-date.
5. Remuneration and Commission Rules
Story: Dev was excited about earning commissions, but there were limits. Key Points:
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• IRDAI sets maximum commission rates for different products.
• Agents cannot charge clients extra fees beyond the allowed commission.
Why It Matters: Prevents overcharging and protects customers.
6. Prohibition of Rebating
Story: One day, Dev’s friend suggested offering part of his commission back to customers to
attract sales. But that’s illegal. Key Points:
• Agents cannot offer rebates, gifts, or incentives not approved by the insurer.
• Violating this can lead to license cancellation.
Why It Matters: Keeps competition fair and prevents unethical selling.
7. Record-Keeping Requirements
Story: Dev learned he had to maintain proper records of every policy sold. Key Points:
• Keep copies of proposal forms, policy documents, and correspondence.
• Maintain records for a specified period (often 3–5 years).
Why It Matters: Helps in resolving disputes and ensures transparency.
8. Consumer Protection Regulations
Story: Dev discovered that IRDAI has rules to protect policyholders’ interests. Key Points:
• Agents must explain policy terms clearly.
• Must disclose all charges, exclusions, and conditions.
• Must assist clients in claim settlement.
Why It Matters: Builds trust and ensures customers get what they were promised.
9. Anti-Money Laundering (AML) Compliance
Story: Dev was surprised to learn that insurance can be misused for money laundering. Key
Points:
• Agents must verify customer identity (KYC).
• Report suspicious transactions to the insurer.
Why It Matters: Protects the financial system from illegal activities.
10. Penalties for Misconduct
Story: Dev’s mentor warned him — breaking the rules has consequences. Key Points:
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• Penalties can include fines, suspension, or cancellation of license.
• Serious violations can lead to legal action.
Why It Matters: Keeps the industry clean and professional.
A Simple Analogy — The Pilot’s License
Becoming an insurance agent is like becoming a pilot:
• License = Pilot’s license to fly
• Code of Conduct = Air safety rules
• Training = Flight school
• Appointment = Being hired by an airline
• Remuneration rules = Salary regulations
• Prohibition of rebating = No bribing passengers for tickets
• Record-keeping = Flight logs
• Consumer protection = Passenger safety measures
• AML compliance = Security checks before boarding
• Penalties = License suspension for unsafe flying
Exam-Ready Definition
Agency regulations are the set of legal provisions, rules, and guidelines established by the
insurance regulator (IRDAI in India) to govern the licensing, conduct, training,
remuneration, and responsibilities of insurance agents, ensuring ethical practices,
consumer protection, and industry integrity.
SECTION-C
5. What is underwriting? What are the considerations in deriving gross premium?
Ans: The Story of the “Risk Detective”
In the heart of a busy insurance company, there was a quiet office where the real magic
happened — not the magic of selling policies, but the magic of deciding whether a policy
should even be sold, and at what price.
This was the office of Ananya, the company’s senior underwriter. Her job? She liked to call
herself a “risk detective”.
One rainy Monday morning, a file landed on her desk. It was a proposal from a man named
Mr. Kapoor, who wanted life insurance worth ₹50 lakh. Ananya’s task was simple in words
but complex in reality:
• Should the company insure him?
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• If yes, how much should he pay as premium?
And that, my friend, is where the concept of underwriting begins.
Definition — What Is Underwriting?
In simple, human terms:
Underwriting is the process by which an insurance company evaluates the risk of insuring
a person or property, decides whether to provide coverage, and determines the premium
to be charged.
It’s like a restaurant chef deciding whether to serve a dish to a customer with allergies —
the chef must check the ingredients, the customer’s health, and the kitchen’s capacity
before saying “yes” or “no”.
In formal terms:
• Underwriting involves risk assessment (how likely is a claim?),
• Risk selection (should we accept or reject this proposal?), and
• Pricing (what premium will cover the risk and still allow profit?).
Why Underwriting Exists — The Human Angle
Without underwriting, insurance companies would be like gamblers betting blindly. They
might charge too little for high-risk customers and too much for low-risk ones. This could
lead to:
• Financial losses for the insurer
• Unfair treatment of customers
• Collapse of trust in the system
Underwriting ensures fairness, stability, and sustainability.
Ananya’s Process — The Steps of Underwriting
When Ananya looked at Mr. Kapoor’s file, she followed a structured process:
1. Collect Information — Age, health history, occupation, lifestyle habits, financial
background.
2. Analyse Risk Factors — Does he smoke? Does his job involve danger? Any medical
conditions?
3. Classify the Risk — Standard risk, sub-standard risk, or high risk.
4. Decide on Acceptance — Approve, reject, or approve with conditions.
5. Fix the Premium — Based on the level of risk and company guidelines.
Link Between Underwriting and Gross Premium
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Here’s where the story gets interesting. Once Ananya decides to insure Mr. Kapoor, the next
big question is: How much should he pay?
That’s where gross premium comes in.
Definition — What Is Gross Premium?
In simple words:
Gross premium is the total amount the policyholder pays to the insurer for coverage,
before any deductions like commissions, expenses, or reinsurance costs.
Think of it as the full ticket price for the insurance service.
Considerations in Deriving Gross Premium — Told as Ananya’s Checklist
When Ananya calculated Mr. Kapoor’s premium, she didn’t just pick a number out of thin
air. She considered several factors — each like an ingredient in a recipe.
1. Mortality (Risk of Death)
Story: Since this was life insurance, Ananya checked mortality tables — statistical charts
showing the probability of death at different ages. Why It Matters: Higher mortality risk =
higher premium.
2. Morbidity (Risk of Illness)
Story: If it were health insurance, she’d check the likelihood of illness or disability. Why It
Matters: More illness risk means more claims, so premiums rise.
3. Expenses of the Insurer
Story: Ananya knew the company had to cover salaries, office rent, technology, and
marketing. Why It Matters: These operating costs are built into the premium.
4. Interest Rate Assumptions
Story: The company invests part of the premium to earn returns. Higher expected returns
can reduce the premium charged. Why It Matters: Investment income helps subsidise the
cost of coverage.
5. Profit Margin
Story: Insurance is a business. The company must include a margin to stay profitable and
grow. Why It Matters: Without profit, the insurer can’t survive long-term.
6. Risk Loadings
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Story: If Mr. Kapoor had risky hobbies like mountain climbing, Ananya would add an extra
charge. Why It Matters: Special risks require extra premium to cover potential losses.
7. Contingency Margin
Story: Ananya always added a small buffer for unexpected events — like a sudden
pandemic. Why It Matters: Protects the insurer from unforeseen spikes in claims.
8. Reinsurance Costs
Story: Sometimes, the insurer shares big risks with another company (reinsurance). The cost
of this is factored into the premium. Why It Matters: Ensures the insurer can handle large
claims without collapsing.
9. Policy Term and Benefits
Story: A 30-year policy with high benefits will cost more than a short-term, low-benefit one.
Why It Matters: Longer coverage = higher risk exposure.
10. Competition and Market Conditions
Story: Ananya also checked what other insurers were charging for similar coverage. Why It
Matters: Premiums must be competitive to attract customers.
A Simple Analogy — The Tailor’s Suit
Calculating gross premium is like tailoring a suit:
• Measurements = Risk assessment (age, health, lifestyle)
• Fabric cost = Mortality/morbidity cost
• Tailor’s labour = Expenses of the insurer
• Extra stitching = Risk loadings
• Profit for tailor = Profit margin
• Final price tag = Gross premium
Exam-Ready Definition of Underwriting
Underwriting is the process of evaluating, selecting, and pricing the risk of insuring a
person or property, ensuring that the premium charged is adequate to cover potential
claims, expenses, and profit margins.
Exam-Ready Definition of Gross Premium
Gross premium is the total premium charged to the policyholder before deductions for
commissions, expenses, or reinsurance, calculated based on mortality/morbidity risk,
expenses, interest, profit margin, and other loadings.
Final Takeaway — The Art and Science of the Price Tag
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When Ananya finally wrote down Mr. Kapoor’s premium, it wasn’t just a number. It was the
result of:
• Careful risk investigation (underwriting)
• Smart financial planning (premium calculation)
• A balance between fairness to the customer and sustainability for the insurer
Underwriting is the art of asking the right questions, and gross premium calculation is the
science of putting the right price on the promise.
6. Discuss the principle in underwriting and features aflecting insurability.
Ans: The Story of the “Gatekeeper of Promises”
In a tall glass building in the middle of the city, there was a quiet corner office where Ravi, a
senior insurance underwriter, worked. Most people in the company called him “The
Gatekeeper of Promises”.
Why? Because every insurance policy is a promise — a promise that if something bad
happens, the insurer will pay. But not every promise can be made to everyone, at any price.
If the insurer promises too much to the wrong person, the company could collapse. If it
promises too little, customers will feel cheated.
Ravi’s job was to make sure every promise was fair, safe, and sustainable. And to do that,
he followed certain principles of underwriting and carefully studied the features affecting
insurability.
Part 1 — Principles in Underwriting
Ravi often explained it to new trainees like this: "Underwriting is like building a bridge. The
principles are the pillars that keep it standing. Without them, the whole structure falls
apart."
Here are the main pillars:
1. Principle of Utmost Good Faith
Story: One day, a client applied for health insurance but didn’t mention a recent surgery.
Ravi explained that insurance works only when both sides are completely honest. Meaning:
The applicant must disclose all relevant facts truthfully, and the insurer must clearly explain
the terms and conditions. Why It Matters: Without honesty, the risk assessment will be
wrong, and the policy may become invalid later.
2. Principle of Insurable Interest
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Story: A man once tried to insure his neighbour’s shop. Ravi rejected it — because you can
only insure something if you would suffer a financial loss from its damage. Meaning: The
policyholder must have a genuine financial stake in the insured item or person. Why It
Matters: Prevents people from taking insurance on things they don’t own or care about,
which could lead to fraud.
3. Principle of Indemnity
Story: A client’s warehouse caught fire. The payout matched the actual loss — not more,
not less. Meaning: Insurance aims to restore the insured to their original financial position,
not to let them profit from a loss. Why It Matters: Keeps insurance fair and prevents moral
hazard.
4. Principle of Contribution
Story: A businessman insured his factory with two companies. When a loss occurred, both
insurers shared the payout proportionally. Meaning: If multiple policies cover the same risk,
the insured can’t claim the full loss from each — the insurers share the burden. Why It
Matters: Prevents over-compensation and ensures fairness between insurers.
5. Principle of Subrogation
Story: After paying a car accident claim, the insurer took legal action against the driver who
caused the accident — in the policyholder’s name. Meaning: Once the insurer pays for a
loss, it gains the right to recover the amount from any third party responsible. Why It
Matters: Prevents the insured from collecting twice for the same loss.
6. Principle of Loss Minimisation
Story: A shop owner whose store caught fire quickly used extinguishers to control the
flames before help arrived. Meaning: The insured must take reasonable steps to reduce the
loss, even after the incident starts. Why It Matters: Encourages responsible behaviour and
reduces claim costs.
7. Principle of Risk Selection and Pricing
Story: Ravi explained to a trainee that not all risks are equal — some are acceptable, some
are not, and some need higher premiums. Meaning: Underwriters must select risks carefully
and charge premiums that match the level of risk. Why It Matters: Keeps the insurer
financially stable.
Part 2 — Features Affecting Insurability
Ravi often said: “Even if a person wants insurance, not every risk is insurable. We have to
check certain features first.”
Here are the main ones:
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1. Nature of Risk
Story: Insuring a bakery is easier than insuring a fireworks factory. Meaning: Risks that are
predictable and measurable are more insurable than highly unpredictable or catastrophic
risks.
2. Financial Value of the Subject Matter
Story: A priceless family heirloom with no clear market value is harder to insure. Meaning:
The item or life insured must have a definable monetary value.
3. Measurability of Loss
Story: A shop’s fire damage can be measured in rupees, but the “emotional value” of a lost
photo album cannot. Meaning: The loss must be quantifiable in financial terms.
4. Probability of Loss
Story: A healthy 30-year-old has a lower probability of death than a 70-year-old with heart
disease — and premiums reflect that. Meaning: The likelihood of the insured event
happening affects insurability and pricing.
5. Law of Large Numbers
Story: Insurers can predict car accident rates for 10,000 drivers, but not for just 2 drivers.
Meaning: The risk must be part of a large group so statistical predictions are reliable.
6. Homogeneity of Risk
Story: Insuring a fleet of similar delivery vans is easier than insuring a mix of vans, boats,
and helicopters. Meaning: Risks that are similar in nature are easier to price accurately.
7. Premium Affordability
Story: If the premium needed to cover a high-risk person is too high for them to pay, the risk
becomes practically uninsurable. Meaning: The cost of coverage must be reasonable for the
customer.
8. Legal and Public Policy Considerations
Story: Ravi once refused to insure an illegal gambling operation — it’s against the law.
Meaning: The subject matter must be legal and not against public interest.
9. Moral Hazard
Story: A person who deliberately damages their own property to claim insurance is a moral
hazard. Meaning: The insured’s behaviour and intentions affect insurability.
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10. Physical Hazard
Story: A factory with poor safety equipment is a higher physical hazard than one with
modern fire suppression systems. Meaning: Physical conditions that increase the chance of
loss affect insurability.
A Simple Analogy — The School Admission Test
Ravi compared underwriting to a school admission process:
• Principles = The school’s rules (honesty, eligibility, fairness)
• Features affecting insurability = The student’s qualities (grades, behaviour, health)
Only when both match does the student get admission — just like only when
principles are followed and features are favourable does a risk get insured.
Exam-Ready Definition
Underwriting principles are the fundamental rules that guide insurers in assessing,
selecting, and pricing risks fairly and sustainably. Features affecting insurability are the
characteristics of a risk that determine whether it can be insured and at what cost.
Final Takeaway — The Balance Between Promise and Protection
When Ravi closed Mr. Kapoor’s file at the end of the day, he knew he had done more than
approve or reject a policy. He had balanced the promise to protect with the need to protect
the insurer.
That’s what underwriting really is — a careful dance between trust and caution, guided by
principles and shaped by the features of each risk.
SECTION-D
7. What are the different Rigidities in the present pricing system ?
Ans: The Story of the “Slow-Moving Price Machine”
In the bustling city of Metroville, there was a grand old insurance company called
SafeShield. It had been around for decades, with tall filing cabinets, thick policy books, and a
pricing system that was… well… let’s just say it was like an old steam engine — powerful, but
painfully slow to change direction.
One day, the company’s young analyst, Meera, noticed something strange. The market was
changing fast — new risks, new customer demands, new competitors — but SafeShield’s
prices stayed almost the same for months, sometimes years.
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She asked her mentor, "Why don’t we just update the prices quickly when things change?"
Her mentor sighed and said, "Ah, Meera… that’s because of the rigidities in our pricing
system."
Definition — What Are “Rigidities” in Pricing?
In simple words:
Rigidities in the pricing system are the obstacles, delays, and inflexible processes that
prevent prices from adjusting quickly and accurately to changes in the market, risk levels,
or customer needs.
It’s like steering a huge ship — you can turn the wheel, but the ship takes a long time to
actually change direction.
Why This Matters
In insurance (and many other industries), prices need to reflect reality:
• If risks go up, premiums should go up.
• If risks go down, premiums should go down.
But when the system is rigid, prices lag behind reality. This can mean:
• The company charges too little and loses money.
• Or charges too much and loses customers.
The Main Rigidities — Told as Meera’s Discoveries
Let’s follow Meera as she uncovers each rigidity in SafeShield’s pricing system.
1. Outdated and Inflexible Systems
Story: Meera found that the company’s pricing software was older than she was. Every time
they wanted to change rates, they had to call the IT department, who would take weeks to
make updates. Meaning: Legacy systems can’t adapt quickly to new data or market
changes. Impact: By the time prices are updated, the market has already moved on.
2. Over-Dependence on IT Teams
Story: Even small changes — like adjusting a discount — required a formal request to IT,
approval from multiple managers, and testing in a slow, bureaucratic process. Meaning:
Pricing teams can’t make quick adjustments themselves. Impact: Delays in responding to
competition or risk changes.
3. Fragmented Data and Siloed Departments
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Story: The underwriting team, analytics team, and sales team each had their own data
systems. Meera had to merge spreadsheets from three departments just to get a full
picture. Meaning: When data is scattered, it’s hard to make quick, informed pricing
decisions. Impact: Decisions are based on incomplete or outdated information.
4. Regulatory and Compliance Delays
Story: In insurance, every price change must comply with IRDAI rules. Sometimes, even after
internal approval, they had to wait weeks for regulatory clearance. Meaning: Legal
requirements slow down the speed of price adjustments. Impact: Prices can’t react instantly
to market shifts.
5. Long Product Approval Cycles
Story: When SafeShield wanted to launch a new policy with updated rates, it had to go
through multiple internal committees. Meaning: Too many approval layers create
bottlenecks. Impact: Competitors can launch faster and capture market share.
6. Legacy Contracts and Commitments
Story: Some corporate clients had multi-year contracts with fixed premiums. Even if market
risks changed, SafeShield couldn’t adjust prices until the contract ended. Meaning:
Long-term agreements lock prices in place. Impact: The company bears the extra risk
without extra revenue.
7. Cultural Resistance to Change
Story: Some senior managers preferred “stable prices” to avoid upsetting customers, even if
the data showed a need for change. Meaning: Organisational mindset can resist necessary
adjustments. Impact: The company becomes slow and less competitive.
8. High Cost of Price Changes
Story: Every price change meant reprinting brochures, updating websites, training agents,
and informing customers. Meaning: The operational cost of changing prices discourages
frequent updates. Impact: Prices remain static for long periods.
9. Misalignment Between Teams
Story: The analytics team wanted to raise rates based on risk data, but the sales team
feared losing clients. The disagreement delayed action. Meaning: Different priorities
between departments slow decisions. Impact: The company misses the “right time” to
adjust.
10. Customer Backlash Concerns
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Story: Management worried that frequent price changes would confuse or anger customers.
Meaning: Fear of negative reactions can lead to price rigidity. Impact: Prices stay the same
even when they shouldn’t.
A Simple Analogy — The Old Train vs. the Bullet Train
Think of the pricing system as a train:
• Old Train (Rigid System): Heavy, slow to start, slow to stop, takes a long time to
change tracks.
• Bullet Train (Flexible System): Fast, responsive, can change direction quickly.
Most traditional pricing systems are still “old trains” — they get you there, but not at the
speed the modern market demands.
Definition
Rigidities in the present pricing system are the structural, technological, procedural, and
behavioural obstacles that prevent prices from being updated quickly and accurately in
response to changes in risk, market conditions, or competition.
Final Takeaway — Why This Matters for the Future
When Meera finally presented her findings to the board, she said: "We can’t control the
market, but we can control how fast we respond to it. If our pricing system is rigid, we’ll
always be reacting late — and in insurance, late can mean loss."
The lesson? A modern pricing system should be like a skilled dancer — quick on its feet,
able to change moves instantly when the music changes. Rigidities slow the dance, and in
today’s competitive world, that can mean losing the spotlight.
8. What is the impact of legislation and competition on pricing?
Ans: The Story of the “Two Invisible Hands”
In the busy world of insurance, there’s a constant tug-of-war over prices. On one side is
Legislation — the rule-maker, wearing a judge’s robe, holding a book of laws. On the other
side is Competition — the market warrior, wearing running shoes, always ready to sprint
ahead of rivals.
Both are invisible forces, but together they decide how much you and I pay for insurance.
One day, a young pricing analyst named Arav joined a big insurance company. His first
assignment was to figure out why their premiums had changed so much over the past year.
His mentor smiled and said: "Arav, if you want to understand pricing, you need to meet the
two invisible hands — Legislation and Competition. They shape everything we do."
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Part 1 — The Impact of Legislation on Pricing
Arav’s first “meeting” was with Legislation — not a person, but a set of rules created by the
government and enforced by regulators like the Insurance Regulatory and Development
Authority of India (IRDAI).
Legislation affects pricing in several ways:
1. Setting Boundaries for Pricing
Story: Arav learned that in some insurance products, IRDAI sets maximum commission rates
and sometimes even prescribes how premiums should be calculated. Impact: This prevents
companies from charging excessively high premiums, ensuring fairness for customers.
2. Mandatory Coverage Requirements
Story: The law might require insurers to cover certain risks — for example, third-party
liability in motor insurance is compulsory in India. Impact: Even if the risk is high, insurers
must offer it, which can push premiums up to cover potential losses.
3. Anti-Discrimination Rules
Story: Arav discovered that insurers can’t set different prices based on factors like gender in
certain products, even if statistics show different risk levels. Impact: This keeps pricing fair
and socially acceptable, but may limit the use of some risk-based pricing models.
4. Consumer Protection and Transparency
Story: Regulations require insurers to clearly explain how premiums are calculated and
what’s covered. Impact: This transparency builds trust but also limits the use of overly
complex or hidden pricing strategies.
5. Capital and Solvency Requirements
Story: Laws require insurers to keep a certain amount of capital in reserve to ensure they
can pay claims. Impact: Maintaining these reserves costs money, which can be factored into
premiums.
6. Price Approval Processes
Story: In some cases, insurers must get regulatory approval before changing prices. Impact:
This slows down the ability to respond quickly to market changes, leading to more stable
but less flexible pricing.
7. Taxes and Levies
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Story: Arav noticed that changes in GST rates directly affected the final price customers
paid. Impact: Legislative changes in taxation can make insurance more expensive or cheaper
overnight.
In short: Legislation acts like a referee — setting the rules, ensuring fair play, and protecting
customers. But it can also slow down pricing changes and limit flexibility.
Part 2 — The Impact of Competition on Pricing
Next, Arav “met” Competition — the fast-moving, unpredictable force of the market.
Competition affects pricing in ways that legislation never could:
1. Price Wars
Story: When a new insurer entered the market offering lower premiums, Arav’s company
had to adjust its rates to stay attractive. Impact: Healthy competition can lower prices for
customers, but too much can hurt profitability.
2. Innovation Pressure
Story: Competitors started offering flexible payment plans and customised coverage.
Impact: To keep up, Arav’s company had to innovate — sometimes adjusting prices to
match new product features.
3. Market Positioning
Story: Some insurers position themselves as “premium” brands with higher prices, while
others aim for “affordable” mass-market appeal. Impact: Pricing becomes a strategic tool to
define brand identity.
4. Customer Switching Behaviour
Story: With online comparison sites, customers could easily see who offered the cheapest
premium. Impact: This transparency forces insurers to keep prices competitive or risk losing
business.
5. Economies of Scale
Story: Larger insurers with more customers could spread their costs over a bigger base,
allowing them to offer lower premiums. Impact: Smaller players may struggle to match
these prices without hurting margins.
6. Product Differentiation
Story: Some insurers added extra benefits at the same price to stand out. Impact:
Competition isn’t always about lowering prices — sometimes it’s about offering more value
for the same cost.
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In short: Competition acts like a race — pushing companies to be faster, smarter, and more
attractive to customers. It can lower prices, improve products, and benefit consumers, but it
can also squeeze profits.
Part 3 — When Legislation and Competition Interact
Arav soon realised that these two forces don’t work in isolation — they interact in
interesting ways:
• Legislation can limit competition — for example, by setting minimum prices to
prevent destructive price wars.
• Competition can influence legislation — if too many companies fail due to low
prices, regulators may step in to stabilise the market.
• Both aim to protect consumers — legislation through rules, competition through
choice.
A Simple Analogy — The Cricket Match
Arav compared it to a cricket match:
• Legislation = The umpire, ensuring fair play, enforcing rules, and stopping foul
moves.
• Competition = The players, trying to score more runs than the others, using skill,
speed, and strategy.
Without the umpire, the game could turn chaotic. Without the players competing, the game
would be boring.
Exam-Ready Definition
Legislation impacts pricing by setting legal boundaries, ensuring fairness, mandating
coverage, and enforcing transparency, which can stabilise but also limit flexibility in
pricing. Competition impacts pricing by driving innovation, influencing market positioning,
and pushing prices up or down based on market forces, benefiting consumers but
potentially squeezing insurer margins.
Final Takeaway — The Balancing Act
When Arav finished his report, he wrote: "Pricing is a balancing act between the steady
hand of legislation and the restless energy of competition. One keeps us fair, the other keeps
us sharp. Together, they shape the price tag on every insurance policy we sell."
And that’s the truth — in the world of insurance, prices are never decided in isolation. They
are the product of rules that protect and rivals that push.
“This paper has been carefully prepared for educaonal purposes. If you noce any mistakes or have
suggesons, feel free to share your feedback.”
